DB 4.6 - Classification of Income Statement Items As the audit partner of Seymour CPA's, you are in charge of reviewing the classification of unusual items that have occurred during the current year for several year-end audit clients of your firm. The following material items have come to your attention: 1) An automobile dealer sells for $160,000 an extremely rare historical vehicle that it purchased for $40,000 over 10 years ago. The vehicle is the only such display item that the dealer has owned over that time. 2) A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 3) A restaurant chain that has over 200 locations in over 40 states sold six restaurants located in the Midwest. 4) Depreciation expense last year was incorrectly understated by $650,000. The mistake was discovered in the current year. 5) A construction company, at great expense, prepared a major proposal for a government loan. The loan was not approved. 6) A retail outlet changed its computation for bad debt expense from 3% of sales to 2% of sales because of changes in its customer clientele. 7) A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to shut down the division that sells to one of the two classes of customers. 8) A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed. Required (and please read all of the requirements below before beginning with your answers): Part (a): For each item above, indicate whether it relates to: 1) a change in accounting principle, 2) a change in accounting estimate, 3) a correction of an accounting error, or 4) none of these. Part (b): Indicate if the item would be reported on the: 1) Income Statement, 2) Statement of Retained Earnings, or 3) Neither. Part (c): If the item would appear on the Income Statement, indicate in which section it would appear, using the following choices: 1) Sales (Operating) Revenue, 2) Cost of Goods Sold, 3) Operating Expenses, 4) Other/Unusual Items, or 5) Discontinued Operations. Part (d): In order to receive full credit on this assignment, be sure to provide a brief explanation/rationale related to each of your answers for the 8 items above. Here is an example of an explanation: "This does not appear to be a normal operating expense, so since it is large (material) it should be separately reported in the 'Other/Unusual Items' section." Another example might be, "Changes in Accounting Principle are treated retrospectively, so prior periods are re-stated for this change." Note: It probably would be best to structure your answers this way: 1a. (But type the words from the above choices, not just the number. For example, type, 'Change 1b. in accounting principle' instead of '1' or type 'Operating Expenses,' instead of just typing '3.') 1c. 1d. DB 4.6 - Classification of Income Statement Items As the audit partner of Seymour CPA's, you are in charge of reviewing the classification of unusual items that have occurred during the current year for several year-end audit clients of your firm. The following material items have come to your attention: 1) An automobile dealer sells for $160,000 an extremely rare historical vehicle that it purchased for $40,000 over 10 years ago. The vehicle is the only such display item that the dealer has owned over that time. 2) A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 3) A restaurant chain that has over 200 locations in over 40 states sold six restaurants located in the Midwest. 4) Depreciation expense last year was incorrectly understated by $650,000. The mistake was discovered in the current year. 5) A construction company, at great expense, prepared a major proposal for a government loan. The loan was not approved. 6) A retail outlet changed its computation for bad debt expense from 3% of sales to 2% of sales because of changes in its customer clientele. 7) A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to shut down the division that sells to one of the two classes of customers. 8) A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed. Required (and please read all of the requirements below before beginning with your answers): Part (a): For each item above, indicate whether it relates to: 1) a change in accounting principle, 2) a change in accounting estimate, 3) a correction of an accounting error, or 4) none of these. Part (b): Indicate if the item would be reported on the: 1) Income Statement, 2) Statement of Retained Earnings, or 3) Neither. Part (c): If the item would appear on the Income Statement, indicate in which section it would appear, using the following choices: 1) Sales (Operating) Revenue, 2) Cost of Goods Sold, 3) Operating Expenses, 4) Other/Unusual Items, or 5) Discontinued Operations. Part (d): In order to receive full credit on this assignment, be sure to provide a brief explanation/rationale related to each of your answers for the 8 items above. Here is an example of an explanation: "This does not appear to be a normal operating expense, so since it is large (material) it should be separately reported in the 'Other/Unusual Items' section." Another example might be, "Changes in Accounting Principle are treated retrospectively, so prior periods are re-stated for this change." Note: It probably would be best to structure your answers this way: 1a. (But type the words from the above choices, not just the number. For example, type, 'Change 1b. in accounting principle' instead of '1' or type 'Operating Expenses,' instead of just typing '3.') 1c. 1d