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ACG 4101 > 4 | Income Statement, Comprehensive Income, & Statement of Cashflows > Flashcards

4 | Income Statement, Comprehensive Income, & Statement of Cashflows Flashcards

1
Q

The Income Statement

What is Comprehensive Income?

A

An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.

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2
Q

The Income Statement

The Income Statement is also known as…

A

…Statement of Operations or Statement of Earnings.

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3
Q

The Income Statement

What does the Income Statement report?

A

The profit-generating activities that occurred during a particular reporting period.

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4
Q

The Income Statement

Gains/losses excluded from the determination of net income and the income statement but are included in the broader concept of comprehensive income are called?

A

Other Comprehensive Income (OCI)

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5
Q

The Income Statement

What are the two ways Other Comprehensive Income can be reported?

A

1) Single, continuous Statement of Comprehensive Income

2) Two separate but consecutive Statements - an Income Statement and a Statement of Comprehensive income

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6
Q

The Statement of Cash Flows

The purpose of the Statement of Cash Flows is to provide information about…

A

the cash receipts and cash disbursements of an neterprise that occurred during a period.

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7
Q

The Statement of Cash Flows

The Statement of Cash Flows provides valuable information about the

A

…operating, investing, and financing activities that occurred during a period.

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7
Q

The Income Statement

Income from continuing operations includes …

A

…the revenues, expenses, gains and losses that will probably continue in future periods.

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8
Q

The Income Statement & Statement of Cash Flows

Unlike the balance sheet, which is a position statement, the income statement and the statement of cash flows are…

A

…change statements.

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9
Q

The Income Statement

What are Revenues?

A

Inflows of resources resulting from providing goods/services to customers.

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10
Q

The Income Statement

What are Expenses?

A

Outflows of resources incurred while generating revenue. The costs of providing goods/services.

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11
Q

The Income Statement

Which accounting principle is key to measuring expenses?

A

The matching principle.

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12
Q

The Income Statement

What are Gains and Losses?

A

Increases or decreases in equity from peripheral or incidental transactions of an entity.

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13
Q

The Income Statement

How is Income Tax Expense shown on the Income Statement?

A

As a separate expense.

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14
Q

The Income Statement

Income Tax Expense is also known as?

A

Provision for Income Taxes.

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15
Q

The Income Statement

When tax rules and GAAP differ regarding the timing of revenue or expense recognition, the actual payment of taxes…

A

…may occur in a period different from when income tax expense is reported in the Income Statement.

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16
Q

The Income Statement

Taxable income comprises of …

A

1) Revenues
2) Expenses
3) Gains
4) Losses

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17
Q

The Income Statement

Operating Income includes revenues and expenses…

A

…related to the primary revenue-generating activities of the company.

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18
Q

The Income Statement

Nonoperating income relates to…

A

…peripheral or incidental activities of the company.

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19
Q

The Income Statement

Give 4 examples of Nonoperating income.

A

1) Interest Revenue
2) Dividend Revenue
3) Gains/Losses from selling investments
4) Interest expense in non-operating income

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20
Q

The Income Statement

Is there a specfic format that dictates how income from continuing operations must be displayed?

A

No

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21
Q

The Income Statement

What are the two extreme format approaches generally used when preparing The Income Statement?

A

1) Single-step

2) Multiple-step

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22
Q

The Income Statement

How is information formated/organized when preparing the Income Statement using the Single-Step method?

A

Groups all revenues and gains together and groups all expenses and losses together.

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23
Q

The Income Statement

How is information formated/organized when preparing the Income Statement using the Multiple-Step format?

A

Information is reported in a series of intermediate subtotals such as gross profit, operating income, and income before taxes that separates operating from nonoperating items, and classifies items by function.

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24
Q

The Income Statement

What is the advantage of the single-step format?

A

Simplicity because reveneus and expenses are not classified or prioritized.

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25
Q

The Income Statement

What is the advantage of the multiple-step format?

A

It provides information that might be useful in analyzing trends.

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27
Q

The Income Statement format | GAAP vs IFRS

Information to be reported.

A

IFRS require certain minimum information to be reported on the face of the Income Statement.

GAAP has no minimum requirements.

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28
Q

The Income Statement format | GAAP vs IFRS

Classification of expense items.

A

IFRS: Allows expenses to be classified either by function (e.g., COGS, general & administrative expenses, etc.) or by natural description (e.g. salaries, rent, etc.)

GAAP: SEC regulations require that expenses be classified by function.

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29
Q

The Income Statement format | GAAP vs IFRS

The ‘bottom line’ of the statement is referred to as?

A

IFRS: Profit or Loss

GAAP: Net Income or Net Loss

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30
Q

The Income Statement format | GAAP vs IFRS

Reporting “extraordinary items”

A

IFRS: Prohibits reporting ‘extraordinary items’

GAAP: Reported separately.

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31
Q

The Income Statement

Earnings quality refers to the…

A

…abilitiy of reported earnings (income) to predict a company’s future earnings.

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32
Q

The Income Statement

To enhance predictive value, analysts try to separate a company’s…

A

…transitory eaernings from its permanent earnings.

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33
Q

The Income Statement

Transitory earnings effects result from transactions or events that are…

A

…not likely to occur again in the foreseeable future or that are likely to have a different impact on earnings in the future.

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34
Q

The Income Statement

Manipulating Income and Income Smoothing is also known as…

A

…Earnings Management

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35
Q

The Income Statement

What is Earnings Management

A

The practice of ‘banking’ earnings by understating them in particularly good years and using the ‘banked’ profit to polish results in bad years.

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36
Q

The Income Statement

Give two methods used in Earnings Management.

A

1) Income Shifting

2) Income Statement Classification

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37
Q

The Income Statement | Earnings Management

What is “Income Shifting”?

A

Accelerating or delaying recogniiton of revenues or expenses.

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38
Q

The Income Statement | Earnings Management

What is “Channel Stuffing”

A

Income Shifting. Accelerate revenue recognition by persuading distributors to purchase more of your product than necessary near the end of a reporting period.

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39
Q

The Income Statement

What does the most common income statement classification manipulation involve?

A

Inclusion of recurring operating expenses in “special charge”categories such as restructuring costs.

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40
Q

The Income Statement

The practice of Income Statement classification manipulation is sometimes referred to as…

A

“big bath” accounting, referencing the “cleanign up” of the company balance sheet.

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41
Q

The Income Statement

Restructuring costs include costs…

A

associated with shutdown or relocation of facilities or downsizing of operations.

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42
Q

The Income Statement

Restructuring costs are incurred in connection with…

A

…a program that is planned and controlled by management, and materially changes either the scope of a busienss undertaken by an entity, or the manner which that business is conducted.

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43
Q

The Income Statement

What kinds of costs are included under Restructuring Costs?

A

Costs associated with shutdown or relocation of facilities or downsizing of operations.

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44
Q

The Income Statement

Give 2 examples of Restructuring Costs.

A

1) Severance Pay

2) Relocation Costs

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45
Q

The Income Statement

GAAP requires that restructuring costs are recognized…

A

…only in the period the exit or disposal cost obligation actually is incurred.

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46
Q

The Income Statement

What is the value objective established by GAAP for initial measurement of restructuring cost liabilities?

A

Fair Value

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47
Q

The Income Statement

How is the fair value for initial measurements of restructuring cost liabilities established according to GAAP?

A

The present value of future estimated cash flows.

48
Q

The Income Statement

Any long-lived asset, whether intangible or tangible, should have its balance reduced if there has been a significant impairment of value. This is referrred to as…

A

Impairment losses or charges.

49
Q

The Income Statement

What are Nonoperating Income?

A

Earnings that are only tangentially related to normal operations, such as interest and gains/losses.

50
Q

The Income Statement

What are pro forma earnings?

A

Management’s view of “permanent earnings”.

51
Q

The Income Statement

Sarbanes-Oxley Act Scetion 401 requires reconciliation between…

A

… pro forma earnings and earnings determined according to GAAP.

52
Q

The Income Statement

What is Intra-period Income Tax Allocation?

A

Income Statement presentation that displays associated/allocated income tax expense/incomewith each major compponenet of the income that causes it.

53
Q

The Income Statement

How does FASB define a component of an entity as an ‘operation’ segment?

A

A component of an entity whose operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.

54
Q

The Income Statement

A recent Exposure Draft of a proposed ASU defines a discontinued operation as a componenet that either

A

a) has been disposed of
b) is classified as held for sale

And represents

1) a separate major line of business or major geographical area of operations
2) part of a single coordinated plan to dispose of a separate major line of business or geographical area or operations
3) a business that eets the criteria to be classified as held for sale on acquisiton

55
Q

The Income Statement

When reporting Discontinued Operations when the Component has been sold - the income effects will include these 2 elements.

A

1) Income/loss from operations (revenues/expenses, gains/losses) of the componenet from the beginning of the reporting period to the disposala date.
2) Gain/loss on disposal of the componenet’s assets.

56
Q

The Income Statement

A Component is considered “held for sale” if it is likely to be sold within…

A

…one year.

57
Q

The Income Statement

Two components are reported on the income effects of the discontinued operations “held for sale”

A

1) Income/Loss from operations (revenues/expenses, gains/losses) of the component from the begining to the end of the reporting period.
2) An “impairment loss” if the carrying value (book value) of the assets of the component is more than the fair value minus cost to sell.

58
Q

The Income Statement

What is the value of a ‘discontinued opertion’ ‘held for sale’ reported on the Balance Sheet?

A

Assets & Liabilities of a componenet ‘held for sale’ are reported at the lower of their 1) carrying amount (book value) or 2) fair value minus cost to sell.

59
Q

The Income Statement

Since an asset classifed as ‘held for sale’ is no longer part of PP&E, it is no longer…

A

…depreciated/amortized.

60
Q

The Income Statement

What are Extraordinary Items?

A

Items that are material gains/losses that are both unusual in nature and infrequent in occurence.

61
Q

The Income Statement

Extraordinary items are reported separately because the event…

A

…. is not likely to occur again.

62
Q

The Income Statement

Extraordinary gains/losses are presented net of tax, below…

A

… Discontinued Operations.

63
Q

The Income Statement

A Disclosure Note is necesary for Extraordinary Items to…

A

…describe the nature of the event and the tax effects if they are not indicated on the face of the Income Statement.

64
Q

The Income Statement | IFRS vs GAAP

Extraordinary Items

A

GAAP provides for separate reporting of extraordinary items

IFRS states that the Income Statement may not contain any Extraordinary Items.

65
Q

The Income Statement

If a material event is either unusual or infrequent - not both - it should be included in …

A

… continuing operations as a separate income componenet

66
Q

The Income Statement

Give 2 examples of Unusual or Infrequent Items…

A

1) Restructuring Costos

2) Impairment of Goodwill or long-lived assets

67
Q

The Income Statement

Are Unusual or Infrequent Items reported ‘net of tax’?

A

No

68
Q

The Income Statement

Accounting changes falls into 3 categories

A

1) accounting principle
2) estimate
3) reporting entity

69
Q

The Income Statement

Voluntary changes in Accounting Principle refers to a change from…

A

…one acceptable accounting method to another.

70
Q

The Income Statement

GAAP requires that voluntary accounting changes be accounted for…

A

…retrospectively - recast prior years’ statements as if the new method has been in use.

71
Q

The Income Statement

After the statements are recasted due to an accounting principle change, journal entries is created to…

A

…the earliest affected period to adjust all account balances affected to the cumulative affect of the change.

72
Q

The Income Statement

Whe there is insufficient information to change statements retrospectively after a change in accounting principle….

A

…the new method is applied prospectively.

73
Q

The Income Statement

When a change in accounting principle is mandated by a FASB ASU, the board…

A

…allows companies to choose among multiple ways to account for the change.

74
Q

The Income Statement

The 2 most common options of documenting a change in accounting principle dictated by FASB ASU is…

A

1) Retrospectively

2) Cumulative effect on income of previous years as a separate item below ‘extraordinary items’.

75
Q

The Income Statement

A change in depreciation, amortization, or depletion method is a change in accounting…

A

…estimate and principle.

76
Q

The Income Statement

A change in depreciation, amrotization, or depletion method is accounted for…

A

…prospectively but must be justivied as to why the new method is preferable (because of the change in principle).

77
Q

The Income Statement

A change in an accounting estimate is accounted for…

A

…prospectively. DO NOT revise prior years.

78
Q

The Income Statement

If a change in accounting estimate is material…

A

…a disclosure note is needed describing its effect on net income and earnings per share.

79
Q

The Income Statment

Accounting errors occur when transactions are either recorded…

A

…incorrectly or not at all.

80
Q

The Income Statement

If an error is discovered in the same year…

A

…the original entry is reversed and the appropriate entry is recorded.

81
Q

The Income Statement

If an immaterial error is discovered in a subsequent year you…

A

…correct the entry in the year discovered.

82
Q

The Income Statement

If a material error is discovered in a subsequent year you require…

A

…‘prior period adjustments’ to correct.

83
Q

The Income Statement

What are “Prior Period Adjustments”?

A

A journal entry adjusting Balance Sheet Accounts to the appropriate levels to correct the income effects of the error by increasing/decreasing the beginning balance of retained earnings in a statement of shareholders’ equity.

84
Q

The Income Statement

In addition to a Statement with “Prior Period Adjustments”, previous statements affected by the error are…

A

…retrospectively restated to reflect the correction and a disclosure note must communicate the impact of the error on the prior periods’ net income.

85
Q

The Income Statement

The ‘Earnings Per Share’ ratio shows the amount of income earned by a company…

A

…expressed on a per share basis.

86
Q

The Income Statement

All coprorations whose common stock is publicly traded must disclose this ratio -

A

Earnings Per Share (EPS)

87
Q

The Income Statement

Companies report Basic EPS and, if there are dilutive securities, Diluted EPS, on …

A

… the face of the Income Statement

88
Q

The Income Statement | Ratio

Earnings Per Share

A

Net Income - Preferred Stock Dividends
________________________________

 Weighted-Average Number of 
 Common Shares Outstanding
89
Q

The Income Statement

Diluted Earnings Per Share reflects potential dilution because of…

A

…oustanding securities convertible into common shares/stock options that could create additional common shares.

90
Q

The Income Statement

Corporations must disclose per share maounts for (3)…

A

1) Income before any separately reported items
2) Each separately reported items
(3) Net Income/loss

91
Q

Statement of Cash Flow

What does SCF stand for?

A

Statement of Cash Flow

92
Q

Statement of Cash Flow

A Statement of Cash flowsispresented for ech period for which…

A

…results of operations are provided.

93
Q

Statement of Cash Flows

The purpose of the SCF is to provide information about the…

A

…cash receipts and cash disbursements for an enterprise that occurred during a period.

94
Q

Statement of Cash Flows

The SCF summarized transactions that caused cash to change during a period, it is a…

A

…change statement.

95
Q

Statement of Cash Flows

The term ‘cash’ means…

A

cash plus cash equivalents.

96
Q

Statement of Cash FLows

Operating activites are inflows and outflows of cash related to the transactions entering into the determination of…

A

…net operating income.

97
Q

Statement of Cash Flows

List the 3 categories of classifying all transactions for the SCF.

A

1) Operating Activities
2) Investing Activities
3) Financing Activities

98
Q

Statement of Cash Flows | Operating Activities

Give 2 sources of cash inflows from operating activities.

A

1) Received from customers for goods/services

2) Interest/dividends from investments

99
Q

Statement of Cash Flows | Operating Activities

Give 4 sources of cash outflows from operating activities.

A

1) Purchase of Inventory
2) Salaries, wages, & other operating expenses
3) Interesto on debt
4) Income Taxes

100
Q

Statement of Cash Flows

On what basis is items reported on the SCF?

A

Cash basis, not Accrual.

101
Q

Statement of Cash Flows

Why are Internal Revenues & Expenses, like Depreciation Expense, not included in the SCF?

A

Because it does not affect cash.

102
Q

Statement of Cash Flows

What is the difference between operating activities inflows and outflows of cash called?

A

Net Cash Flows from Operating Activities.

103
Q

Statement of Cash Flows | GAAP vs IFRS

Classification of Cash Flows.

Both require a SCF & both classify cash activities as Operating, Investing, or Financing

How do they differ in classifying interest/dividend entries?

A

GAAP: Cashflows for interest/dividends are Operating. Dividends paid to Shareholders are Financing.

IFRS: Cashflows for interest/dividends paid can be Operating or Financing. Interest/dividends received can be Operating or Investing.

104
Q

Statement of Cash Flows

Name the 2 generally accepted formats that can be used to reporting operating activities.

A

1) The Direct Method

2) The Indirect Method

105
Q

Statement of Cash Flow

When using the Direct Method to report Operating Activities on the SCF you…

A

…add/subtract the cash effect of each operating activity directly on the SFC.

106
Q

Statement of Cash Flow

When using the Indirect Method to reort Operating Activities on the SCF you…

A

…start with Net Income from the ‘Income Statement’, then add/subtract items to convert the amount to a cash basis.

107
Q

Statement of Cash Flow

When using the Indirect Method on the SCF, what are the 2 types of adjustments to Net Income?

A
  1. Componenets of Net Income that do not affect cash is reversed (ie depreciaiton)
  2. Adjustments due to changes in assets/liabilities to reverse non cash effects (ie A/R)
108
Q

Statement of Cash FLows

Investing Activities involveactivities related to the…

A

…acquisition/dispostion of long-lived assets used in operations (PP&E) and investment assets (except cash equivalents & trading securities).

109
Q

Statement of Cash Flows

Is thep purchase and sale of inventories considered investing activities?

A

No. It is included under operating activities.

110
Q

Statement of Cash Flows

Give 3 outflows from investing activities

A

1) purchase of long-lived assets used in business
2) purchase of investment securities (other than cash equivalents & trading securities)
3) Loans to other entities

111
Q

Statement of Cash Flows

Give 2 inflows from investing activities

A

1) Sale of long-lived assets used in business
2) Sale of investment securities (other than cash equivalents and trading securities)
3) Collection of nontrade receivable (excluding the collection of interest which is an operating acctivity)

112
Q

Statement of Cash Flows

Financing Activities invovle cash flow transactions with…

A

…creditors (excluding trade creditors) and owners).

113
Q

Statement of Cash Flows

The payment of interest to creditors from financing activities are classified as an…

A

…operating activity.

114
Q

Statement of Cash Flows

Give 2 inflows from financing activities.

A

1) Owners when shares are sold to them

2) Creditorss when cash is borrowed (notes, loans, mortgages, and bond)

115
Q

Statement of Cash Flows

Give 3 outflows from financing activities

A
  1. Owners in the form of dividends or other distributions
  2. Owners for the reacquistion of shares previsously sold
  3. Creditors as repayment of the principal amounts of debt (excluding trade payables that relate to operating activities)
116
Q

Statement of Cash Flows

Any significan noncash investing and financing activities (that is, noncash exchanges) are reported either on the…

A

…face ofthe SCF or in a disclosure note.

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