Case 6 - 3 Dan 6 - 4 Schroeder

Case 6-3 Income Statement Format
Accountants have advocated two types of income statements based on differing views of the
concept of income : the current operating performance and all inclusive concept of income
Required:
a. Discuss the general nature of these two concept of income?
b. How would the following items be handled under each concept?
1) Cost of Good Sold
2) Selling Expenses
3) Extraordinary Items
4) Prior period Adjustment
Answer :
a. The two concepts of income i.e. the current operating performance and all-inclusive
concepts of income entail current operating performance concept that is explained in
IAS 8 as Unusual and Prior Period items and Changes in Accounting policy. Income
measured using current operating performance concept contains income from normal
enterprise operations before non-recurring items and capital gains and losses
accounted for.
All inclusive concept of income also called comprehensive income is a method of
reporting income utilized in accounting which reports all gains and losses in income
statement minus extraordinary items and nonrecurring gains and losses
b. How the following items would be handled under each concept
1) Cost of goods sold -these are treated the same under the two concepts as cost of
goods is an operating expense
2) Selling expenses are as well treated the same as they debit income statement
under each concept
3) Extra-ordinary items-these are not part of income statement under current concept
of income statement. Extra-ordinary items are deemed part of earnings under all
-inclusive income concept
4) Prior period adjustments-these should be treated by being excluded from
calculation of current operating income under current operating performance
management concept. Under all-inclusive concept of income, prior period
items shouldn't appear in income but should reflect as adjustments to opening
retained earnings balance.
Case 6-4 Accounting Changes

It is important in accounting theory to be able to distinguish the type of accounting changes.
Required.
a. If a public company desired to change from the sum of year digits depreciaton method
to the straight-line method fot its fixed asset, what type of accounting change will this
be? How would it be treated? Disscuss the permissibility of this change.
b. If a public company obtained additional information about the service lives of some
of its fixed assets that showed that the service lives previously used should be
shortened, what type of accounting change, would this be? Include in your disscussion
how the change should be reported in the income statement of the year of the change
and what dislosure should be made in the financial statements or notes.
c. Changing specific subsidiaries comprising the group of companies for which
consolidated financial statements are presented is an example of what type of
accounting change? What effect does it have on the consolidated income statements?
Answer :
a. A change in accounting principle. Change in accounting principle is the change
from accounting method for the item or transaction to another accounting method
for same transaction, when both methods are GAAP. GAAP requires that changes
in an accounting principle should be done retrospectively. Retrospectively
meaning revisiting past years statements. It is done by reporting the current results
on the new basis, reporting the cumulative effect of change in current income
statement.“FASB ASC 250 requires that the new accounting principle must be
applied to the balances of the appropriate asset and liabilities as of the beginning
of the earliest period for which retrospective application is
practicable…”(Schroeder, Clark & Cathey, 2014)
b. A change in accounting estimates. Change in estimates require the current and
prospective approach by reporting current and future financial statements on the
new basis. Estimated that are based on the judgments have substantial accounting
role. Any entity shall disclose the nature and amount of a change in an accounting
estimate that has an effect in the current period or is expected to have an effect in
future periods. If the amount of the effect in future periods is not disclosed
because estimating it is impracticable, and entity shall disclose that fact
c. This form of accounting change is known as a change in a reporting entity.
“Reporting entities prepare GPFRs. GPFRs include financial statements, which
present information about such matters as the financial position, performance and
cash flows of the entity, and financial and non-financial information that
enhances, complements and supplements the financial statements”(Reporting
Entity, 2013). Whenever an entity is the primary beneficiary of the financing
entity the assets and liabilities of that entity are used as the fair value of the assets
and liabilities of that particular entity.

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Case 6-3 Income Statement Format

Case 6-4 Accounting Changes

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