Chapter 13

Question 1

what must be done to determine sustainable income?

Answer 1

remove irregular items from net income (discontinued operations, other comprehensive income-recorded net of tax)

Question 2

discontinued operations

Answer 2

disposal of significant component of a business
elimination of a major class of customers
elimination of entire business activity

Question 3

comprehensive income

Answer 3

all changes in stockholders’ equity except those resulting from:
investments by stockholders
distributions to stockholders

Question 4

most changes in principle are reported ___________

Answer 4

retro-actively

Question 5

do accting rules permit a change in principle?

Answer 5

yes-only when the new principle is most preferable

Question 6

comparative analysis

Answer 6

1) intracompany basis-historical trend analysis
2) intercompany basis- direct comparison to competitor
3) industry averages- relative position w/in an industry

Question 7

what 3 tolls do financial users utilize to highlight significance in financial statement data?

Answer 7

1) horizontal analysis
2) vertical analysis
3) ratio analysis

Question 8

horizontal analysis

Answer 8

trend analysis-over a period of time

• expressed in $ amounts and % change
• commonly applied to balance sheet/income statement
• current results in relation to base period

Question 9

vertical analysis

Answer 9

size analysis-% of base amount

• commonly applied to the balance sheet/income statement
• can compare companies of dif sizes

Question 10

liquidity ratios

Answer 10

measure short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

Question 11

solvency ratios

Answer 11

measure the ability of the company to survive over a long period of time

Question 12

profitability

Answer 12

measure the income or operating success of a company for a given period of time

Question 13

price-earnings ratio

Answer 13

reflects investor’s assessment of the company’s future earnings
(higher if thought that earnings will increase-lower if thought to have poor quality of earnings)

Question 14

quality of earnings

Answer 14

want this to be high-means co has transparent info that will not confuse or mislead users

Question 15

issues with quality of earnings

Answer 15

1) alternative accting methods (inventory, depreciation, amortization)
2) improper recognition (offering really good discounts so people buy now)
3) capitalization of operating expenses
4) not reporting all liabilities