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 after
income from continuing operations on the income statement.
4- 6. Unusual or infrequent items relate to operations. Examples are writedowns of receivables and write-downs of inventory.
4- 7. In 2003, the cumulative effect of the new change would be presented
on the income statement as a reduction, net of tax, after any extraordinary
items and just before net income.
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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.
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.

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. Minority share of earnings 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.
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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.
2004 2003 2002
4-16. Earnings per share $1.40 $2.00 $1.60
4-17. Accountants have not accepted the role of disclosing the firms capacity
to make distributions to stockholders. Therefore, the firms 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.
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