Chapter 4

Question 1

Income Statement

Answer 1

The income statement is the report that measures the success of company operations for a given period of time

Question 2

Usefulness of the Income Statement

Answer 2

• Evaluate the past performance of the company
• Provide a basis for predicting future performance
• Help assess the risk or uncertainty of achieving future cash flows

Question 3

Limitations of the Income Statement

Answer 3

• Companies omit items from the income statement that they can’t measure reliably
• Income numbers are affected by the accounting methods used
• Income measurement involves judgment

Question 4

Gains

Answer 4

Increases in equity (net assets) from transactions of an entity except those that result from revenues or investments by owners

Question 5

Discontinued operations occurs when 2 things happen:

Answer 5

• A company eliminates the results of operations of a component of the business
• The elimination of a component that represents a strategic shift, having a major effect on the company’s operations and financial results. A strategic shift generally includes the disposal of a major line of business, a major geographical area, or a major equity investment method

Question 6

EPS

Answer 6

EPS = (Net Income - Preferred Dividends)/(Weighted-Avg Common shares outstanding)

Question 7

Comprehensive Income

Answer 7

Comprehensive Income includes all changes in equity except investments by owners and distributions to owners.

In other words, comprehensive income is net income (or loss) + all changes except investments by owners and distributions to owners. The non-owner related changes in equity are called Other Comprehensive Income

Question 8

Similarities between GAAP and IFRS for Income Statement

Answer 8

• Require disclosure of the amount of net income attributable to non-controlling interest
• Similar guidelines regarding presentation of discontinued operations
• GAAP and IFRS have items recognized in equity as part of comprehensive income but don’t affect net income

Question 9

Unusual gains and losses

Answer 9

These items are reported as part of income before income taxes

i.e. gains/losses from natural disasters, restructuring charges etc

Question 10

Changes in Accounting Principle

Answer 10

When a company wants to change its accounting method from the one it previously used, it has to make retrospective adjustment of the prior years’ financial statements

Question 11

Changes in Accounting estimates

Answer 11

Company recognizes changes in accounting estimates prospectively, meaning you only have to adjust for future statements and not past ones

Question 12

Noncontrolling interest

Answer 12

Portion of equity (net assets) interest in subsidiary that’s not attributable to the parent company