ACCT Chapter 3 : Income Statement and Related Information

Question 1

Uses of the Income Statement ( there is 3)

Answer 1

1. Evaluate past performance
2. Predict future performance
3. Predict the risk (uncertainty) of achieving future cash flows

1 and 2 are the most relevant to the course

Question 2

Limitations of the Income Statement

Some contingencies ________be _________, and therefore are not reported

Answer 2

Some contingencies CANNOT be MEASURED, and therefore are not reported

Question 3

What are different methods of reporting limitations of the Income statement ?

Answer 3

FIFO vs. LIFO
SL Depr vs. DDB Depr.

Question 4

Limitations of the Income Statement

Management JUDGEMENT like use of ______.

Answer 4

Management judgement like use of ESTIMATE.

Question 5

Income Measurement

Net Income is a summary of ____, ____, ____, _____ grouped by

Answer 5

Net Income is a summary of REV/ EXP/ GAINS, LOSSES grouped by ACTIVITY or FUNCTION

Question 6

Operating v. Non-Operating
Product v. Period Cost

This an example of …

Answer 6

Income measurement

Question 7

Quality of Earnings

Does managing earnings make rev/ exp/ gains/ losses SMOOTH or ROUGH earnings?

Answer 7

Smooth Earnings

Question 8

Quality of Earnings

“Managed earnings” does what to the information and users?

Answer 8

“Managed earnings” DISORTS the information and makes it LESS USEFUL.

LOSES integrity and trust with users

Question 9

Quality of Earnings

Managed Earnings distorts the information and makes it less useful so how can we make it more useful?

Answer 9

To be useful, reported income should help users PREDICT FUTURE EARNINGS

Question 10

• Top 5 ways to spot mismanagement

Answer 10

1. Earnings don’t correlate with cash flows (i.e. strong earnings & weak cash flows)
2. Earnings deviate from a company’s peers or the industry norms
3. Sudden changes in reserves
4. Earnings growth is too consistent
5. Large and frequent one-time charges or gains

Question 11

Elements on the Income Statement

______ : increase in net assets from day to day operations

Answer 11

Revenue

Question 12

Elements on the Income Statement

______: decreases in net assets from day to day operations

Answer 12

Expense

Question 13

______: increase in net assets from peripheral or incidental transactions

Answer 13

Gains

Question 14

______: decreases in net assets from peripheral or incidental transactions

Answer 14

Losses

Question 15

Formula for 1 Element on the Comprehensive Income Statement

Answer 15

Comprehensive Income = NI+ Other Stuff

Question 16

Income Statement Format

GAAP permits what kind of format ?

Answer 16

GAAP permits either single step or multiple step format

Question 17

Single step IS formula

Answer 17

Single Step NI = ( Σ Revenues and Gains ) - ( Σ Expenses and Losses )

Question 18

What has NO DISTINCTION between gross profit, operating, and non operating income.

Answer 18

Single Step IS

Question 19

What is the main advantage in single step IS

Answer 19

the main advantage is SIMPLE

Question 20

What does Multiple step IS do

Answer 20

It separates OPERATING from NON-OPERATING activities

Classifies expenses by FUNETION and MATCHES to corresponding REVENUES

Question 21

Multiple step IS format creates what

Answer 21

This format creates SUBTOTALS GROSS PROFIT and OPERATING INCOME before other revenue and gains and other expenses and losses

Question 22

• What components are highlighted for easier performance evaluation

Answer 22

INTERMEDIATE COMPONENTS are highlighted for EASIER PREFORMANCE EVALUATION

Question 23

• Items that affect hoe Net Income is measured and reported

Answer 23

A. Unusual or infrequent items (aka Non-recurring items)
B. Intra-period Income Tax Allocation
C. Discontinued Operation
D. Earnings Per Share
E. Change in Accounting Principles – Cumulative Effect Adjustment (CEA)
F. Changes in Estimates
G. Corrections of Errors – Prior Period Adjustment (PPA)
H. Comprehensive Income

(C- H ARE THE MOST IMPORTANT )