3-1 Income Statements

Question 1

Income Statement

Answer 1

Reports revenues, gains, expenses, and losses of a company for a specific TIME PERIOD

Question 2

What is the primary source of information on a company’s current operating peformance?

Answer 2

Income Statement

Question 3

What are other names of the Income Statement?

Answer 3

Statement of Income
Statement of Earnings
Statement of Operations
Profit and Loss Statement

Question 4

Income from Continuing Operations

Answer 4

Specifies the revenues, gains, expenses, and losses associated with the parts of a company that are expected to continue in the future (after taxes)

Question 5

Income (loss) from Discontinued Operations

Answer 5

Operations that have been disposed of or are held for sale (reported in a separate section)

Question 6

Performance Evaluation

Answer 6

Income components are used to assess a company’s performance relative to prior results, expectations, industry and competitior results

Question 7

Future Earning Prediction

Answer 7

The income statement provides a basis for predicting future results, with special emphasis on differentiating recurring and nonrecurring amounts

Question 8

Risk Assessment

Answer 8

Income results provide a basis for a financial statement user to assess risk about predicting future financial results

Question 9

What are some factors that limit financial statement users?

Answer 9

Estimates and Judgement
Selection of Accounting Methods
Other Sources of Information

Question 10

Estimates and Judgement

Answer 10

Measurement in financial statements commonly involve estimates, classifications, summarizations, judgements, and allocations

Question 11

Selection of Accounting Methods

Answer 11

Income components are impacted by accounting methods used. Explanations of underlying assumptions or methods better enable one to compare results across companies

Question 12

Other Sources of Information

Answer 12

Financial statement users must rely on additional information in analyzing financial statements such as economic indicators and analyst expectations. Also, some items are omitted from the income statement because they cannot be reliably measured, such as internally generated goodwill and investments in human capital

Question 13

Real world: Ralph Lauren vs. U.S. Bancorp

Answer 13

Interest expense, Interest and other income, net are classified as nonoperating for Ralph Lauren, but are listed first on the Bancorp Income Statement because it is considered part of the company’s primary operation

Question 14

Operating Items

Answer 14

Revenues and Expenses of a company’s primary or major operations

Question 15

Revenues

Answer 15

Sales (the main source of revenue) - reported net of discounts, returns, and allowances

Question 16

Expenses

Answer 16

Cost of Goods Sold
Selling Expenses
General and Administrative Expenses
Other Operating Expenses

Question 17

Cost of Goods Sold

Answer 17

Direct cost of goods sold in generating revenues

Question 18

Selling Expenses

Answer 18

Expenses incurred by the company in its efforts to generate revenues
(Marketing Expense, Delivery Expense, Promotional Materials Expense, Vehicle Expense, Advertising Expense, Sales Salaries Expense)

Question 19

General and Administrative Expenses

Answer 19

Expenses incurred by the company to maintain is operations that are not directly related to production of goods and services
(Administrative Salaries and Benefit, Bonus Expense, Insurance Expense, Depreciation on Corporate Office, Legal Expense, Utilities Expense)

Question 20

Other Operating Expenses

Answer 20

Items management feels are important to identify separately such as Recurring Costs, Research and Development Costs, and Amortization of Intangible Assets

Question 21

Nonoperating Items

Answer 21

Revenue and expense items that are not components of the company’s primary operations but are related to secondary or auxiliary activities
Gains and losses or changes in equity resulting from peripheral transactions of an entity

Question 22

Other Revenues and Gains

Answer 22

Interest Revenue, Royalty Revenue, Dividend Revenue, Gains from the Sale of Investments

Question 23

Other Expenses and Losses

Answer 23

Interest Expense, Litigation Losses, and Losses from the Sale of Investments

Question 24

Income Tax

Answer 24

Portion of state and federal income tax expenses applicable to income from continuing operations

Question 25

What are the two formats for an income statement?

Answer 25

Multi-Step Format

or Single-Step Format

Question 26

Multi-Step Format

Answer 26

Distinguishes among various operations and activities that affect income
(Operating and nonoperating items are separated)

Question 27

Gross Profit/Gross Margin

Answer 27

Sales revenue less cost of goods sold

Question 28

Operating Income/Income from Operations

Answer 28

Operating revenues less operating expenses

Question 29

Single-Step Format

Answer 29

Uses only two broad classifications:
1. Revenues and gains
2. Expenses and losses
(no priority in reporting one revenue/expense item over another)