Chapter 4 Terms Flashcards
Gains/Losses
Increases or decreases in equity from peripheral or incidental transactions of an entity.
Income from continuing operations
Components of net income likely to continue into the future.
Earnings quality
Ability of reported earnings to predict a company’s future earnings.
Restructuring costs
Company incurs significant costs to materially change the scope of business ops or the manner in which they are conducted; done to attain greater efficiency.
Non-GAAP earnings
Excludes certain expenses (and sometimes revenues) such as restructuring costs, acquisition costs, write-downs of impaired assets and stock-based compensation because these are management’s views of “permanent earnings,” better measuring company’s long-term performance.
When are discontinued operations reported?
1) A component of an entity or group of components has been sold or disposed of, or is considered held for sale.
2) If the disposal represents a strategic shift that has, or will have, a major effect on a company’s operations and financial results.
What are the two elements reported when a discontinued component is sold before the end of the reporting period?
1) Income/loss from operations (revenues, expenses, gains, losses) of the component from the beginning of the reporting period to the disposal date.
2) Gain or loss on the disposal of the component’s assets.
How are the income effects of a discontinued operation reported when the component is considered held for sale?
Income effects of the discontinued operation still reported, but the two components of the reported amount are modified as follows:
1) Income/loss from operations (revenues, expenses, gains, loses) of the component from the beginning of the reporting period to the end of the reporting period.
2) An impairment loss if the book value (sometimes called carrying value or carrying amount) of the assets of the component is more than fair value minus cost to sell.
What are the three methods of implementing mandated changes in accounting principles?
Retrospective Approach, modified retrospective approach, prospective approach.
Retrospective Approach
Restate all prior periods’ financial statements as if the new method/standard had been used all along.
Modified Retrospective Approach
Prior periods’ financial statements not restated, change in net income from prior periods shown as adjustment to retained earnings of adoption period.
Prospective Approach
No modification or adjustment of prior periods’ account balances. Used in current period and moving forward.
Earnings Per Share (EPS)
Amount of profit generated for each shareholder. Relates amount of net income a company generates to number of shares outstanding.
Comprehensive Income
Net income plus other changes in SHE that do not represent transactions with owners.
Investing Activities
Involve the acquisition and sale of LTAs used in business and nonoperating investment assets.
