Ch 3 - Income Statement

Question 1

Revenue

Provide example

Answer 1

Inflow of assets or settlement of liabilities, during a period, as result of ongoing major or central operations

Typically reported on gross basis

ex: sales; ex: fulfilling service obligation from unearned revenue

Question 2

Expenses

Provide examples

Answer 2

outflow of assets or incurrence of liabilities, during a period, as result of ongoing major or central operations

Typically reported on gross basis

Ex: cost of goods sold; Ex: salary expense

Question 3

What are the benefits of using an Income Statement? (3)

Answer 3

• evaluate past performance
• predict future performance
• help asses the risk or uncertainty of achieving future cash flows

Question 4

What are the limitations of an Income Statement? (4)

Answer 4

• companies omit items that cannot be measured reliably
• income is affected by the accounting methods employed
• income measurement involves judgement
• some items are more recurring than other items on the income statement

Question 5

Gains

Provide Example

Answer 5

increases in equity resulting from peripheral or incidental transactions

Typically reported on net basis

gain from sale of building by a retail company

Question 6

Losses

Provide Example

Answer 6

decreases in equity resulting from peripheral or incidental transactions

Typically reported on net basis

Impairment Loss (carrying the asset costs more than its worth to make money)

Question 7

What are the 2 types of Income Statements?

Explain

Answer 7

• Single-Step: list revenue, then list expense, no distinction between operating and non-operating transactions (revenues - expenses = net income)
• Multi-Step: divided into 4 major sections: operating, non-operating, income tax, discontinued operations, Earnings Per Share (EPS); Expenses are matched with related revenues

Question 8

What are the 5 Irregular Reporting Items?

And how are they reported?

Answer 8

• Discontinued Operations: net of tax
• Unusual gains and losses: before tax
• Changes in accounting principle: retroactive
• Changes in accounting estimates: prospective
• Corrections of errors: correction

Question 9

What are Discontinued Operations?

Answer 9

A component of an entity that has been disposed of or held for sale, and:
- the operations and cash flow component have been (or will be) eliminated from ongoing operations
- the entity will not have any significant continuing involvement in the operations of component after the disposal

Question 10

What are the 2 reporting items when the Discontinued Operation has been sold?

Answer 10

• Income (loss) from operations of component from beginning of reporting date to disposal date
• Gain or loss from the disposal

Question 11

What are the 2 reporting items when the Discontinued Operation has been held for sale?

Answer 11

• Income (loss) from operations of the component from beginning of period to end of reporting period
• “impairment loss” if the carrying value of assets of compnent is more than fair value minus cost to sell

Question 12

What is the important thing to remember when correcting prior errors?

Answer 12

The beginning balance of retained earnings must be adjusted, after tax

Question 13

What is Comprehensive Income comprised of?

Answer 13

Comprehensive Income = Net Income + Other Comprehensive Income (OCI)

Examples of OCI: gain/loss form foreign currency exchnage rate changes; unrealized gain/loss from certain security investment

Question 14

Where is Accumulated Other Comprehensive Income reported?

Answer 14

stockholders’ equity section of the balance sheet