Chapter 4

Income Statement

TO THE NET

1. a. $0

b. $152,750,000

c. $77,540,000

d. Equity earnings (losses) are the investor’s proportionate share of the

investee’s earnings (losses).

2. a. Net sales
$19,166,000,000 (2008); $14,835,000,000 (2007); $10,711,000,000 (2006)

b. Gross profit
$4,270,000,000 (2008); $3,353,000,000 (2007); $2,456,000,000 (2006)

c. Income from operations

$842,000,000 (2008); $655,000,000 (2007); $389,000,000 (2006)

d. Interest expense
$71,000,000 (2008); $77,000,000 (2007); $78,000,000 (2006)

e. Material improvement in net sales, gross profit, income from operations, and
interest expense. There may be some future benefit from the expenditure for
technology and content.

3. a. “Equity in income of real estate affiliates”

Equity earnings (losses) are the investor’s proportionate share of the
investee’s earnings (losses)

b. Yes
Income from continuing operations was $96,000,000. Income from
discontinued operations, net of income taxes was $36,000,000.

c. Gain on insurance settlement $8,000,000

d. Ocean transportation

e. Cost of ocean transportation services

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4. a. Goodwill arises from the acquisition of a business for a sum greater than the
physical asset value, usually because the business has unusual earnings.

b. No.

c. The amount for goodwill is reduced on the balance sheet and taken to the
income statement. No cash is involved in this entry.

5. a. Occidental Petroleum
A separate statement of comprehensive income

b. Washington Post Co.

Presented as part of the statement of stockholders’ equity

c. Arden Group, Inc.

Presented at the bottom of the income statement

d. Presentation at the bottom of the income statement should be best for the
user. This should help the reader understand the difference between net
income and comprehensive income.

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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

periodical 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.

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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 net
income – noncontrolling interest.

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
retained earnings.

4-12. 1. Appropriations as a result of a legal requirement

2. Appropriations as a result of a contractual agreement
3. Appropriations as a result of management discretion

Appropriations as a result of management discretion are not likely a detriment

to the payment of a dividend.

4-13. The balance sheet shows the account balances as of a particular point in time.
The income statement shows the revenues and expenses resulting from
transactions for the period of time.

4-14. a. Net income – noncontrolling interest is an income statement item that

represents the minority owners' share of consolidated earnings.

b. Equity in earnings is the proportionate share of the earnings of the

investor that relate to the investor's investment.

4-15. The two traditional formats for presenting the income statement are the
multiple-step and single-step. The multiple-step is preferable for analysis
because it provides intermediate profit figures that are useful in analysis.

2011 2010 2009

4-16. Earnings per share $1.40 $1.00 $ .80

4-17. Accountants have not accepted the role of disclosing the firm’s capacity to
make distributions to stockholders. Therefore, the firm’s capacity to make
distributions to stockholders cannot be determined using published financial
statements.

4-18. Management does not usually like to tie comprehensive income closely with
the income statement because the items within accumulated other
comprehensive income have the potential to be volatile.

4.19.This represents a finer line item discloser than under U.S. GAAP. Many of the
items are similar but with an IAS describing what goes in each function. For
example, U.S. GAAP has other gains and losses but the content may be
different than under IFRS.
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4.20.This represents a finer line item disclosure than under U.S. GAAP. Many of the
items are similar but with an IAS describing what goes by each nature. U.S.
GAAP would have some similar items such as (1) revenue, (2) other gains and
losses, and (3) share of profits of associates.

4.21.Per Exhibit 4-12:

Profit for the year $ 27,049

Profit attributable to:
Owners of the company 23,049
Noncontrolling interests (4,000)
U.S. GAAP: 27,049
Profit for the year $ 27,049
Less: Net income – noncontrolling interest (4,000)
Net income $ 23,049

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PROBLEMS

PROBLEM 4-1

a.
Decher Automotives
Income Statement
For the Year Ended December 31, 2010
Sales $1,000,000
Cost of sales
Beginning inventory $ 650,000
Purchases 460,000
Merchandise available for sale $1,110,000
Less: Ending inventory (440,000)
Cost of sales 670,000
Gross profit 330,000
Operating expense:
Selling expenses $ 43,000
Administrative expenses 62,000 105,000
Operating income 225,000
Other income:
Dividend income 10,000
235,000
Other expense:
Interest expense (20,000)
Income before taxes and extraordinary items 215,000
Income taxes (100,000)
Income before extraordinary items 115,000
Extraordinary items: flood loss, net of tax (30,000)
Net income $ 85,000

b.
Earnings per share:
Before extraordinary items $ 1.15
Extraordinary items (loss) (0.30)
Net income $ 0.85

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c.
Decher Automotives
Income Statement
For the Year Ended December 31, 2010
Revenue:
Sales $1,000,000
Other income 10,000
Total revenue $1,010,000

Expenses:
Cost of sales $ 670,000
Operating expense 105,000
Interest expense 20,000 (795,000)
Income before taxes and extraordinary items $ 215,000
Income taxes (100,000)
Income before extraordinary items $ 115,000
Extraordinary items: flood loss, net of tax (30,000)
Net income $ 85,000

PROBLEM 4-2

Lesky Corporation
Income Statement
For the Year Ended December 31, 2010
Revenue from sales $ 362,000
Cost of products sold (242,000)
Gross profit $ 120,000
Operating expenses:
Selling expenses $ 47,000
Administrative and general expenses 11,400 (58,400)
Operating income $ 61,600
Other items: 3,400
Other income:
Rental income $ 1,000
Interest income 2,400
Other expense:
Interest expense (2,200)
Income before tax $ 62,800
Federal and state income taxes (20,300)
Net income $ 42,500

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PROBLEM 4-3

Consolidated Can
Income Statement
For the Year Ended December 31, 2010

Sales $ 480,000
Cost of products sold (410,000)
Gross profit 70,000
Selling and administrative expenses ( 42,000)
Operating income 28,000
Other income 1,600
Income before tax and extraordinary items 29,600
Interest expense (8,700)
Income before tax and extraordinary items 20,900
Income tax (9,300)
Income before extraordinary items 11,600
Extraordinary gain, net of tax 1,000
Net income plus retained earnings 1/1 12,600
Retained earnings 1/1 270,000
Net income plus retained earnings on 1/1 282,600
Less: dividends (3,000)
Retained earnings $ 279,600

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PROBLEM 4-4

a.
Taperline Corporation
Income Statement
For the Year Ended December 31, 2010

Revenues:
Sales $ 670,000
Rental income 3,600
Gain on the sale of fixed assets 3,000
Total revenues $ 676,600
Expenses:
Cost of sales $ 300,000
Selling expenses 97,000
General and administrative expenses 110,000
Depreciation expense 10,000
Interest expense 1,900 (518,900)

Income before extraordinary items and taxes on income $ 157,700

Income tax (63,080)
Earnings before extraordinary item $ 94,620
Casualty loss $ 30,000
Less: Tax saving (12,000) (18,000)

Net income $ 76,620

Earnings per share on common stock:
(30,000 shares outstanding)
Income before extraordinary items $ 3.15
Net income $ 2.55

81
b.
Taperline Corporation
Income Statement
For the Year Ended December 31, 2010

Sales $ 670,000
Cost of sales (300,000)
Gross profit 370,000

Operating expenses
Selling expenses $ 97,000
General and administrative expenses 110,000
Depreciation expense 10,000 217,000
Operating income $ 153,000

Other revenue:
Rental income $ 3,600
Gain on the sale of fixed assets 3,000
Total other revenue $ 6,600
Other expenses:
Interest expense (1,900)
Income before extraordinary items and taxes on income $ 157,700
Income tax (63,080)
Income before extraordinary item $ 94,620
Casualty loss $ 30,000
Less: Tax saving (12,000) (18,000)

Net income $ 76,620

Earnings per share on common stock:

(30,000 shares outstanding)
Income before extraordinary items $ 3.15
Net income $ 2.55

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PROBLEM 4-5

Taxes $20,000
Tax Rate = Income Before = $40,000 = 50%
Taxes

Provision for unusual write-offs $ 50,000

Less: tax effects (50% x $50,000) 25,000
Net item $ 25,000
Extraordinary charge, net of tax of $10,000 $ 50,000

Net earnings (loss) (30,000)

Net earnings with nonrecurring items
removed [(30,000) + $25,000 + $50,000] $ 45,000

PROBLEM 4-6

Sales $ 4,000,0001
Cost of sales (2,000,000)
Gross profit $ 2,000,000
Operating expenses:
Administrative expenses $ 400,0001
Selling expenses 600,0002 (1,000,000)
Operating income $ 1,000,000
Interest expense (110,000)3
Earnings before tax $ 890,000
Income tax (48%) (427,200)
Net income $ 462,800
Earnings per share $9.26
1
Administrative expenses are 20% of $2,000,000. This is 10% of sales. Therefore,
sales are $4,000,000.
2
150% times $400,000
3
$1,000,000 x 11% = $110,000

PROBLEM 4-7

Total revenues from regular operations $ 832,000

Total expenses from regular operations 776,000
Income from operations 56,000
Extraordinary gain, net of tax 30,000
Net income $ 86,000

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 Earnings per share:
Before extraordinary items $56,000/10,000 = $5.60
Extraordinary gain $30,000/10,000 = $3.00
Net income $86,000/10,000 = $8.60

PROBLEM 4-8

Victor, Inc.
Partial Income Statement
For the Year Ended December 31, 2010

Income from continuing operations, unadjusted $ 400,000

Adjustments:
Settlement of lawsuit (10,000)
Gain on sale of securities 30,000

Income from continuing operations, adjusted, before tax $ 420,000

Income tax (30%) (126,000)

Income from continuing operations $ 294,000

Discontinued operations:
Loss on operations of consumer products division $ 60,000
Loss from disposal of assets 90,000
$ 150,000
Tax effect (30%) (45,000)
Loss from discontinued operations (105,000)
Income before extraordinary item $ 189,000
Extraordinary item:
Loss from hailstorm $ 20,000
Tax effect (30%) (6,000) (14,000)
Income before cumulative change in accounting principle $ 175,000
Cumulative change in accounting principle from average
cost to FIFO $ 30,000
Tax effect (30%) (9,000)
Increase in income from change in accounting principle 21,000
Net income $ 196,000

Earnings per share: (100,000 shares outstanding)

Income from continuing operations $ 2.94
Discontinued operations (1.05)
Extraordinary loss (0.14)
Cumulative effect of a change in accounting principle 0.21
Net income $ 1.96

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PROBLEM 4-9

a. A h. B p. A
b. A i. C q. A
c. A j. B r. A
d. B k. B s. A
e. B l. B t. B
f. A m. A u. B
g. A n. B v. A
o. B

PROBLEM 4-10

a. C h. B o. A
b. B i. B p. B
c. A j. A q. A
d. B k. B r. B
e. A l. A
f. B m. B
g. C n. B

PROBLEM 4-11

a. Net income $ 20,000

Plus: Extraordinary loss from flood 120,000
$ 140,000
b. $60,000

c. $60,000

d. $40,000

e. $100,000 – $50,000 = $50,000

PROBLEM 4-12

a. Net income from operations $146,000

b. $20,000 Loss

c. $94,000
–30,000
–50,000
+25,000
$39,000

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86
PROBLEM 4-13

a. 1. Receipt of cash:
Sales, 210,000 ounces x $300 = $ 63,000,000
Cost of goods sold (1),
210,000 ounces x $250 = (52,500,000)
Gross profit $ 10,500,000

Selling expenses (2,000,000)

Administrative expenses (1,250,000)
Profit before taxes $ 7,250,000
Taxes (3,625,000)
Net income $ 3,625,000

(1) $50,000,000
= $250 ounce
200,000

2. Point of sale:
Sales, 230,000 ounces x $300 = $ 69,000,000
Cost of goods sold,
230,000 ounces x $250 = 57,500,000
Gross profit $ 11,500,000

Selling expenses (2,000,000)

Administrative expenses (1,250,000)
Profit before taxes $ 8,250,000
Taxes (4,125,000)
Net income $ 4,125,000

3. End of production:
Sales, 200,000 ounces x $300 = $ 60,000,000
Cost of goods sold,
200,000 ounces x $250 = (50,000,000)
Gross profit $ 10,000,000

Selling expenses (2,000,000)

Administrative expenses (1,250,000)
Profit before taxes $ 6,750,000
Taxes (3,375,000)
Net income $ 3,375,000

87
 4. Based on delivery:
Sales, 190,000 ounces x $300 = $ 57,000,000
Cost of goods sold,
190,000 ounces x $250 = (47,500,000)
Gross profit $ 9,500,000

Selling expenses (2,000,000)

Administrative expenses (1,250,000)
Profit before taxes $ 6,250,000
Taxes (3,125,000)
Net income $ 3,125,000

b. 1. Receipt of cash

This method should only be used when the prospects of collection are
especially doubtful at the time of sale.

2. Point of sale

In practice, the point of realization usually is the point of sale. At this point, the
earnings process is virtually complete and the exchange value can be
determined.

3. End of production

The realization of revenue at the completion of the production process is

acceptable when the price of the item is known and there is a ready market.

This method should receive strong consideration in this case. The question
that needs to be resolved is how fixed is the price of uranium. Since the price
has gone from $150 per ounce in 1981 to $300 per ounce in 2006, the price
does not appear to be fixed.

4. Based on delivery

This is not usually an acceptable realization point. Delivery is an objective

guideline, but delivery does not usually represent a significant event.

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PROBLEM 4-14

a. No. This loss does not relate to the cost of goods sold. It is likely an
extraordinary loss meeting the criteria of being of unusual in nature and
infrequent in occurrence.

b. No. Land is carried at historical cost.

c. Yes. The cost of machinery and equipment should be charged to a fixed asset
account.

d. No. Depreciation should be recognized over the period of use.

e. Yes. Some loss to employees would be expected and it is immaterial in relation

to the cost of goods sold.

f. No. This car should not be recorded on the company’s books, unless it is to be
used for company business.

PROBLEM 4-15

a. Comprehensive income will tend to be more volatile than net income because the
items within other comprehensive income tend to be more volatile than net
income.

b. The standard directs that earnings per share be computed based on net income.

c. $30,000
5,000
3,000
$38,000

d. No. These items could net out as an addition to net income or a deduction from
net income.

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PROBLEM 4-16

a. 2 Advertising expense would be classified as an operating expense.

b. 2 Equity in earnings of nonconsolidated subsidiaries would be recurring as

long as there is an investment in the subsidiary. If our firm gained control,
then there would be consolidation.

c. 2 Beginning inventory $ 65,000 Computed

Purchases $ 180,000
Purchase returns (5,000) 175,000
Total available 240,000 Computed
Less ending inventory (30,000)
Cost of goods sold $ 210,000

d. 3, 4, 5 Discontinued operations and extraordinary items are considered to be

nonrecurring items.

e. 3 30% x $150,000 = $45,000

f. 1 Extraordinary items are material events and transactions distinguished by

their unusual nature and by the infrequency of their occurrence. A loss
from a tornado would qualify as an extraordinary item.

g. 2 A cash dividend declared by the board of directors reduces retained

earnings by the amount of the dividend declared.

h. 5 The overall effect is to leave stockholders’ equity in total unchanged and

each owner’s share of stockholders’ equity unchanged; however, the total
number of shares increase.

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PROBLEM 4-17

a. 2 Beginning inventory $ 80,000

Purchases 580,000
Purchase returns (8,000)
Total available 652,000
Less ending inventory (132,000) Computed
Cost of goods sold $ 520,000

b. 4 Assets increase $ 400,000

The increase in assets is equal to the change in liabilities and

stockholders’ equity.
Liabilities increase $150,000
Capital stock increases 120,000
Additional paid-in capital
increases 110,000
Therefore, increase in
retained earnings 20,000
$400,000
Decrease to retained earnings
related to dividends $ 20,000
Net increase to retained
earnings 20,000
Therefore, net income was $ 40,000

c. 5 An extraordinary item is a material event or transaction distinguished by

unusual nature and by infrequency of occurrence.

d. 1 If a firm consolidates subsidiaries not wholly owned, the total revenues

and expenses of the subsidiaries area included with those of the parent.
However, to determine the income that would accrue to the parent, it is
necessary to deduct the portion of income that would belong to the
minority owners.

e. 2 An adjustment for an error of the current period is adjusted during the

current period.

f. 2 2,000,000 x .05% = 100,000 x $10 = $1,000,000

g. 3 100,000 x .05% = 5,000 x $10 = 50,000

h. 2 200,000 x 2 = 400,000

i. 5 Extraordinary items are not part of accumulated other comprehensive

income.

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CASES

CASE 4-1 HOME BUILDING BLUES

(This case provides a good review of the income statement).

a. Appears to be a modified single-step income statement.

b. No. Minority interest expense, net appears on the statement. This indicates that
there is a minority ownership in some of the subsidiaries.

c. No. Equity income would be presented. This would represent the same amount
of income.

d. Equity earnings (losses) are the investor’s proportionate share of the investee’s
earnings (losses). If the firm gained control, then there would be consolidation.

e. No, but these costs did decline materially in 2008. The decline is a positive sign.

f. Their opinion was that these goodwill costs could not be recovered. Disclosure
was improved by separating these goodwill impairments.

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CASE 4-2 MOBILE EXPERIENCES

(This case provides a good review of the income statement).

a. A multiple-step income statement.

b. Yes.

c. No. Equity income would be presented. This would represent the same amount
of income.

d. 1. 2009 had goodwill impairment of $1,619,000,000. This implies that

Motorola invested in a subsidiary in the past for a sum greater than the
physical asset value. It now estimates it will not recover some or all of the
costs that were greater than the physical asset value.

2. The investment impairments imply that Motorola has investments that have
declined in market value below Motorola’s costs.

3. 2008
Goodwill impairment $ 1,619,000,000
Investment impairment 365,000,000
Total impairments (A) $ 1,984,000,000
Earnings (loss) from continuing operations before
income taxes (B) $ 2,637,000,000
(A) ÷ (B) 75.24%

Very material

e. 1. (In millions)
2008 2007 2006
Selling, general and
administrative expenses (A) $ 4,330 $ 5,092 $ 4,504
Gross margin (B) $ 8,395 $ 9,952 $ 12,727
(A) ÷ (B) 51.58% 51.17% 35.39%

Very significant with a material increase in 2007 that went slightly higher in 2008.

2. (In millions)
2008 2007 2006
Research and development
expenditures (A) $ 4,109 $ 4,429 $ 4,106
Gross margin (B) $ 8,395 $ 9,952 $ 12,727
(A) ÷ (B) 48.95% 44.50% 32.26%

Very significant with a material increase in 2007 followed by a moderate increase

in 2008.

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 3. 2008 2007 2006
Dividends paid per share $ .20 $ .20 $ .18
Net earnings (loss) per diluted share $ (1.87) $ (.02) $ 1.46

Dividends exceeded loss per share on 2007 and 2008. Dividends were only 12.33% of
net earnings in 2006.

4. a. Reduce dividends

b. Protect research and development expenditures

CASE 4-3 APPAREL

(This case represents a selected review of the income statement).

a. 1. When a parent company has control over the subsidiary, then the parent
company will consolidate the subsidiary.

2. No. Noncontrolling interest is present (minority interest).

b. Management makes estimates and assumptions that affect the amounts in the
consolidated financial statements and the accompanying footnotes.

c. No. Not if they were classified under current assets.

d. Unusual or infrequent item.

CASE 4-4 THE BIG ORDER

a. United Airlines should record the purchase of these planes when a plane is
delivered.

b. In general, revenue recognition is being made at the completion of production.

Under summary of significant accounting policies in the notes to the 1990
financial statements, Boeing describes its revenue recognition with this
statement.

“Sales under commercial programs and U.S. Government and foreign military
fixed-price type contracts are generally recorded as deliveries are made.”

94
c. The case indicates that the order was equally split between firm orders and
options. This would lead us to believe that the firm orders were “firm” and that
United Airlines would be committed to accept delivery of these planes.

In reality, the orders may not be firm in the sense that Boeing may be willing to
negotiate a reduction if United Airlines were in financial trouble or if the need for
the planes had substantially declined.

In the 1990 annual report of Boeing, in the section Management’s Discussion

and Analysis of Financial Condition and Results of Operations, a section on
backlog had this comment:

“In evaluating the Company’s firm backlog for commercial customers, certain risk
factors should be considered. Approximately 55% of the firm backlog for
commercial airplanes is scheduled to be delivered beyond 1992. An extended
economic downturn could result in less than currently anticipated airline
equipment requirements resulting in requests to negotiate the rescheduling, or
possible cancellation, of firm orders.”

d. 1. There would not necessarily be disclosure in the financial statements and

notes. This was not a transaction that was recorded.

There was disclosure of credit agreements in a note “long-term debt.” This

note did not specifically refer to this order.

2. Disclosure would likely be found in the president’s letter and the section
Management’s Discussion and Analysis. In fact, extensive disclosure was
located in these sections.

e. 1. There would not necessarily be disclosure in the financial statements and

notes. This was not a transaction that was recorded. A review of the
financial statements and notes did not turn up disclosure.

2. Disclosure would likely be found in the president’s letter and the section
Management’s Discussion and Analysis. In fact, extensive disclosure
relating to orders was found. Some of this disclosure specifically
commented on the United Airlines order, while some was general on orders.

CASE 4-5 CELTICS

(This case provides the opportunity to review the statements of income of the Boston
Celtics.)

a. Franchise and other intangible assets were recognized as intangible assets on

the balance sheet.

b. No. Since these operations were discontinued they would not be included in
projecting the future.
95
c. Possibly there was a new contract with players that called for substantial
increases.

d. Revenues from ticket sales and television and radio broadcast rights fee
increased substantially between 1997 and 1998.

e. Much of the income in 1996 came from discontinued operations. The board
would typically not want to consider the income from discontinued operations
when setting the distribution.

CASE 4-6 IMPAIRMENTS

(This case provides a selected view of impairments.)

a. 1. No. Because of the nature of the business, there is no current asset

classification.

2. No. Inventory includes the costs of direct land acquisition, land

development and home construction, capitalized interest, real estate taxes
and direct overhead costs incurred during development and home
construction.

b. 1. This implies that D. R. Horton invested in a subsidiary in the past for a sum
greater than the physical asset value. It now estimates that
it will not recover some or all of the cost that were
greater than the physical asset value.

2. For D. R. Horton, inventory is like a long-lived asset.

c. 1. The company holds cash that is restricted as to its use. This cash cannot
be used in operations.

2. “Each quarter, all components of inventory are reviewed for the purpose of
determining whether recorded costs and costs required to complete each
home or project are recoverable. If the review indicates that an impairment
loss is required under the guidelines of SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets,’ an estimate of the loss is
made and recorded to cost of sales in that quarter.”

This procedure does not reduce cash.

3. Probably. This company needs its cash for operations.

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CASE 4-7 CANADIAN GAAP vs. U.S. GAAP

(This case provides the opportunity to compare Canadian GAAP and U.S. GAAP.)

a. (In thousands)
2008 2007 2006
$ $ $
Net income using Canadian GAAP 671,562 388,479 458,250
Net income using U.S. GAAP 654,839 385,934 464,622
Comprehensive income using U.S. GAAP 651,704 437,674 449,496

Those differences can be material and they vary between U.S. GAAP and
comprehensive income U.S. GAAP.

b. There could be a significant difference. The relative value of the Canadian dollar
and the U.S. dollar changes daily.

CASE 4-8 TELECOMMUNICATIONS SERVICES – Part 2

(This case provides an opportunity to review a Hong Kong company presentation to the
SEC).

a. 1. This was done to help the understanding of the U.S. investor.

2. Nature

3. Net income is presented as follows:

Attributable to:
Equity holders of the company
Minority Interest

The U.S. GAAP presentation would have the minority interest as part of the
net income presentation.

2007
as 2008 2008
4. restated RMB U.S. $
Earnings per share for income
attributable to the equity holders of
the company during the year
Basic earnings per share .93 1.43 .21
Diluted earnings per share .92 1.42 .21

The equity holders are the true owners.

5. With U.S. GAAP, dividend paid during the year would be presented in the
cash flow statement.

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THOMSON ONE

This Thomson One exercise provides for a review of key income statement data for
Merck & Company. The trend will change as Thomson One is updated.

98