CH 4 Flashcards
Define income statement
a. The report that measure the success of company operations for a given period of time (statement of earnings or statement of income)
What do income statements determine for a company?
a. Profitability that is investment value and creditworthiness
What types of information are helpful for investors and creditors?
a. Profitability’s
i. Amounts
ii. Timing
iii. Uncertainty of future cash flows
What are useful types of income statements
a. Evaluated the past performance of the company
b. Provide a basis for predicting furture performance
i. Correlation other than success from earnings
c. Help assess the risk of uncertainty of achieving future cash flows
i. To predict, use correlation of income, rev, exp, gains, and losses.
What are limitations of the income statement
a. Companies omit items from the income statement that they cannot measure reliably
i. Ex: unrealized gains and losses when there are uncertain investments
b. Income numbers are affected by the accounting methods employed
i. Straight line dep increases dep and reporting lower earnings
c. Income measurement involves judgement
i. Identifying optimistic factors could lower exps and increase higher income
d. Quality of earnings
i. Is this statement true: companies try to only meet Wall Street expectations to insure companies have a higher stock options.
1. False, companies try to meet Wall Street’s expectations and beyond for higher stock options
Define Earnings Management
- Planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings
Why timing of revenues, exps, gains, and losses important for company’s earnings?
i. To predict earnings with accuracy
ii. Helpful to increase future earnings
Define quality of earnings
i. Earnings management negative effects the quality of earnings if information is distorted by estimations.
What are elements of the income statement
i. Revenues
ii. Expenses
iii. Gains
iv. losses
Define transaction approach
a. Focuses and identify income related activities
i. Scrupulous analysis that defines income effects of income statement
What is format of multiple income statement
a. Operating sections
i. COGS
ii. Selling Expenses
iii. Administrative or General Expenses
iv. Sales or Revenue
b. Non-Operating
i. Other revenues and gains
ii. Other expenses and losses
c. Income tax
d. Extraordinary items
e. Non-controlling interest
f. Earnings per share
Define single step income statements
a. Revenues, gains, expenses, and losses, some companies often use a format of grouping revenues and expenses
What are FASB’s specific guidelines in two important areas
a. Include income
b. Report certain unusual or irregular items
Define current operating performance approach
a. Advocates reporting only regular and recurring revenue and expense elements, but not irregular items, in come
How do you identify irregular items
a. Modified all inclusive concept
i. Records all items includes unusual or irregular ones
Define modified all inclusive concept
a. Companies , are required, must record most items, including unusual or irregular ones as a part of net income
Identify incomes items that are recorded from modified all inclusive concept
a. Unusual gains and losses
b. Discontinued operations
c. Extraordinary items
d. Non-controlling interests
Which items need disclosure from unusual gains and losses
a. Losses on the write down or write off of receivables; property, plant, and equipment; deferred research and development cost; or other intangible assets
b. Gains or losses from exchange or translation of foreign currencies, including those relating to major devaluation and revaluations
c. Other gains or losses from sale or abandonment of property , plant , or equipment used in the business
d. Other gains or losses from sale or abandonment of property, plant, or equipment used in the business
e. Effects of a strike including those against competitors and major suppliers
f. Adjustment of accruals on long term contracts
Define restructuring charge
a. Relates to a major reorganization of company affairs, such as cost associated with employee layoffs, plant closing costs, write-offs of assets, and so on.
Where do you report unusual items in a multi-income statement?
a. Separate section just above income from operations before income taxes
Why is there Discontinued Operations?
a. To report results of an discontinued operations and to dispose transactions
Define Discontinued Operations
a. eliminates the results of operations of a component
b. no significant involvement in the component after the disposal transaction
Why do companies use the phrase,” Income from continuing operations”.
a. When gains or losses on discontinued operations occur
Why is intra-period tax allocation is used?
a. Meaning,” allocation within a period
Secondly, why intraperiod tax allocation is used
a. Used for income from continuing operations
b. Discontinued operations
c. Extraordinary items
Why do users rely on financial statement’s intraperiod tax allocation?
a. Better understand the impact of income taxes on various components of net income
b. Identify the relationship between income tax expense and income from continuing operations
i. Labeling amount, timing, and uncertainty of future cash flows
Where on multi-income statement is intraperiod tax allocation reported?
a. Continuing operations
b. Discontinued operations
c. Extraordinary items
What does let the tax follow the income
a. That tax relates to more than one source of income
Define Extraordinary items
a. Nonrecurring material items that differ significantly from a company’s typical business activities
Define unusual nature
a. Underlying event or transaction should possess a high degree of abnormiality and be of a type clearly unrelated to , or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates
Define infrequency of occurrence
a. Underlying event or transaction should be of a type that company does not resasonably expect to recur in the foreseeable future, taking into account the environment in which the company operates
When does a company classify gains or losses as an extraordinary?
a. Resulted directly from a major casualty, expropriation, or a prohibition under a newly enacted law or regulation
Define non-controlling interest
a. The portion of equity interest in a subsidiary not attributable to the parent company
Define Earnings per share
a. Net income minus preferred dividends divided by the weighted average of common shares outstanding
b. NI minus preferred dividends divided by weight average of common shares outstanding
When do companies disclose earnings per share on the face of the income statement
a. Company that reports a discontinued operation or an extraordinary item must report per share amounts for the line items
Define exposure draft
a. Presented examples of what these new financial statements might look like that are conducted by users and preparers
Define Preparers
a. Prepare FS and comment on results
How are accounting principles altered in FS
a. They are altered by important events or conditions
Define changes in account principle
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
When does a company recognize a change in accounting principle
a. Adjustment recasts the prior years’ statements on a basis consistent with the newly adopted principle
How are accounting estimates altered?
a. When false estimates such as in useful life and salvage values
Are changes in accounting considered errors?
a. No
Do companies handle changes in estimation retrospectively?
a. No
How do companies correct errors
a. Treated through prior period adjustments
Define Prior period adjustments
a. Company’s record a correction of an error the year in which it is discovered
When restrictions of retained earnings are comply with contractual requirements
a. By board of director’s policy
b. Current necessity
What account do companies transfer RE?
a. Appropriate retained earnings
How are RE separated
a. Retained earnings free ( unrestricted)
b. Retained earnings appropriated ( restricted)
c. Totals ( combined) equal total retained earnings
Define comprehensive income
a. Changes in equity during a period except those resulting from investments by owners and distributions to owners.
Why can be gains or losses can be misleading to investors?
a. Because fair value changes to frequently
b. It does not define NI precisely
How does FASB fix fair value frequency?
a. Identify limited number of transactions
b. That are recorded in comprehensive income
Define statement of stockholders’ equity
a. Reports the changes in each SE account and in total stockholder’s equity during the year
Do companies prepare in columnar form in SE statements?
a. yes
What are two ways to include comprehensive income statement
a. In one statement approach is included
b. In two statement approach is separate from income statement
Are comprehensive income statements include earnings per share info?
a. No
