A.2. Comprehensive Income and the Income Statement Flashcards
What is the definition of comprehensive income?
Comprehensive income is defined by the FASB as the change in ewuity (net assets) of a company during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investements by owners and distributions to owners. Comprehensive income includes net income and all the items of other comprehensive income recorded during the period in the accumulated other comprehensive income account.
What are the components of comprehensive income?
Revenues, expenses, gains and losses during the period.
What are the sections on a standard multiple-step income statement?
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating income
Interest and dividend income
Interest expense
Non-operating gains/losses
Income from continuing operations before tax
Provision for income taxes on continuing operations
Income from continuing operations
Discontinued operations:
-gain or loss
-tax benefit/expense
Net income
information regarding earnings per share (EPS) must also be presnted on the face of the income statement
What is the definition of revenues
Revenues are inflows or other enhancements of assets or settlements of liabilities (or a combination of both) that result from delivering or producing goods, rendering services or other activities.
What is the revenue recognition principle?
The revenue recognition principle requires revenues to be recognized in the accounting period in which the performance obligation is satisfied.
What is the definition of expenses
Expenses are outflows or other using-up of assets or the incurrence of liabilities (or a combination of both) that result from delivering or producing goods, providing services, or carrying out other activities.
What is the definition of gains?
Gains are increases in equity (that is, net assets) resulting from transactions and other events and circumstances affecting the company other than those resulting from revenues or investments by owners.
What is the definition of losses?
Losses are decreases in equity (net assets) that result from transactions and other events and circumstances affecting the company other than those resulting from expenses or distributions to owners.
What are the differences between revenues/expenses and gains/losses? (3)
Revenues and expenses result from delivering or producing goods or providing services. Revenues and expenses can also result from activities that permit others to use the company’s resources and that result in interest, rent, royalties and fees.
Gains and losses result from exchange transactions such as sales of assets used in a productive capacity; holding gains and losses; and loss events such as natural catastrophes.
However, if gans and losses are an ordinary part of a company’s activities, they may be presented with revenues and expenses. An example is gains and losses from trading activities of a company whose primary business is trading securities or commodities.
What are unusual gains and losses? How are they presented on the income statement?
Unusual gains and losses are gains and losses the company considers to be of an unusual nature of of a type that indicates infrequency of occurrence or both. Some examples of unusual losses are losses on inventory or other assets damaged in a fire and restructuring charges.
Unusual gains and losses are part of income from continuing operations and generally reported as non-operating gains and losses. If they are similar and not material individually they should be combined on one line. If they are material individually they should be reported on a seperate line or disclosed in the notes to the financial statements.
What are discontinued operations?
A discontinued operation is defined as a component or a group of components of a company that is either held for sale or has been disposed of by sale or otherwise that represents a strategic shift that has or will have a major effect on the company’s operations and financial results.
How are discontinued operations reported on the income statement?
All gains and losses incurred by the discontinued component are reported net of tax in the period in which the gain or the loss occurred
Also the gains and losses of the prior period should be reported seperately
Which 3 conditions need to be met so disposal of a component or group of components must be reported as discontinued operations?
Disposal of a component or a group of components must be reported as discontinued operations if ANY of the following three items occurs:
1) The component or group of components meet the criteria to be classified as held for sale. ALL criteria met :
-management commits to a plan to sell the component
-the components are available for immediat sale
-an active program to locate a buyer has been initiated
-the sale is probable within one year
-the component is actively marketed for a fair price
-actions required to complete the plan mak it unlikely that it will be withdrawn or significantly changed.
2) the component or group of components is sold
3) The component or group of components is disposed of in a manner other than sale (e.g. abandonment or distribution to owners in a spinoff.)
What is intra-period Tax Allocation?
The income tax effect of discontinued operations needs to be reported on the income statement seperately.
Therefore, taxes must be allocated on the income statement between income from continuing operations and income from discontinued operations. In addition, any items in AOCI are to be reported net of tax.
The income tax due should be allocated first to income from continuing operations. The remaining tax due should be allocaed to gains/losses from discontinued operations and items reported in AOCI according to each one’s proportion of the total other taxable items.
What are the benefits of the income statement? (3)
The income statement helps to predict future cash flows, as follows:
-it helps users to evaluate the company’s past performance and to compare it to the performance of its competitors
-it provides a basis for predicting future performance
-it helps users assess the risk or uncertainty of achieving future cash flows.
