5-1
CHAPTER 5
THE INCOME STATEMENT AND THE STATEMENT OF CASH FLOWS
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number
Content
Time Range
(minutes)
E5-1
Simple Income Statement. (Easy) Periodic inventory system.
Multiple-step and single-step format preparation from selected
account balances.
15-20
E5-6
Basic Income Statement and Statement of Comprehensive
Income. (Moderate) Multiple-step and single-step income
statement. Statement of comprehensive income.
20-25
E5-7
Basic Income Statement. (Moderate) Schedule of cost of
goods sold. Multiple-step and single-step income statement
preparation.
20-25
5-2
Number
Content
Time Range
(minutes)
E5-11 Income Statement Calculations. (Moderate) Determination of
various amounts from partial information.
10-15
is held for sale at end of year.
E5-15
(AICPA adapted). Income Statement Deficiencies.
(Moderate) Identify appropriate and inappropriate disclosures.
Provide rationale.
20-25
E5-16
Comprehensive Income. (Moderate) Preparation of income
statement and statement of comprehensive income under two
different methods.
10-15
E5-20
Statement of Cash Flows. (Moderate) Prepare simple
statement of cash flows from a list of items.
10-15
P5-1
Comprehensive Income. (Moderate) Format preparation of
multiple-step income statement, statement of comprehensive
income, and retained earnings statement.
30-50
5-3
Number
Content
Time Range
(minutes)
P5-5
Comprehensive. (Moderate) Manufacturing income
statement. Supporting schedules, multiple-step income
statement, retained earnings statement. Computation of
return on stockholders’ equity and discussion. IFRS discussion.
40-55
P5-9
Misclassifications. (Moderate) Preparation of a correctly
classified multiple-step income statement and retained
earnings statement from one that is misclassified.
20-40
P5-10
Classification. (Moderate) Recognition of unusual and/or
infrequent items and indication of where to disclose.
30-45
P5-14
(AICPA adapted). Income Statements. (Challenging)
Comparative. Preparation of a multiple-step comparative
statement of income.
30-45
Number
Content
Time Range
(minutes)
P5-18
Net Income and Comprehensive Income. (Moderate)
Preparation of income statement and reporting of
comprehensive income using three different methods.
20-30
ANSWERS TO QUESTIONS
Q5-1 Under the capital maintenance concept, income for an accounting period is the
amount that may be paid to stockholders (or owners) during that accounting period
and still enable the corporation to be as well off at the end of the period as it was at
Q5-2 In the transactional approach, a company records its net assets at their historical cost
and it does not record changes in these assets and liabilities unless a transaction,
event, or circumstance has occurred that provides reliable evidence of a change in
5-5
Q5-3 Comprehensive income is the change in equity of a company during a period from
transactions, other events, and circumstances related to nonowner sources. It
Q5-4 (a) Return on investment is a measure of overall company performance.
Stockholders (investors) invest capital in order to obtain a return on capital.
Before a company can provide a return on investment, its capital must be
maintained.
Q5-5 The purposes of the income statement are: (1) to help evaluate management’s past
Q5-6 The specific guidelines for reporting (presenting) revenues, expenses, gains, and
losses are:
Q5-6 (continued)
Q5-7 Revenues are inflows of (increases in) assets of a company or settlement of its
liabilities during a period from delivering or producing goods, rendering services, or
Q5-8 The two criteria that ordinarily must be met for revenues to be recognized are:
Q5-9 Revenue might be recognized prior to the sale or after the sale in special cases to
better reflect the nature of a company’s operations (i.e., to increase the predictive
Q5-10 Expenses are outflows of (decreases in) assets of a company or incurrences of
liabilities during a period from delivering or producing goods, rendering services, or
5-7
Q5-11 The three principles for recognizing the expenses to be matched against revenues, as
identified by the FASB are:
1. Association of cause and effect. Some costs are recognized as expenses on the
basis of a presumed direct association with specific revenues. Examples are
Q5-12 Gains are increases in the equity (net assets) of a company from peripheral or
incidental transactions, and from all other events and circumstances during a period
except those that result from revenues or investments by owners. Losses are
decreases in the equity (net assets) of a company from peripheral or incidental
transactions, and from all other events and circumstances during a period except
those that result from expenses or distributions to owners. Gains or losses may be
classified into three categories:
1. Gains or losses from exchange transactions. Examples are gains or losses on
sales or disposals of fixed assets such as equipment or land.
5-8
Q5-13 Items included in a company’s “income from continuing operations” are
1. Sales revenues (net)
If the company uses a single-step format to prepare its income statement, those
items are classified into two categories: revenues or expenses. All operating and
If the company uses a multiple-step format to prepare its income statement, the
format is as follows:
Sales revenues (net)
Q5-14 The current operating performance concept of income emphasizes that only the
normal, ordinary, recurring results of operations for the current period should be
included in a company’s net income on the income statement. Any unusual and
nonrecurring items of income or loss should be reported in the statement of retained
earnings.
5-9
Q5-15 Material recurring revenues and expenses (and gains and losses) that are not directly
related to the primary operations of a company are classified as other items on its
income statement. Examples are dividend revenue; interest revenue and expense;
Q5-16 Intraperiod tax allocation involves allocating a corporation’s total income tax
expense for the accounting period to the various major components of its net
income, retained earnings, and other comprehensive income (if any). The rationale
Q5-17 Items included in a company’s results from discontinued operations are (a) the
income or loss from the operations of a discontinued component (net of income
Q5-18 An extraordinary item is an event or transaction that is unusual in nature and
infrequent in occurrence. These criteria are defined as follows:
1. Unusual nature. The underlying event or transaction possesses a high degree of
Q5-19 Gains or losses resulting from events or transactions that are either unusual in nature
or infrequent in occurrence, but not both, such as the loss from the write-down of
Q5-20 Changes in accounting estimates arise because a company’s financial statements
are presented on a periodic basis. These changes are due to the occurrence of new
events, as additional experience is acquired, or as more information is obtained.
Q5-21 “Earnings per share” usually is shown directly below the net income on a company’s
income statement.
Q5-22 There are several differences between IFRS and U.S. GAAP in regard to a company’s
presentation and content of the income statement. Some of these differences are:
(a) IFRS contain no prescribed format (single-step or multiple-step) for the income
statement;
Q5-23 The items included in a company’s statement of retained earnings are: beginning
retained earnings; retrospective adjustment (change in accounting principle) or prior
5-11
Q5-24 A change in accounting principle occurs when a company adopts a generally
accepted accounting principle that is different from the one it has been using in its
financial reporting.
Q5-25 An error in a company’s financial statements may result from a mathematical
mistake, the incorrect use of existing facts, an oversight, the use of an accounting
principle that is not generally accepted, or fraud. The correction of a material error is
Q5-26 A company’s comprehensive income consists of two parts: net income and other
comprehensive income. Currently, there are four items of a company’s other
Q5-27 A company may report its comprehensive income on the face of its income
Q5-28 A statement of cash flows is a statement that reports on a company’s cash inflows,
cash outflows, and net change in cash from its operating, investing, and financing
Q5-29 When used with a company’s other financial statements, the statement of cash flows
helps external users to assess: (a) the company’s ability to generate positive future
Q5-30 The three types of activities that a statement of cash flows reports on for a company
are its:
Q5-31 Under the indirect method, the net cash provided by operating activities is
determined by adjusting net income (1) to eliminate certain amounts included in net
Q5-32 Under the direct method, the most common cash inflows from operating activities
ANSWERS TO MULTIPLE CHOICE
5-13
SOLUTIONS TO REVIEW EXERCISES
RE5-1
BRANDT CORPORATION
Income Statement (Partial)
For Year Ended December 31, Current Year
Sales revenue $500,000
Cost of goods sold (240,000)
RE5-2
BRANDT CORPORATION
Income Statement (Partial)
For Year Ended December 31, Current Year
Revenues
Sales revenue $500,000
RE5-3
Beginning inventory $ 50,000
RE5-4
Selling expenses
Delivery expense $ 2,300
RE5-5
NILER CORPORATION
Income Statement (Partial)
For Year Ended December 31, Current Year
Income from continuing operations $35,000
RE5-6
PALLEST CORPORATION
Income Statement (Partial)
For Year Ended December 31, Current Year
Pretax income from continuing operations $40,000
5-15
RE5-7
MANGOLD CORPORATION
Income Statement (Partial)
For Year Ended December 31, Current Year
Earnings per Common Share
Components of Income (80,000 common shares)
RE5-8
OWENS, INC.
Statement of Retained Earnings
For Year Ended December 31, Current Year
Retained earnings, 1/1 $250,000
RE5-9
JORDAN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, Current Year
RE5-10
AMELIA’S BOOKSTORE
Statement of Cash Flow (Partial)
For Year Ended December 31, Current Year
Net Cash Flow From Operating Activities
Net income $62,000
RE5-11
ROSS CORPORATION
Statement of Cash Flow (Partial)
For Year Ended December 31, Current Year
Cash Flows From Investing Activities
SOLUTIONS TO EXERCISES
E5-1
1. DIBB COMPANY
Income Statement
For Year Ended December 31, 2010
Sales (net) $198,000
Cost of goods sold (130,000)
Earnings per Common Share
Components of Income (12,000 common shares)
2. DIBB COMPANY
Income Statement
For Year Ended December 31, 2010
Revenues
Sales (net) $198,000
E5-1 (continued)
Earnings per Common Share
Components of Income (12,000 common shares)
E5-2
1. ALBERTSON COMPANY
Income Statement
For Year Ended December 31, 2010
Sales (net) $100,000
Cost of goods sold
Inventory, 1/1/2010 $20,000
Earnings per Common Share
Components of Income (10,000 common shares)
Income before extraordinary items $2.17
E5-2 (continued)
2. ALBERTSON COMPANY
Income Statement
For Year Ended December 31, 2010
Revenues
Sales (net) $100,000
Earnings per Common Share
Components of Income (10,000 common shares)
ALBERTSON COMPANY
Schedule 1: Cost of Goods Sold
For Year Ended December 31, 2010
Inventory, 1/1/2010 $20,000
E5-3
1. Income statement; as part of General and Administrative Expenses
2. Income statement; as a deduction from Sales Revenues
7. Income statement; as part of General and Administrative Expenses
8. Statement of retained earnings; as a deduction from retained earnings
12. Income statement; as part of Selling Expenses
13. Both balance sheet and income statement; as a current asset on the
balance sheet and as a deduction from cost of goods available for sale to