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Accounting problems for National Industries, Inc.

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

NATIONAL INDUSTRIES, INC.
Statement of Consolidated Earnings
For the Year Ended March 31, 2004

Net Sales $38,041,200
Other revenue 407,400
Total revenue $38,448,600
Cost of products sold $27,173,300
Selling and administrative expenses 8,687,500
Interest expense 296,900
Total cost and expense $36,157,700
Earnings before income taxes $ 2,290,900
Provision for income taxes $ 1,005,200
Net earnings $ 1,285,700

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 earning should have been included on the statement of earning, namely, a gain of $633,400 on the sale for additional income taxes of $164,900 resulting from and examination of the returns covering the year ended March 31, 2002, and 2003.

Required:
a.Discuss the accounting problem involved in measuring net profit by industry segment with 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 it 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 earning?

ii.What criteria should be applied in determining whether a gain or loss that is properly included in the determination of net earning should be included in the results of ordinary operation 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 statement?

Solution Preview

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

NATIONAL INDUSTRIES, INC.
Statement of Consolidated Earnings
For the Year Ended March 31, 2004

Net Sales $38,041,200
Other revenue 407,400
Total revenue $38,448,600
Cost of products sold $27,173,300
Selling and administrative expenses 8,687,500
Interest expense 296,900
Total cost and expense $36,157,700
Earnings before income taxes $ 2,290,900
Provision for income taxes $ 1,005,200
Net earnings $ 1,285,700

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 ...

Solution Summary

This solution is comprised of a detailed explanation to solve the accounting and performance problems for National Industries, Inc.

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