The most recently published statement of consolidated earnings of National Industries, Inc., appears as follows:

Charles Norton, a representative of a firm of security analysts, visited the central headquarters of National Industries for the purpose of obtaining more information about the company's operations.

In the annual report, National's president stated that National was engaged in the pharmaceutical, food processing, toy manufacturing, and metalworking industries. Norton complained that the published statement of earnings was of limited utility in his analysis of the firm's operations. He said that National should have disclosed separately the profit earned in each of its component industries. Further, he maintained that several items appearing on the statement of consolidated retained earnings should have been included on the statement of earnings, namely, a gain of \(\$ 633,400\) on the sale of the furniture division in early March of the current year and an assessment for additional income taxes of \(\$ 164,900\) resulting from an examination of the returns covering the years ended March 31, 2002, and 2003.

Required:

a. Discuss the accounting problems involved in measuring net profit by industry segments within a company.

b. With reference to National Industries' statement of consolidated earnings, identify the specific items where difficulty might be encountered in measuring profit by each of its industry segments and explain the nature of the difficulty.

i. What criteria should be applied in determining whether a gain or loss should be excluded from the determination of net earnings?

ii. What criteria should be applied in determining whether a gain or loss that is properly included in the determination of net earnings should be included in the results of ordinary operations or shown separately as an extraordinary item after all other terms of revenue and expense?

iii. How should the gain on the sale of the furniture division and the assessment of additional taxes each be presented in National's financial statements?

Transcribed Image Text:

Net sales NATIONAL INDUSTRIES, INC. Statement of Consolidated Earnings for the Year Ended March 31, 2004 Other revenue Total revenue Cost of products sold Selling and administrative expenses Interest expense Total cost and expense Earnings before income taxes Provision for income taxes Net earnings $38,041,200 407,400 $38,448,600 $27,173,300 8,687,500 296,900 $36,157,700 $ 2,290,900 1,005,200 $ 1,285,700