Ch 4

Question 0

3 Limitations of income statement?

Answer 0

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)

Question 1

3 ways Business and investment community uses from income statement?

Answer 1

Helps predict amounts, timing and uncertainty of future cash flows

Question 2

Earnings management

Answer 2

Planned timing of revenues, expenses, gains and losses

To smooth out bumps in earnings

Question 3

Quality of earnings

Answer 3

Usefulness for predicting future earnings and cash flows

Question 4

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

Answer 4

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

In predicting future earnings

Question 5

Transaction approach

Answer 5

Focuses on income-related activities that occurred

During the period

Question 6

4 Elements of income related items?

Answer 6

Revenues, expenses, gains, losses

Question 7

Revenues

Answer 7

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

Question 8

Expenses

Answer 8

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

Question 9

Gains

Answer 9

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

Question 10

Losses

Answer 10

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

Question 11

Capital maintenance approach

Answer 11

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

Question 12

7 main steps in multi-step income statement?

Answer 12

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

Question 13

4 parts of Operating section, define?

Answer 13

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

Question 14

Non operating section, define, 2 parts?

Answer 14

Report revenues and expenses from secondary activities

1 other revenues and gains

2 other expenses and losses

Question 15

Income tax

Answer 15

Section reporting federal and state income taxes levied

On income from continued operations

Question 16

Discontinued operations section

Answer 16

Material gains or losses resulting from disposition

Of component of business

Question 17

Extraordinary items

Answer 17

Unusual and infrequent material gains and losses

Question 18

Noncontrolling Interest

Answer 18

Allocation of income to non controlling shareholders

Question 19

Single step income statement, advantage?

Answer 19

Consists of two groupings: revenues and expenses

Advantage is simplicity

Question 20

Current operating performance approach

Answer 20

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

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

Question 21

Modified all inclusive concept of income reporting

Answer 21

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

Question 22

4 general categories for unusual items on income statements?

Answer 22

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

Question 23

Unusual gains and losses 6 components?

Answer 23

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

Question 24

Restructuring charge , 3 examples?

Answer 24

Major reorganization of company affairs

Ex. Employee layoff costs, plant closing costs,
write off of asset’s

Question 25

Discontinued operations 2 things?

Answer 25

1) company eliminates results of operations of
component of business

2) there is no significant involvement in component after
Disposal transaction

Question 26

Component

Answer 26

Manufactures and sells consumer products

It has several product groups, each with different product
Lines and brands

Question 27

Intraperiod tax allocation

Answer 27

Allocation of tax to item within a period

Question 28

Extraordinary items 2 qualities?

Answer 28

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

Question 29

Noncontrolling interest, example? Define?

Answer 29

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

Question 30

Earnings per share

Answer 30

Earnings per share =
(net income - preferred dividends)/
weighted avg. common shares outstanding

Question 31

2 examples of changes in accounting principle?

Answer 31

Change in method of inventory (FIFO to avg. cost)

Change in accounting construction contracts from
Percentage of completion to completed contract method

Question 32

Retrospective adjustment

Answer 32

Company recognizes a change in accounting principle
On financial statements

Adjustment recasts the prior years statements on newly
Adopted principle preserving comparability

Question 33

Changes in accounting estimates?

Answer 33

Do not get carried back to financial statements

Of prior years

Question 34

Corrections of errors are treated as…

Answer 34

Prior period adjustments, similar to changes in accounting principles

Question 35

Appropriated retained earnings

Answer 35

Restricted retained earnings

Question 36

Comprehensive income

Answer 36

Includes all changes in equity during period except
Those resulting from investments to owners and
Distributions to owners

Question 37

Other comprehensive income

Answer 37

Non owner changes in equity that bypass the

income statement

Question 38

One statement approach

Answer 38

Reports comprehensive income in single statement

Question 39

Two statement approach

Answer 39

Two separate but consecutive statements of net income

And other comprehensive income

Question 40

Statement of stockholders equity

Answer 40

Presents account of total stockholders equity in columnar
Form (columns)

Consists of contributed capital, retained earnings and accumulated balances in other comprehensive income

Question 41

2 items disclosed in statement of stockholders equity?

Answer 41

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