Statement of Comprehensive Income Paper 1

Answer (C) is correct. The operating section of a retailer’s income statement includes all revenues and costs necessary for the operation of the retail establishment, e.g., sales, cost of goods sold, administrative expenses, and selling expenses. Dividend revenue, however, is classified under other revenues. In a statement of cash flows, cash dividends received are considered an operating cash flow.

Answer (A) is correct. Extraordinary items are reported net of tax after discontinued operations.

Answer (D) is correct. Certain items ordinarily are not to be treated as extraordinary gains and losses. Rather, they are included in the determination of income from continuing operations. These gains and losses include those from write-downs of receivables and inventories, translation of foreign currency amounts, disposal of a business segment, sale of productive assets, strikes, and accruals on long-term contracts. A write-down of inventory is therefore included in the computation of income from continuing operations.

Answer (B) is correct. A single-step income statement combines all revenues and gains, combines all expenses and losses, and subtracts the latter from the former in a “single step” to arrive at net income. Gross profit, being the difference between sales revenue and cost of goods sold, does not appear on a single-step income statement.

Answer (A) is correct. Revenues occur in the course of ordinary activities. Gains may or may not occur in the course of ordinary activities. For example, gains may occur from the sale of noncurrent assets. Thus, the gain on the sale of a plant asset is not an operating item and should be classified in an income statement with separate operating and nonoperating sections in the other revenues and gains section.

Answer (D) is correct. Net income equals sales minus cost of sales, G&A expenses, interest, and tax. Given a 50% tax rate, income before tax must have been $20 [$10 net income ÷ (1.0 – 0.5 tax rate)]. Accordingly, income before interest and tax must have been $40 ($20 income before tax + $20 interest), and the gross margin (sales – cost of sales) must have been $90 ($40 income before interest and tax + $50 G&A expenses). If the gross margin is 50% of sales, sales equals $180 ($90 gross margin ÷ 0.5).

Answer (A) is correct. Losses may or may not occur in the course of ordinary activities. For example, they may result from nonreciprocal transactions (e.g., theft), reciprocal transactions (e.g., a sale of plant assets), or from holding assets or liabilities. Losses are typically displayed separately.

Answer (A) is correct. Cost of goods sold equals cost of goods manufactured (COGM) adjusted for the change in finished goods. COGM equals the sum of raw materials used, direct labor costs, and production overhead, adjusted for the change in work-in-progress. Raw materials used equals $255,000 ($105,000 BI + $300,000 purchases – $20,000 returns – $130,000 EI). Thus, COGM equals $1,650,000 ($255,000 RM + $600,000 DL + $750,000 OH + $220,000 BWIP – $175,000 EWIP), and COGS equals $1,480,000 ($1,650,000 COGM + $90,000 BFG – $260,000 EFG).

Answer (C) is correct. Madengrad’s cost of goods manufactured can be calculated as follows: Sales.................................... $160,000
Less: gross profit.... ................(48,000)
Cost of goods sold.................. $112,000
Add: ending finished goods........ 58,300
Goods available for sale.......... $170,300
Less: beginning finished goods... (60,190)
Cost of goods manufactured..... $110,110

Answer (C) is correct. Purchases equals usage adjusted for the inventory change. Hence, purchases equals $130,150 ($128,900 used – $27,500 BI + $28,750 EI).