Ch. 17

Question 1

Comprehensive Income

Answer 1

• Measures all changes in owners’ equity except for:
  
  • Investments by owners & distributions to owners
  • Errors made on past financial statements

Question 2

Income statement purpose

Answer 2

• The income statement reflects the earnings generated by the company during the accounting period

Question 3

Types of Income Statement Formats

Answer 3

1. Single-step format = Total revenues - total expenses
2. Multi-step format - Under this, income & expenses are divided by the activities that created the income or expense

Question 4

Multi-Step Format

Answer 4

• Net Sales = Sales - Sales Returns & Allowances - Sales Discounts
• Gross Profit (Gross Margin) = Net Sales - COGS
• Income from Operations = Gross profit - Selling & Administrative Expenses

Question 5

Discounted Operations

Answer 5

• Discounted Operations are operations management of a company believes will not contribute to the operations of the business in the future
• Reasons for Separation - Show financial statement readers the discontinued operations WILL NOT contribute towards future earnings

Question 6

Earnings per Share (EPS)

Answer 6

EPS formula = (Net Income - Preferred stock dividends) / Weighted Average # of common shares outstanding
- Shares outstanding = (Shares Issued - Treasury Stock)

Question 7

Cumulative effect of a change in accounting principle

Answer 7

• The income statement would account for the total change from one accounting principle to another accounting principle. Catch up number called
• The catch up number would adjust net income in total for the past differences between the two accounting principles

Question 8

FASB rulestatement 154

Answer 8

• Changes in accounting principles from one period to the next period should be handled retrospectively
• Retrospectively - Retrospective treatment means that past financial statement should be restated to adjust for the application of the new accounting principle

Question 9

Earnings Quality

Answer 9

• High quality earnings should help a financial statement reader predict future earnings

Question 10

Transitory Earnings

Answer 10

• Transitory earnings are earnings that are not part of the normal earning process (not what the company does)

Question 11

Perminent Earnings

Answer 11

• The earnings generated from the central operations of the business
• Permanent earnings are usually income statement accounts found before the “other items”
  Net Sales
  COGS
  Selling & Administrative Expenses (operating expenses)