Chapter 4: Income Statement and Related Information Flashcards
Corrections of errors on financial statements
Treated as prior periods adjustments:
1) make proper entries
2) report corrections in financial statements
Recorded in year discovered - show as adjustment to beginning retained earnings
- restate any prior statements to include adjustments
Shown net of tax
Multi-step income statement
Operating Section - sales or revenue (net of returns/ discounts/ allowances) - Cost of goods sold - selling expenses - administrative/ general expenses Non-Operating section - other revenue / gains - other expenses/ losses Income Tax Discontinued Operations Noncontrolling interest Earnings per share
Change in accounting principle
Must demonstrate that new principle is preferable
results in loss of consistence - requiring retrospective adjustment
shown net of tax
Changes in accounting estimates
NOT shown net of tax
New info can change even good faith estimates
- accounts for change in period affected or period affected + future periods affected, but never past
Not errors
Retrospective adjustment
When accounting principle change
recasts prior years statements on a basis consistent with newly adopted principle
- records cumulative affect of change for prior periods as an adjustment to beginning retained earnings for earliest year presented
Revenues
inflows or other enhancements of assets of an entity of settlements of its liabilities during a period from delivering or producing goods rendering services or other activities that constitute the entity’s ongoing major or central operations
EBITDA
Earnings before interest, taxes, depreciation and amortization
Non-GAAP financial measure
Non-GAAP Reporting
Financial measures on financial statements not in accordance with GAAP but that companies claim are more indicative of true results/ operations
Often show higher income numbers than GAAP
creates difficulty in cross-company comparison.
SEC requires these to be reconciled to GAAP
Quality of earnings
Usefulness of reporting for predicting future earnings and cash flow
Earnings Management
Planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings
choices made in accounting methods to provide more favorable statements of earnings (could be increases or decreases)
“cookie jar reserves”
Modified all-inclusive concept
Income reporting method
- companies record most revenue/ expense items INCLUDING unusual / infrequent items as part of net income
Certain items are required to be highlighted:
- unusual and infrequent gains and losses
- discontinued operations
- noncontrolling interest
- earnings per share
Current operating performance approach
An income reporting method
most useful income measures reflect only regular and recurring revenue and expense elements
(unusual / infrequent events not considered informationally useful)
Natural Expense Classification
COGS
Selling Expenses
Admin/General expenses
manufacturing and wholesale merchandisers
Functional Expense classification
example: Administrative Occupancy Publicity Buying Selling
(retail store use)
Discontinued Operations
two requirements:
1) company eliminates the results of operations of a component of business
2) elimination of the component represents a strategic shift (has a major affect on company’s financial result)
Usually disposal of:
- major business line
- major geographical area
- major equity investment
Component of a business
Operation and cash flow that can be clearly distinguished operationally and for financial purposes
Intraperiod tax allocation
Allocation of tax within the income statement of a period
relates income tax expense (provision) to specific items that gave rise to it
Helps understand impact of income tax and future cash flows
discourages pretax measures of performance
Noncontrolling interest
The portion of equity interest in a subsidiary not attributable to the parent company
