57 St of CI Textbook Summary

Question 1

Comprehensive income is the change in a company’s equity
during a period of time resulting from transactions and
other events and circumstances from non-owner sources.
Comprehensive income is the sum of net income and other
comprehensive income.

Question 2

Net income is a measure of financial performance resulting from
the aggregation of revenues, expenses, gains, and losses that
are not items of other comprehensive income.
Other comprehensive income (OCI) is revenues, expenses,
gains, and losses that are explicitly excluded from net income in
specific accounting standards.

Question 3

Advantages of the income statement include:
1. Provides confirmatory value.
2. Has predictive value.
3. Assesses the risks or uncertainties of achieving future cash
flows.

Question 4

Disadvantages of the income statement include:
1. Certain revenues, expenses, gains, and losses that cannot be
measured reliably are not reported on the income statements.
2. The measurement of income is dependent upon the
accounting methods selected.
3. Even if management is not intentionally biasing the earnings
figure, different judgments will lead to different income
numbers, resulting in a lack of comparability.

Question 5

Earnings quality captures the degree to which currently reported
earnings provide financial statement users with information that
is useful, particularly in predicting future firm performance.

Question 6

Permanent earnings are likely to continue into the future. Transitory earnings are not likely to continue into the future.

Question 7

Earnings management occurs when management uses the
discretion afforded them under the accounting standards to
inappropriately manipulate earnings to meet certain goals.

Question 8

The four primary elements included in the statement of net
income are:

Answer 8

• Revenues
• Expenses (arranged by nature or function)
• Gains
• Losses

Question 9

The SEC requires presentation by function. U.S. GAAP allows
presentation by either nature or function.

Question 10

Two common income statement formats are:
* Single-step income statement format that combines all revenues
and gains and all expenses and losses into single categories
* Multiple-step income statement format that reports several
critical performance measures before computing income
from continuing operations and net income, including:
1. Gross profit
2. Operating income
3. Income before tax (Income from continuing operations
before tax when discontinued operations included)
4. Income from continuing operations (when discontinued operation
is included)
5. Net income
6. Earnings per share

Question 11

Net income from continuing operations is income from
portions of the business that are expected to continue into the
future. It is commonly presented as the sum of three income
statement items:
1. Operating income: Revenues and expenses from the entity’s
principal operations.
2. Non-operating income items: Gains and losses along with
revenues and expenses resulting from peripheral activities
of the company including items with an unusual nature and/
or are infrequent in occurrence. A transaction or event is
unusual if it possesses a high degree of abnormality and is
unrelated or only tangentially related to ordinary activities.
A transaction or event is infrequent if it is not reasonably
expected to reoccur in the foreseeable future.
3. Income tax provision: Reports the income tax expense associated
with all income items included in income from continuing
operations.

Question 12

Companies report discontinued operations for various income related
items associated with portions of the business that
1. have been disposed of, or
2. are in the process of being disposed of.

Question 13

A discontinued operation is a component or a group of
components of an entity that is

Answer 13

(1) a portion of the entity
(2) comprising operations and cash flows
(3) that can be clearly distinguished, operationally and for financial reporting
purposes from the rest of the entity.

Question 14

The portion of the entity that is viewed as a component may be

Answer 14

• a reportable segment
• an operating segment
• a reporting unit
• a subsidiary
• an asset group

Companies must also demonstrate that the disposal represents
a strategic shift that has or will have a major effect on the
company’s operations and financial results.
Discontinued operations are reported net of taxes on the
income statements.

Question 15

Companies report three main types of
income, gain or loss under discontinued operations.
For discontinued operations, companies disclose
– Pre-tax income (loss)
– Pre-tax income (loss) attributable to the company’s shareholders
– Major line items to arrive at pre-tax income (loss)
– Reconciliation of the major items making up the pre-tax profit
(loss) disclosed in notes to the after-tax profit (loss) presented
in the income statement
– Carrying amounts of the major classes of assets and liabilities
included as part of discontinued operations and classified as
held for sale
– Gain or loss on remeasurement of net assets held for disposal
– Reconciliation of the carrying amounts of major classes of
assets and liabilities disclosed in notes to total assets and
liabilities classified as held for sale on the balance sheet
– Either total operating and investing cash flows related to the
discontinued operation, or the depreciation, amortization,
capital expenditures, and significant operating and investing
noncash items associated with the discontinued operation
For individually significant operations disposed of, companies
disclose the pre-tax income (loss) and amount attributable to
the company’s shareholders.

Question 17

Net income is presented after discontinued operations.

Net income is separated into net income attributable to shareholders
and net income attributable to the noncontrolling interests. There is a
noncontrolling interest when one company controls another company
but owns less than 100% of its voting shares.

Question 18

Earnings per share represents the amount of earnings assigned to
each outstanding share of the company’s common stock. Companies
report earnings per share for income from continuing operations,
discontinued operations, and net income in a supplemental section of
the income statement directly below net income or loss for the period.

Question 19

Companies have two choices in reporting comprehensive income:

• In one statement, usually called the statement of comprehensive income, or
• In two consecutive statements: the statement of net income and the statement of comprehensive income.

OCI consists of:
1. Unrealized gains and losses from the available-for-sale portfolio
of investment securities and derivatives classified as cash flow
hedges.
2. Foreign currency translation gains and losses.
3. Unrecognized pension costs (benefits) from adjustments needed to
bring the accounting pension asset or liability to the funded status
of the pension plan.
All OCI items must be shown net of tax. The tax effects can be applied
to the OCI items in total or on each individual item comprising other
comprehensive income.