Financial Statements Analysis Fall term 2022-2023
Tutorial 3
Income Statement
Questions
1. Which of the following would be classified as non-recurring items?
a. Selling expense
b. Interest expense
c. Gain on sale of marketable securities
d. Loss from flood
e. Income tax expense
f. Loss from prohibition of red dye
g. Loss from the write-down of inventory
2. A health food distributor selling wholesale dairy products and vitamins decides to
discontinue the division that sells vitamins. How should this discontinuance be classified on
the income statement?
The vitamin line seems to be specifically separate from the dairy product line. So, its disposal
is identified as discontinued operations. Earnings from discontinued operations must be
presented separately after the earnings from continuing operations. The earnings per share
must show the earning per share from continuing operations, the earnings per share from
discontinued operations and the total earnings per share.
3. Describe the following items:
a. Net income-noncontrolling interest: This income statement item represents the minority
owners share of consolidated earnings. It is deducted on the consolidated income
statement to determine the net income.
b. Equity in earnings of nonconsolidated subsidiaries: This is the proportionate share of the
earnings of the investor that relate to the earnings of the investee company.
Multiple Choice Questions
a. The following relate to the income statement of Growth Company for the year ended
December 31, N. What is the beginning inventory?
Purchases $180 000
Ending inventory 30 000
Purchase returns 5 000
Sales 240 000
Cost of goods sold 210 000
1. $6 000
2. $65 000
3. $50 000
4. $55 000
5. $70 000
b. Which of the following items would be classified as operating revenue or expense on an
income statement of a manufacturing firm?
1. Interest expense
2. Advertising expense
3. Equity income
4. Dividend income
5. Cumulative effect of change in accounting principle
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Financial Statements Analysis Fall term 2022-2023
c. If the investor company owns 30% of the stock of the investee company and the investee
company reports profits of $150 000, then the investor company reports equity income of:
1. $25 000
2. $35 000
3. $45 000
4. $50 000
5. $55 000
d. Which of the following is true when a cash dividend is declared and paid?
1. The firm is left with a liability to pay the dividend.
2. Retained earnings is reduced by the amount of the dividend.
3. Retained earnings is increased by the amount of the dividend.
4. Retained earnings are not influenced by the dividend.
5. Stockholders’ equity is increased.
e. Which of the following is true when a 10% stock dividend is declared and paid?
1. Retained earnings is increased.
2. Stockholders’ equity is increased.
3. Stockholders’ equity is decreased.
4. Authorized shares are increased.
5. The overall effect is to leave stockholders’ equity in total and each owner’s share of
stockholders’ equity unchanged; however, the total number of shares increases.
Problems
1 The information presented below pertains to the income statement of Elizabeth Company for the
year ended December 31, N:
Purchases $3 500 000
Beginning inventory of merchandise 1 000 000
Ending inventory of merchandise 2 500 000
Sales revenue 4 000 000
Selling expenses 400 000
Administrative expenses 600 000
Interest expense 90 000
Unusual write-off losses 20 000
Tax expense 427 200
Required:
a. Present a multiple-step income statement based on the information given.
b. Calculate the earnings per share knowing that 50 000 shares of common stock were
outstanding for the entire year N.
c. Calculate the effective tax rate of the company.
d. Prepare a reconciliation of retained earnings for the year ended December 31, N, knowing
that beginning retained earnings are equal to $2 000 000 and that the firm distributed
dividends of $100 000 during the period N.
e. Assume that for the purpose of financial analysis, the unusual write-offs are considered as
non-recurring. Calculate the amount of recurring earnings.
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Financial Statements Analysis Fall term 2022-2023
Answer:
a. Let’s find the cost of goods sold:
COGS= Purchases + Beginning inventory of merchandise – Ending inventory of merchandise
= 2 000 000
Elizabeth Company
Income statement for the year ended December 31, N
Sales revenue 4 000 000
Cost of goods sold 2 000 000
Gross profit 2 000 000
Operating expenses:
Selling expenses 400 000
Administrative expenses 600 000
1 000 000
Operating income 1 000 000
Other expenses:
Interest expense 90 000
Unusual write-off losses 20 000
110 000
Income before taxes 890 000
Tax expense 427 200
Net income 462 800
b. Earnings per share: 462800/50000= $9.256 per common share
c. Effective tax rate: tax expense/Income before taxes: 427200/890000=48%
d.
Beginning retained earnings: 2 000 000
+Net income of the year N: 462 800
-Dividends distributed during the year N: 100 000
=Ending retained earnings: 2 362 800
e. Recurring earnings = Net income – Nonrecurring item(s) of earnings net of taxes
Recurring earnings= 462800+20000 x (1-0.48) =473 200
2 The consolidated income statement of Leen Company for the year ended December 31, N, shows
the following:
Revenue from sales $980 000
Cost of products sold (510 000)
Gross profit 470 000
Operating expenses
Selling expenses 110 000
General expenses 140 000 (250 000)
Operating income 220 000
Equity on earnings of nonconsolidated subsidiary 60 000
Legal settlement gain 100 000
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Financial Statements Analysis Fall term 2022-2023
Income before income taxes 380 000
Income taxes (133 000)
Net income before noncontrolling interest 247 000
Net income-noncontrolling interest (50 000)
Net income 197 000
Required:
a. Determine the earnings from the nonconsolidated subsidiary: 60 000
b. For the subsidiary that was not consolidated, what amount of income would have been
included in the income statement if this subsidiary had been consolidated? 60 000
c. What earnings relate to the (minority) shareholders of the subsidiary that was consolidated?
50 000
d. Assume that for the purpose of financial analysis, the legal settlement gain is non-recurring.
Determine the recurring earnings (use the effective tax rate for the adjustment).
Effective tax rate: 133000/380000=35%
We ignore any tax adjustment related to the noncontrolling interest in earnings.
Recurring earnings=Net income – Legal settlement gain net of taxes
197000-100000x (1-0.35) = 132 000
3 The stockholders’ equity of Bell company on November 30, N shows the following items:
- Common stock at par (100 000 shares issued and outstanding, par value $5): $500 000
- Paid-in capital in excess of par: $100 000
- Retained earnings: $300 000
On December 1, N, the board of directors declared a 10% stock dividend, to be distributed on
December 20. The market price of the common share was $10 on December 1 and $12 on December
20.
Required: Present the equity section of Bell company after the distribution of the stock dividend.
Equity
Common stock at par (110 000 shares issued and outstanding, par value $5) $550 000
Paid-in capital in excess of par $150 000
Retained earnings $200 000
Total equity $900 000
4 The following information for Gaffney Corporation covers the year ended December 31, N:
Gaffney Corporation
Income statement
For the year ended December 31, N
Revenues
Revenues from sales $500,000
Other 50,000
Total revenue 550,000
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Financial Statements Analysis Fall term 2022-2023
Expenses
Cost of products sold $(300,000)
Selling expenses (50,000)
Administrative and general expenses (20,000)
Income taxes (54,000)
Total expenses (424,000)
Net income $?
Other comprehensive income
Adjustment on investments at FVTOCI*, net of $5,000 income tax $7,000
Foreign currency translation adjustment, net of $3,000 income tax 8,000
Other comprehensive income ?
Comprehensive income ?
*FVTOCI=Fair Value Through Other Comprehensive Income
Required:
a. Determine the missing amounts.
b. What is the effective tax rate applicable to the net income items?
c. Will net income or comprehensive income tend to be more volatile? Why?
d. Which income figure will be used to compute the earnings per share?
e. What is the total tax expense reported?
f. Will the items within other comprehensive income always net out as an addition to net
income?
a. Net income: 550 000 -424 000 = 126 000
Other comprehensive income: 7 000 + 8 000 = 15 000
Comprehensive income: 126 000 + 15 000 = 141 000
b. Income before taxes= 126 000 + 54 000 = 180 000
Effective tax rate= 54 000/ 180 000 = 30%
c. Comprehensive income tends to be more volatile than net income because it includes other
comprehensive income items, which are typically more volatile than net income.
d. Net income
e. Total tax expense reported=54 000 + 5 000 + 3 000 = 62 000
f. No, other comprehensive income items can also correspond to losses.
5* Refer to the following link related to the financial statements of the company ENNAKL
AUTOMOBILES on June 30, 2022:
[Link]
ennakl_automobiles_nct_efi300622.pdf
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Financial Statements Analysis Fall term 2022-2023
Required:
a. Are the presented statements annual statements?
No, the statements are interim statements which cover a period less than one year (semestrial
statements which relate to the time period from 31/12/2021 to 30/6/2022)
b. Are the statements audited?
No, the statements are not audited. But it is mentioned that they were reviewed by an
independent external auditor.
c. Does the income statement follow a single-step or a multiple-step format? Multiple-step
6* Refer to the following link related to the interim financial statements of the company Société
Moderne de Céramique SOMOCER on June 30, 2022:
[Link]
somocer_efi300622.pdf
Required:
a. Is the presented income statement a single-step or a multiple-step income statement?
Modified form of a single-step income statement
Actually, it is a modified form of the single-step presentation since it shows the operating
income, the income before taxes and the net income.
b. Determine the cost of the goods sold on June 30, 2022.
COGS = 1968815+31097496=33 066 311
Note that the variation des stocks des produits finis has a debit balance in this case.
c. Determine the operating income on June 30, 2022.
1 810 368
