Case 4–5 (concluded)
Requirement 5
All of the following information is disclosed in notes to financial statements that
include the period in which an exit or disposal activity is initiated and any subsequent
period until the activity is completed:
a. A description of the exit or disposal activity, including the facts and
b. For each major type of cost associated with the activity (for example, one-time
employee termination benefits, contract termination costs, and other
associated costs), both of the following are disclosed:
Judgment Case 4–6
Financial Statement
Presentation
Situation Treatment (a–g) (CO, BC, or RE)
1. a. CO
Judgment Case 4–7
1. The loss is not unusual. It is included in income from continuing operations along
with other nonoperating items.
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IFRS Case 4–8
1. GSK reported “interest received” and “dividends from associates and joint
Judgment Case 4–9
Requirement 1
1. a. As a component of operating income.
2. b. As a nonoperating income item.
Requirement 2
Situations 3 and 5 would be reported in the statements of income and
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Judgment Case 4–10
It would be nice to think that management makes all accounting choices in the
best interest of fair and consistent financial reporting. Unfortunately, other motives
influence the choices among accounting methods and whether to change methods. It
1Watts, R.L., and J.L. Zimmerman, “Towards a Positive Theory of the Determination of Accounting Standards,” The
Accounting Review, January 1978, and “Positive Accounting Theory: A Ten Year Perspective,” The Accounting
Review, January 1990.
2For example, see Healy, P.M., “The Effect of Bonus Schemes on Accounting Decisions,” Journal of Accounting and
Economics, April 1985, and Dhaliwal, D., G. Salamon, and E. Smith, “The Effect of Owner Versus Management
Control on the Choice of Accounting Methods,” Journal of Accounting and Economics, July 1982.
3Bowen, R.M., E.W. Noreen, and J.M. Lacy, “Determinants of the Corporate Decision to Capitalize Interest,” Journal of
Accounting and Economics,” August 1981.
4This “political cost” motive is suggested by Watts, R.L.. and J.L. Zimmerman, “ “Positive Accounting Theory: A Ten–
Year Perspective,” The Accounting Review, January 1990, and Zmijewski, M., and R. Hagerman, “An Income Strategy
Approach to the Positive Theory of Accounting Standard Setting/Choice,” Journal of Accounting and Economics,
Research Case 4–11
(Note: This case requires the student to reference a journal article.]
Requirement 2
The authors use the S&P 500 companies as their sample.
Requirement 3
Requirement 4
In 2001, 85% of firms have greater pro forma than GAAP earnings. This ratio
Requirement 5
In 2001, 136 firms reported “Restructuring Charges,” and the same number of
Requirement 6
The authors’ main conclusions are that the introduction of pro forma regulation is
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Integrating Case 4–12
DEFICIENCIES:
Balance Sheet:
1. The asset section of the balance sheet should be classified. Cash, short-term
investments, accounts receivable, and inventories should be included as
current assets.
Income Statement:
1. Earnings per share disclosure is required.
Financial Analysis Case 4–13
Requirement 1
2013 to 2014: ($419,520 – 389,529) ÷ $389,529 = 7.7% increase
Requirement 2
Income tax expense ÷ Income before taxes
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Real World Case 4–14
Answers to the questions will, of course, vary because students will research
financial statements of different companies.
Real World Case 4–15
1. The company uses the multiple-step format to present its income statements.
2. Restructuring costs include employee severance and termination benefits
plus other costs associated with the shutdown or relocation of facilities or
3. The 2014 restructuring and other costs were caused by two events:
a. $8 million related to severance and benefit costs associated with
4. During Fiscal 2013, the Company recorded non-cash impairment charges of
$19 million, which included $11 million of impairment charges to reduce the
carrying values (book values) of certain long-lived assets related to its 14
5. Basic earnings per share is computed by dividing net income available to
common shareholders (net income less any preferred stock dividends) by the
Case 4–15 (concluded)
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6. The company could have chosen to present the information in the two
statements in a single, continuous statement of comprehensive income.
7. The company reported the following other comprehensive income items:
a. Foreign currency translation adjustments.
9. The largest cash outflow from investing activities was the purchase of
investments, $1,067 million.
Air France–KLM Case
Requirement 1
AF classifies its expenses by both natural descriptions (e.g., salaries and related
Requirement 2
AF classifies interest paid and interest received as operating cash flows, and