Chap.4 - Chapter 4 Income Statement QUESTIONS 4-1....

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Chapter 4 Income Statement QUESTIONS 4-1. Extraordinary items are events or transactions that are distinguished by their unusual nature and infrequency of occurrence. They might include casualty losses or losses from expropriation or prohibition. They must be shown separately, net of tax, in order that trend analysis can be made of income before extraordinary items. 4-2. d, f 4-3. Examples include sales of securities, write-down of inventories, disposal of a product line not qualifying as a segment, gain or loss from a lawsuit, etc. They are shown separately because of their materiality and the desire to achieve full disclosure. They are not given net-of-tax treatment because they are included in income before the income tax is deducted. Also, net-of-tax treatment would infer that these items are extraordinary. 4-4. Under the equity method, equity in earnings of nonconsolidated subsidiaries is a problem in profitability analysis because the income recognized is not a cash inflow. The cash inflow is only the amount of the investor share of dividends declared and paid. Further, equity earnings do not come directly from the operations of the business in question, but rather from a subsidiary. 4-5. It would appear that this is the disposal of a product line that is specifically separate from the dairy products line. The disposal of the vitamin line should be identified as discontinued operations and be presented net-of-tax after income from continuing operations on the income statement. 4-6. Unusual or infrequent items relate to operations. Examples are write-downs of receivables and write-downs of inventory. 4- 7. A new FASB issued in May 2005 requires retrospective application to prior period financial statements of a voluntary change in accounting principle unless it is impracticable. 4-8. The declaration of a cash dividend reduces retained earnings and increases current liabilities. The payment of a cash dividend reduces current liabilities and cash. 4-9. First, a stock split is usually for a larger number of shares. Secondly, a stock dividend reduces retained earnings and increases paid-in capital. A stock split merely increases the shares and reduces the par value, leaving the capital stock account intact. Both require restatement of any per-share items. 68
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4-10. If a firm consolidates subsidiaries that are not wholly owned, the total revenues and expenses of the subsidiaries are included with those of the parent. To determine the income that would accrue to the parent, however, it is necessary to deduct the portion of income that would belong to the minority owners. 4-11. The statement of retained earnings summarizes the changes to retained earnings. Retained earnings represents the undistributed earnings of the corporation. The income statement net income is added to retained earnings. A loss is deducted from retained earnings. A dividend is deducted from
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This note was uploaded on 12/20/2009 for the course COBA FIN302 taught by Professor Nejlaellili during the Spring '09 term at BA Mannheim.

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Chap.4 - Chapter 4 Income Statement QUESTIONS 4-1....

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