Chapter Four: Income Statement and Related Infomation Flashcards
Income Statement
Picture of operations over a specific period of time, links together balance sheets to show how went from one to another
What does the income statement help investor with?
Time and amount of future cash flows
What allows comparability between firms?
Evaluation of past performance
How do company’s assess risk?
Look at trends
Three uses for Income Statement
1) Evaluation of Past Performance, 2) Assessment of Risk Involved, 3) Prediction of future cash flows
What happens when manager’s want to meet or exceed street expectations?
Tendency to manage earnings
Cookie jar effect
Cause earnings to look nice and smooth and on upward trend
Big Bath Effect
Take known loss along with additional loss
What accounts are shown on the Income Statement?
Revenues and Expenses, temporary and nominal accounts
What are the two subsets of revenues and expenses?
Gains and Losses
How are gains and losses shown on the income statement?
Expenses and revenues reported as net, so they are shown as reductions and increases in net income
Two formats of Income Statement
Multi-step Income Statement and Single Step Income Statement
Sections of Multi-step Income Statement
Operating Section and Selling Expense Section
Operating Section
Contains revenue and expenses earned or incurred over normal course of business
Sections within Operating Section
Sales/Revenue Section, Cost of Goods Sold Section, Selling Expense Section, and Administrative/General Expenses
Sales/Revenue Section
inflows of resources from selling/providing resources, also has contra-accounts
Cost of Goods Sold Section
Beginning Inventory + Purchases = Goods Available for Sale - Ending Inventory = Cost of Goods Sold
Gross Profit/Margin Equation
Sales/Revenue Section - Cost of Goods Sold = Gross Profit/Margin
Administration Selling Expenses
Overhead expense not related to revenue generation
Operating Income Equation
Operating Revenues - Operating Expenses = Operating Income
Non-operating Section of Income Statement
Other Revenues and Gains Section and Other Expenses and Losses Section
Tax Section
Takes away from income before income tax (income before tax - provision)
Net Income Equation
Operating Section + Non-Operating Section
Earnings Per Share Equation
Income Available to Common Shareholders/Weighted Average Shares Outstanding
Income Available to Common Shareholders Equation
Net Income - Preferred Dividends
Single-Step Income Statement
use all revenues and all expenses in sections, separate tax section and earnings per share
Irregular Items on Income Statement
Discontinued Operations, Extraordinary Items, Unusual Gains and Losses, and Changes in Accounting Principle, Changes in Accounting Estimates, and Accounting Error
Discontinued Operations
Company might dispose portion/sector of business, sell a subsidiary
Where are discontinued operations reported?
Beneath the line (Income from Continuing Operations), after Provision for Income Tax
Extraordinary Item
Unusual in nature, infrequent in occurrence (must be both)
Where are extraordinary items reported?
Below the line, net of tax (intraperiod tax allocation: split into different sections), separate earnings per share
Unusual Gains and Losses
unusual or infrequent (not both)
Where are unusual gains and losses reported?
Reported above the line
Changes in Accounting Principle
Company decides better reporting for how recording something or FASB mandates change in accounting principles
How are changes in accounting principle reported?
Reported using a retrospective approach
Retrospective approach
All prior year statements reported (1 or 2) will be adjusted to reflect new accounting principle, except retained earnings
Changes in Accounting Estimates
Correct an estimate made previously
How do you account for accounting estimates?
Adjust books to reflect new estimate
Accounting Error
Made a mistake
How do you account for an accounting error?
Make prior year adjustment: Adjust beginning retained earnings
