Ch 4 Flashcards

0
Q

3 Limitations of income statement?

A

1 companies omit items from income statement they can’t measure reliably (ex. Company may not record unrealized gains/losses from investments b/c uncertainty of realization)

2 income #s are affected by accounting methods employed
(ex. Straight line vs accelerated depreciation)

3 income measurement involves judgement (ex. companies estimate useful life and write off values differently)

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1
Q

3 ways Business and investment community uses from income statement?

A

Helps predict amounts, timing and uncertainty of future cash flows

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2
Q

Earnings management

A

Planned timing of revenues, expenses, gains and losses

To smooth out bumps in earnings

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3
Q

Quality of earnings

A

Usefulness for predicting future earnings and cash flows

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4
Q

What is earnings management’s effect on quality of earnings?

A

Distorts information of earnings in a way that’s less useful

In predicting future earnings

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5
Q

Transaction approach

A

Focuses on income-related activities that occurred

During the period

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6
Q

4 Elements of income related items?

A

Revenues, expenses, gains, losses

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7
Q

Revenues

A

Inflows or other enhancements of assets of entity or
Settlements of liabilities during a period from delivering
Or producing goods, rendering services or other
Activities that constitute the entities central operations

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8
Q

Expenses

A

Outflows or other using up of assets or incurrences of
Liabilities during period from delivering or producing goods,
Rendering services, or carrying out other activities that
Constitute entities ongoing major or central operations

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9
Q

Gains

A

Increases in equity (net assets) from peripheral or incidental
Transactions of an entity except those that result from
Revenues or investments by owners

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10
Q

Losses

A

Decreases in equity from peripheral or incidental transactions
Of an entity except those that result from expenses or
Distributions to owners

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11
Q

Capital maintenance approach

A

Company determines income for period based on change
In equity after adjustment for capital contributions
(investments by owners) or distributions (dividends)

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12
Q

7 main steps in multi-step income statement?

A
1 operating section
2 non operating section
3 income tax
4 discontinued operations
5 extraordinary items
6 noncontrolling interest 
7 earnings per share
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13
Q

4 parts of Operating section, define?

A

Report revenues and expenses of company’s principal
Operations

1 Sales and revenues
2 cost of goods sold
3 selling expenses
4 administrative or general expenses

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14
Q

Non operating section, define, 2 parts?

A

Report revenues and expenses from secondary activities

1 other revenues and gains

2 other expenses and losses

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15
Q

Income tax

A

Section reporting federal and state income taxes levied

On income from continued operations

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16
Q

Discontinued operations section

A

Material gains or losses resulting from disposition

Of component of business

17
Q

Extraordinary items

A

Unusual and infrequent material gains and losses

18
Q

Noncontrolling Interest

A

Allocation of income to non controlling shareholders

19
Q

Single step income statement, advantage?

A

Consists of two groupings: revenues and expenses

Advantage is simplicity

20
Q

Current operating performance approach

A

Most useful income measure reflects only regular
And recurring revenue and expense elements

Irregular items don’t reflect company’s future earning power

21
Q

Modified all inclusive concept of income reporting

A

Approach where companies record most items
Including unusual and irregular ones as part of net income

However companies must highlight extraordinary items
To help users better determine long run earning power

22
Q

4 general categories for unusual items on income statements?

A

1 unusual gains and losses
2 discontinued operations
3 extraordinary items
4 noncontrolling interest

23
Q

Unusual gains and losses 6 components?

A

1 losses on write off of receivables, inventories, property,
plant and equipment, deferred R&D or other intangibles

2 gains or losses from currency exchange

3 restructuring charges

4 gains or losses from sale or abandonment of property,
Plant or equipment used in business

5 effects of strike including against competitors and major
Suppliers

6 adjustment of accruals on Longterm contracts

24
Restructuring charge , 3 examples?
Major reorganization of company affairs Ex. Employee layoff costs, plant closing costs, write off of asset's
25
Discontinued operations 2 things?
1) company eliminates results of operations of component of business 2) there is no significant involvement in component after Disposal transaction
26
Component
Manufactures and sells consumer products It has several product groups, each with different product Lines and brands
27
Intraperiod tax allocation
Allocation of tax to item within a period
28
Extraordinary items 2 qualities?
Unusual nature- possess a high degree of abnormality And unrelated to typical activities of business Infrequency of occurrence- activity that company does not Expect to repeat itself in the near future
29
Noncontrolling interest, example? Define?
The portion of equity interest in a subsidiary not attributable to parent company If Coca Cola acquires 70% of Koch Company Coca Cola has the controlling interest (over 50%) And remaining shareholders of Koch have noncontrolling Interest
30
Earnings per share
Earnings per share = (net income - preferred dividends)/ weighted avg. common shares outstanding
31
2 examples of changes in accounting principle?
Change in method of inventory (FIFO to avg. cost) Change in accounting construction contracts from Percentage of completion to completed contract method
32
Retrospective adjustment
Company recognizes a change in accounting principle On financial statements Adjustment recasts the prior years statements on newly Adopted principle preserving comparability
33
Changes in accounting estimates?
Do not get carried back to financial statements | Of prior years
34
Corrections of errors are treated as...
Prior period adjustments, similar to changes in accounting principles
35
Appropriated retained earnings
Restricted retained earnings
36
Comprehensive income
Includes all changes in equity during period except Those resulting from investments to owners and Distributions to owners
37
Other comprehensive income
Non owner changes in equity that bypass the | income statement
38
One statement approach
Reports comprehensive income in single statement
39
Two statement approach
Two separate but consecutive statements of net income | And other comprehensive income
40
Statement of stockholders equity
Presents account of total stockholders equity in columnar Form (columns) Consists of contributed capital, retained earnings and accumulated balances in other comprehensive income
41
2 items disclosed in statement of stockholders equity?
``` 1 contributions (issuances of shares) and distributions (dividends to owners) ``` 2 reconciliation of carrying amount of each component Of stockholders equity from beginning to end of period