The shares of S Ltd., a manufacturing company, have recently been listed on a Canadian stock exchange. In anticipation of preparing the first quarterly interim report to shareholders, the comptroller has asked CA, the shareholders' auditor, for certain advice. How should CA answer each of the following questions raised by the comptroller?

1. The company plans to distribute a brief interim report containing a summary report by the president and the attached condensed statement of income. What other information should be reported in the interim financial statements?

2. Since the company has no perpetual records and physical stocktaking can be carried out only at the fiscal year-end, how should the amount of cost of goods sold for the quarter be determined?

3. Should an extraordinary item be prorated over a full year so as not to distort the results of the interim period in which it occurs?

4. How should income taxes be reported if there is a profit in the first quarter and an anticipated loss in the second quarter?

Transcribed Image Text:

S. Ltd. Interim Comparative Condensed STATEMENTS OF INCOME for the three months ended June 30 19X2 19X1 Gross revenue from operations (including investment income) $6,094,805 $5,375,700 Deduct: Cost of merchandise sold and all expenses, except for the undernoted items $3,706,921 $3,074,693 Debenture interest Directors' fees Provision for depreciation Income before the following Income taxes 9,353 14,549 1,750 2,350 650,745 523,686 $4,368,769 $1,726,036 826,036 $1,760,422 880,211 $ 880,211 $3,615,278 Income before extraordinary item $ 900,000 Extraordinary item Net income 100,000 $ 800,000 $ 880,211 Number of common shares outstanding 400,000 $2.00 400,000 $2.20 Earnings per common share Notes to interim financial statement: 1. The interim statement for 19X2 is unaudited. 2. An actual physical inventory was not taken on June 30, 19X2 nor on June 30, 19X1.