2) Income Statement

Question 1

What is the presentation order of the major components of an income and retained earnings statement?

Hint: IDA

Answer 1

Income Statement:
INCOME (or loss) from continuing operations
Income (or loss) from DISCONTINUED operations
Retained Earnings Statement:
Cumulative effect of a change in ACCOUNTING principle

Question 2

The gain (loss) from discontinued operations can consist of…

Answer 2

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

Question 3

In what period are the following reported:
An impairment loss?
A gain (loss) from actual operations?
A gain (loss) on disposal?

Answer 3

All are reported in the period in which they occur.

Question 4

In reporting DISCONTINUED OPERATIONS, how is a “component” of an entity defined under U.S. GAAP and IFRS?

Answer 4

U.S. GAAP:
1. An operating segment
2. A reportable segment
3. A reporting unit
4. A subsidiary
5. An asset group
IFRS:
1. A separate major line of business or geographical area of operations
2. A subsidiary acquired exclusively with a view to resale

Question 5

Define the following terms as they are used in reporting discontinued operations:
BUSINESS
NONPROFIT ACTIVITY

Answer 5

A BUSINESS is an integrated set of activities and assets that is conducted and managed for the purpose of providing a return to the investors and other owners, members, or participants.

A NONPROFIT ACTIVITY is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission.

Question 6

Name the types of entities that may be considered for reporting according to the rules for discontinued operations.

Answer 6

• Component of an entity
• Group of components of an entity
• Business
• Nonprofit activity

Question 7

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 7

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a STRATEGIC SHIFT that has or will have a MAJOR EFFECT on an entity’s OPERATIONS AND FINANCIAL RESULTS.

Question 8

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 8

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

Question 9

What types of costs are associated with exit and disposal activities?

Answer 9

• Involuntary employee termination benefits
• Costs to terminate a contract that is not a capital lease
• Costs to consolidate facilities
• Costs to relocate employees

Question 10

Name the three types of ACCOUNTING CHANGES.

Answer 10

• Change in an accounting principle
• Change in accounting estimate
• Change in accounting entity

Question 11

How is a Change In Accounting Principle reported?

Answer 11

• Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.
• Prior period financial statements are restated, if presented.

Question 12

What are the Special Changes in an Accounting Principle? How are Special Changes in an Accounting Principle reported?

Answer 12

• A change to LIFO from another method of inventory pricing under U.S. GAAP.
• Any other change in which a cumulative effect adjustment is considered impractical to calculate.

Special changes are reported prospectively (like a change in estimate).

Question 13

How is a Change in an Accounting Estimate reported?

Answer 13

• Prospectively
• The effect is shown in the current and/or future periods that are affected by the change.
• Financial statements are NOT restated.

Question 14

Under U.S. GAAP, how is a Change in the Accounting Entity reported?

Answer 14

All current and prior period financial statements presented are restated.

Question 15

How are Error Corrections reported?

Answer 15

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.