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
