Chapter 4/5 Flashcards
Shortcomings of Income Statement
(1) items that cannot be measured reliably are not reported
(2) income numbers are affected by accounting methods
(3) income measurement requires estimates, as does accrual accounting
(4) financial reporting contains bias
(5) GAAP is not always optimal
Quality of Earnings
the quality of earnings numbers comes from the integrity of the information presented, but also from the sustainability of the earnings - it is how well the reported income reflects the underlying business and future potential; quality earnings come from real, continuing sources of business, and reflect the actual cash flows of the business; quality earnings are the actual earning power from ongoing activities core to the business clearly presented to users
What Qualifies as a Discontinued Operation and how is it Accounted For
must be a separate component of an enterprise that has been disposed of or is held for sale; it must be accounted for separately and have its own cash flows; gains or losses from discontinued operations are recorded (net of tax) after income from continuing operations; assets held for sale are remeasured at lower of carrying amount and fair value less cost to sell (and no longer depreciated), and become current assets under IFRS (retain current/non-current status under ASPE)
Nature vs Function
two ways to classify expenses: nature refers simply to the items that money was spent on (employee benefits, materials, depreciation, etc); whereas function refers to the part of the business that the money serves, and may require some judgment and allocation between functions (selling costs, administrative costs, etc)
Limitations of the Balance Sheet
(1) many assets and liabilities are stated at historical cost, which is reliable but not particularly relevant
(2) judgment and estimates are used to determine many of the items on the SFP
(3) the SFP leaves out many items that cannot be recorded objectively or are off-balance sheet
Criteria for Recording Assets as Held for Sale
To be held for sale, assets must meet all of these criteria
(1) authorized plan to sell exists
(2) asset available for immediate sale
(3) active search for a buyer
(4) sale is probable within a year
(5) asset is reasonably priced and actively marketed
(6) changes to the plan are unlikely
IFRS Basic Income Statement Presentation Requirements
- Revenue
- Finance costs
- Share of profit/loss for investments accounted for using the equity method
- Expenses by nature or function
- Tax expense
- Results of discontinued operations
- Profit or loss
- Other comprehensive income classified by nature showing which will be recycled and which will not
- Share of other comprehensive income of investments accounted for using the equity method
- Total other comprehensive income
- Profit or loss and comprehensive income attributable to non-controlling interest and owners
- Comprehensive income
ASPE Basic Statement of Income Requirements
- Revenue
- Income from investments
- Income tax expense (before discontinued operations)
- Income or loss before discontinued operations
- Results of discontinued operations
- Net income or loss
- Net income attributable to noncontrolling interest and owners
Accounting Net Income
revenues and gains less expenses and losses from both continuing and discontinued operations; closed out to retained earnings at the end of the period
Comprehensive Income
net income plus/minus other comprehensive income/loss
Other Comprehensive Income
made up of certain gains or losses, such as unrealized gains on securities, foreign exchange gains or losses; some items are later ‘recycled’ to net income; a company must group items that will be reclasssified and not reclassified and present them separately on the income statement; OCI is closed out to a statement of financial position account called accumulated other comprehensive income (AOCI); OCI is not recognized under ASPE
Intraperiod Tax Allocation
relates the income tax expense or benefit of the period to the underlying income statement items and events that are being taxed
Types of Current Assets
(1) cash
(2) short-term investments
(3) accounts receivable
(4) inventories
(5) pre-paid expense
Intangible Assets
are recorded at cost and separated into two groups
(1) those with finite lives
(2) and those with indefinite lives
finite life intangibles are amortized to expense over their useful lives; those with indefinite lives are not amortized; both are tested for impairment; goodwill is not amortized but is tested for impairment
Current Liabilities
are due within a year of the date of the SFP or within the operating cycle, and includes:
(1) payables
(2) unearned revenue
(3) short-term financing
(4) liabilities that will be liquidated in the operating cycle
Items that Need Supplemental Disclosures
(1) contingencies and provisions
(2) accounting policies
(3) contractual obligations
(4) additional detail of SFP line items
(5) events that happened after SFP was composed
Equity Section of Statement of Financial Position
Share Capital
Common [100,000]
Preferred [100,000]
___________
Total Share Capital [200,000]
Contributed Surplus [100,000]
___________
Total Paid-in Capital [300,000]
AOCI [100,000]
Retained Earnings [100,000]
___________
Total Sharehold Equity [500,000]
