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Unformatted text preview: P4-1 Miscellaneous Cases1. Lipski CompanyChanging the method of accounting for depreciation of office furniture could violate the restated using the new method so as to allow for a year-to-year comparison of financialperformance.2. Gomez CorporationReclassifying operating expenses from a more general approach to one where a distinctionis made between Selling Expenses and Administrative Expenses could be justified if itthe new method outweighed the costs.3. Param CorporationBy not reporting an illegal bribe made by a company official, the company would violate the company should be left out. In addition, any information that might affect a reader'sclassified not whether it should be reported.4. K & T Bookstoreacquisition of a long-term asset that is expected to provide benefits to the company overseveral years. Conservatism only applies when there are more than one reasonable methodsto account for a transaction. This is not the case here.5. Chang CompanyBy not disclosing what inventory method they are using, this company is violating theto account for inventory and this knowledge may affect their evaluation of the company its profitability.Consistency Conventionunless the nature and reasons for the changes are fully explainedin the Notes to the Financial Statements. In addition, the two prior years need to bemet the Cost/Benefit Convention. In other words, it would make sense if the benefits of the Principle of Full Disclosure. No transactions which affect the financial condition ofopinion or decision about the company should be included. Invoking the MaterialityConventionis not appropriate since it applies only to how the transaction should beDespite the uncertainty surrounding the future, the addition should be recorded as Property,Plant & Equipmentand depreciated over its useful life. While expensing this cost would conform to the Conservatism Convention, it would not be a fair characterization of the Principle of Full Disclosure. It is important for some readers to know the method usedP4-2 Doug's Hardware Corporation1. Multistep Income StatementDoug's Hardware CorporationIncome StatementsFor the Years Ended July 31, 2011 & 20102011%2010%Net sales$464,200 100.0%$388,466 100.0%Cost of goods sold$243,880 52.5%$198,788 51.2%Gross margin$220,320 47.5%$189,678 48.8%Operating expenses:Selling expenses$95,160 20.5%$55,644 14.3%General & administrative expenses$90,840 19.6%$49,286 12.7%Total operating expenses$186,000 40.1%$104,930 27.0%Income from operations$34,320 7.4%$84,748 21.8%Other revenues & expensesInterest income$1,420 0.3%$750 0.2%Interest expense$5,600 1.2%$1,100 0.3%Excess of other expenses over other revenues$4,180 0.9%$350 0.1%Income before income taxes$30,140 6.5%$84,398 21.7%Income taxes$8,000 1.7%$21,250 5.5%Net income$22,140 4.8%$63,148 16.3%Earnings per share$2.21 $6.31 2. 2....
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- Spring '07