Chapter 4

Question 1

Performance is measured with

Answer 1

Income statement –> ASPE and Statement of comprehensive income –> IFRS

Question 2

overall objective of I/S

Answer 2

Provide relevant information (feedback value and predictive value) with

1. past performance/profitability (over period of time)
2. Assist in assessing cash flows
3. Assess risk (want profit mostly from operations)

Question 3

high earnings quality when

Answer 3

1. content: unbiased, faithfully represented, earnings are sustainable (from main ops)
2. Presentation: clear, concise, understandable, no attempt to disguise information
3. other: over a long-term, a company’s earnings must be highly correlated to its cash flow from operations

Question 4

Shortcomings of income statement

Answer 4

1. A lot of estimates are used (tradeoff of increase relevance and less reliable)
2. Choice of accounting policies can affect the numbers –> lead to bias and managing earnings
3. some items don’t show at all if they cannot be measured or estimated reasonably

Question 5

Statement of comprehensive income format

Answer 5

1. Net Income/Loss: A) Continuing operations (pre tax + line for tax expense) B)Discontinued operations (net of tax) C) income taxes D) Earning per share
2. Other comprehensive income
3. Comprehensive income (1+2)

Question 6

Two formats for income statement

Answer 6

1. single step

2. multi step

Question 7

Single step

Answer 7

combines all revenues and combines all expenses but does not show relationships between expenses and revenues

Question 8

Multi-step

Answer 8

detailed and elaborate, better because it shows more

Question 9

Expenses by nature or function

Answer 9

both allowed under both ASPE and IFRS; both will show the same net income. Under IFRS, when one is used the other is disclosed.

Question 10

Expenses by nature

Answer 10

input costs: what money was spent on. relates to type of expense: depreciation, purchase of materials (not concerned with function)

Question 11

Expense by function

Answer 11

output costs: relates to activities the expenditure was used for. I.e. activity production, expense COGS

Question 12

Infrequent or unusual items

Answer 12

in continuing operations as non-operating, shown before taxes, under ASPE will be under management’s control
under IFRS may or may not be under management control

Question 13

Discontinued operations

Answer 13

component of a business that has been disposed of or classified as held for sale (net of tax)

Question 14

What constitutes disc ops ASPE

Answer 14

1. Single asset generating cash flows
2. Multiple assets generating cash flows (CGU), but not major line of business
3. Major line of business or geographical area
4. Business bought with a view to sell

Question 15

What constitutes disc ops IFRS

Answer 15

1. Major line of business or geographical area

2. Business bought with a view to sell

Question 16

Once criteria for discontinued operations are met

Answer 16

operations sold by the end of operating period or classified as Asset held for sale.

Question 17

Showing discontinued operations shows

Answer 17

representational faithfulness, because the user knows not to expect income from this stream in the future

Question 18

Asset held for sale

Answer 18

may or may not be discontinued operations: selling non-current assets or a group of them sold together as CGU

Question 19

To be considered held must

Answer 19

1. authorize plan to sell
2. available for immediate sale
3. actively looking for a buyer
4. probable sale within a year
5. assets priced to sell
6. no planned changes

Question 20

assets held for sale are carried at

Answer 20

lower of FV less costs to sell or cost (write down may be required if value is below cost

Question 21

once classified as held for sale, depreciation

Answer 21

stops being counted because they are no longer being used

Question 22

high requirements for assets held for sale because

Answer 22

discourage temporarily categorizing concurrent assets as current to bump up the current ratio

Question 23

Declassification of assets held for sale

Answer 23

should be recategorized at lower of: FV less costs to sell and carrying value if depreciation had continued normally

Question 24

Constructive obligation

Answer 24

implicit obligation of uncertain timing or amount due to a company’s past practice or actions that may have created expectations on part of the public –> future costs that are uncertain

Question 25

Failure to recognize the constructive obligation

Answer 25

compromise the representational faithfulness of the statements

Question 26

Provision (IFRS term)

Answer 26

reliably estimable liability of a probable cost that will arise due to a past actions (lawsuit)

Question 27

Classification of asset held for sale on B/S

Answer 27

ASPE: non-current or current
IFRS: current

Question 28

abandoned assets

Answer 28

carried at lower of cost or fair value less costs to sell

Question 29

depreciation of abandoned assets

Answer 29

stops

Question 30

abandoned assets are not classified as

Answer 30

current, because no plan to sell them

Question 31

idle assets

Answer 31

temporarily not being used

Question 32

depreciation of idle assets

Answer 32

continue depreciating them

Question 33

presentation of discontinued operations (2 parts in one line)

Answer 33

1. gain or loss from sale of asset or re-class to asset held for sale (net of tax)
2. operating profit or loss from the year (net of tax)

Question 34

Restructurings

Answer 34

you could show separately restructuring plans (layoffs) and changes to the business model relocation. companies may accrue certain losses on these if:

1. restructuring program in place
2. significantly alter the manner in which business is conducted / scope of the company’s business

Question 35

OCI

Answer 35

gains and losses that are unrealized and bypass the income statement and go to equity (could be called reserves or surplus account)

Question 36

Earnings per share

Answer 36

Net income - preferred dividends/WA #shares

Question 37

WA #shares

Answer 37

shares last year + #shares this year / 2

Question 38

fully diluted shares

Answer 38

effect of conversion of hybrid securities

Question 39

Statement of changes in equity

Answer 39

IFRS only: show how you go from beginning to ending equity for all amounts including retained earnings

Question 40

link between statement of comprehensive income and B/S

Answer 40

Net income –> Retained earnings

OCI –> AOCI

Question 41

Accounting income

Answer 41

Income statement: measures wealth via a transaction based approach (unrealized gains and losses are not taken in account, once realized they will go to income)

Question 42

Economic income

Answer 42

measures changes in wealth by including accounting income and unrealized gains and losses