Chapter 4 - Income Statements Flashcards
Earnings Management
The planned timings of revenues, expenses, gains, and losses to smooth out bumps in earnings. (Put in place to increase integrity / good business practices)
Limitations of Income Statement
- Companies omit items that they cannot measure reliably
- Income numbers are affected by methods employed
- Involves judgement
Usefulness of Income Statement
- Evaluate past performance
- Provide basis for predicting future performance
- Help asses risk / uncertainty of achieving future cash flows
Quality of Earnings
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Format of Multi Step Income Statement
Operating Section, Nonoperating Section, Income Tax, Discontinued Operations, Noncontrolling Interest, Earnings Per Share
Operating Section Consists of….
Sales or Revenue, COGS, Selling Expenses, Administration Expenses or General Expenses
Non Operating Section Consists of….
Other Revenues / Gaines, Other Expenses or Losses
Income Tax consists of…
a section reporting federal and state taxes levied on income from continuing operations
Discontinued Operations
Material gains or losses resulting from the disposition of a component of the business.
Elimination of component represents “strategic shift” and have a major effect on business
Earnings Per Share Consists of…
a measure of performance over the reporting period
Noncontrolling Interest
allocation of income to noncontrolling shareholders
Condensed Income Statement
Shows only totals of each group in statement of income
Single Step Income Statement
Consists of revenues and expenses and earnings per share
Earnings Per Share (EPS)
Net Income - Preferred Dividends / weighted-average common shares outstanding
A company that reports discontinued operations must report per share amounts for this item.
Changes in Accounting Principle
includes a change I the method of inventory pricing (fifo to average cost). Retrospective adjustment needed to recast the prior years’ statements on a basis consistent with newly adopted principles.
