Ch 3 Income Statement, Related Information, and Revenue Recognition

Question 1

income statement

Answer 1

the report that measures the success of company operations for a given period of time

Question 2

transaction approach

Answer 2

summarizes transactions, focuses on the income-related activities that have occurred during the period

Question 3

multi-step income statement

Answer 3

named so because it shows the several steps in determining net income; reports net sales, gross profit, income from operations, income before tax, and net income

shows 1. separation of operating results from those obtained through the nonoperating activities of the company 2. a classification of expenses by functions, such as merchandising or manufacturing, selling, and administration

Question 4

earnings per share

Answer 4

(net income-preferred dividends)/weighted average number of common shares outstanding; measures the number of dollars earned by each share of common stock

Question 5

single-step income statement

Answer 5

only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss)

Question 6

discontinued operation

Answer 6

when a company eliminates the results of operations of a component of the business AND the elimination of a component that represents a strategic shift

Question 7

intraperiod tax allocation

Answer 7

discontinued operations on the income statement net of tax; the allocation of tax to this item, allocation within the income statement of a period; “let the tax follow the income”

Question 8

comprehensive income

Answer 8

includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

Question 9

other comprehensive income

Answer 9

the gains and losses that bypass the income statement are referred to as

Question 10

one statement approach

Answer 10

a single continuous statement; this approach is often referred to as the statement of comprehensive income

Question 11

two statement approach

Answer 11

two separate, but consecutive, statements of net income and other comprehensive income

Question 12

appropriated retained earnings

Answer 12

companies transfer the amount of retained earnings restricted to an account titled (blank)

Question 13

statement of stockholders’ equity

Answer 13

statement that reports the the changes in each stockholders’ equity account and in total stockholders’ equity during the year

Question 14

revenue recognition

Answer 14

standard that recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that the company receives, or expects to receive, in exchange for those goods or services

Question 15

steps of the 5-step model

Answer 15

1. identify the contract
2. identify performance obligations
3. determine transaction price
4. allocate transaction price
5. recognize revenue

Question 16

earnings management

Answer 16

often defined as the planned timing of revenues, expenses, gains, and losses to smooth out the bumps in earnings

Question 17

changes in accounting principle

Answer 17

include a change in the method of inventory pricing from FIFO to average-cost, or a change in accounting for construction contracts from the percentage-of-completion to the completed-contract method

Question 18

prior period adjustments

Answer 18

corrections of errors are treated as

Question 19

revenues

Answer 19

inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations

Question 20

expenses

Answer 20

outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations

Question 21

gains

Answer 21

increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners

Question 22

losses

Answer 22

decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners

Question 23

changes in accounting estimates

Answer 23

inherent in the accounting process

Question 24

capital maintenance approach

Answer 24

the most common alternative to the transaction approach; a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions

Question 25

statement of comprehensive income

Answer 25

the overall income statement that consolidates the standard income statement, which gives details about the repetitive operations of the company

Question 26

retained earnings statement

Answer 26

discloses net income (loss), dividends, adjustments due to changes in account principles, error corrections, and restrictions of retained earnings

Question 27

limitations of income statement

Answer 27

1. the statement does not include many items that contribute to general growth and well-being of a company
2. income numbers are often affected by the accounting methods used
3. income measures are subject to estimates

Question 28

retrospective adjustment

Answer 28

a company recognizes a change in account principle by making a (blank) to the financial statements

Question 29

earnings before bad stuff

Answer 29

skeptics of non-GAAP reporting often note that these adjustments generally lead to higher adjusted net income and as a result often report (blank)

Question 30

strategic shift

Answer 30

generally includes the disposal of 1. a major line of business, 2. a major geographical area, or 3. a major equity method investment

Question 31

gains and losses are sometimes considered

Answer 31

unusual or infrequent, or both

Question 32

contracts can be

Answer 32

written or implied