Chapter 4: The Income Statement and Related Information

Question 1

What are the advantages of the income statement?

Answer 1

• Useful to predict future earnings
• Accrual based
• Primary indicator of success

Question 2

What are the limitations of the income statement?

Answer 2

• Omits items that cannot be measured reliably
• Not comparable if accounting methods are different
• Involves judgement

Question 3

How is the single-step statement presented?

Answer 3

Net Income from Continuing Operations

• Revenues & Gains (sales/other revenue), minus
• Expenses & Losses (COGS, Selling & Admin, Interest expense, Income tax expense)

Discontinued operations (net of tax)

Earnings per share

Question 4

How is the multi-step statement presented?

Answer 4

Net Income from Continuing Operations

• Operating Section (Sales revenue, less COGS, SG&A, R&D, DDA, less restructuring costs)
• Non-operating Section (interest expense, interest & dividend revenue, gains & losses from investment sales)
• Income tax

Discontinued operations (net of tax)

Earnings per share

Question 5

What is discontinued operations?

Answer 5

Company eliminates component of the business and this elimnation represents a strategic shift having a major effect on financial results.

Question 6

What is the Earning Per Share calculation?

Answer 6

Net Income

-

Preferred Dividends

/

Weighted Average of Common Shares Outstanding

Question 7

What is earnings per share?

Answer 7

• Significant business indicator
• Measures dollars earned by each share of common stock
• Must be disclosed on face of income statement

Question 8

What is important about changes in accounting principles?

Answer 8

• Make adjustments retrospectively
• Make cumulative effect adjustment to beginning retained earnings
• Preserves comparability across years

Question 9

What is important about accounting estimates?

Answer 9

• Make changes in the future
• Not considered errors

Question 10

What is important about correcting accounting errors?

Answer 10

• Treated as prior period adjustments
• Adjustment made to the beginning balance of retained earnings

Question 11

What is comprehensive income?

Answer 11

Net Income

+

Other comprehensive income

Question 12

What are the 2 ways to display components of comprehensive income?

Answer 12

• Single continuous statement
• Two separate, but consecutive statements of net income and other comprehensive income

Question 13

What is the statement of stockholder’s equity?

What does it include?

Answer 13

Reports the changes in each stockholders’ equity account and total equity for the period.

Includes:

• Contributions/distributions
• Reconcilation of the carrying amount of each component of equitiy from the beginning to the end of the period