For its fiscal year ending October 31, 2010, Molini Corporation reports the following partial data.
Income before income taxes $540,000
Income tax expense (30% $390,000) 117,000
Income before extraordinary items 423,000
Extraordinary loss from flood 150,000
Net income $273,000
For its fiscal year ending October 31, 2010, Molini Corporation reports the following partial data.
Income before income taxes $540,000
Income tax expense (30% $390,000) 117,000
Income before extraordinary items 423,000
Extraordinary loss from flood 150,000
Net income $273,000
The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.
Instructions
Complete the correct income statement, beginning with income before income taxes.
MOLINI CORPORATION
Partial Income Statement
For the Year Ended October 31, 2010
Income before income taxes $
Income tax expenseExtraordinary loss from floodIncome before extraordinary item
Income before extraordinary itemIncome tax expenseExtraordinary loss from flood
Income before extraordinary itemIncome tax expenseExtraordinary loss from flood
Net income $
The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.
Instructions
Explain in memo form why the income statement data are misleading
Tonya or Chris or whoever,
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Solution Close
E15-12 (a)
MOLINI CORPORATION
Partial Income Statement
For the Year Ended October 31, 2008
Income before income taxes $540,000
Income tax expense ($540,000 × 30%)
162,000
Income before extraordinary item 378,000
Extraordinary loss from flood, net of $45,000
tax savings ($150,000 × 30%)
105,000
Net income
$273,000
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Complete the correct income statement, beginning with income before income taxes.
MOLINI CORPORATION
Partial Income Statement
For the Year Ended October 31, 2008
Income before income taxes $ 540000
Income tax expense
162000
Income before extraordinary item 378000
Extraordinary loss from flood
105000
Net income
$ 273000
Memo:
Subject: Misleading Income Statement Data
Date: [Insert Date]
To: [Molini Corporation Management]
From: [Your Name]
I am writing to bring to your attention the misleading nature of the income statement data for the fiscal year ending October 31, 2010, for Molini Corporation. Please find below an explanation of why the income statement data could be considered misleading:
1. Incomplete Reporting of Income: The income statement provided does not fully reflect all the components of income. It only shows the income before income taxes, income tax expense, and net income. However, it fails to include other essential components such as revenues, operating expenses, and non-operating income or expenses. This makes it difficult to analyze the financial performance of the company accurately.
2. Failure to Separate Extraordinary Loss: The income statement does not clearly show the extraordinary loss from the flood as a separate line item. Instead, it is combined with the income tax expense, resulting in confusion when trying to understand the impact of the flood on the company's financials.
3. Lack of Comparative Analysis: The income statement does not provide any comparative figures from prior periods or industry benchmarks. This omission prevents stakeholders from effectively assessing the company's performance and comparing it to previous years or industry standards.
To provide a clearer and more informative income statement, I would recommend the following actions:
1. Include all relevant components of income, such as revenues, operating expenses, non-operating income, and expenses.
2. Clearly present the extraordinary loss from the flood as a separate line item to highlight its impact on the financials.
3. Consider including a comparative analysis section to show the company's performance over multiple periods or against industry benchmarks.
By addressing these concerns, the income statement will provide a more comprehensive and accurate representation of Molini Corporation's financial performance. This will enable stakeholders to make informed decisions based on reliable financial information.
If you have any further questions or require additional clarification, please do not hesitate to reach out to me.
Thank you for your attention to this matter.
Sincerely,
[Your Name]