Chpt 4 stice Flashcards
What is income?
A measure of a company’s “well-offness.” It is often defined as the amount that an entity could return to its investors and still be as well-off at the end of the period as it was at the beginning
Financial Capital Maintenence
A concept under which income is defined as the excess of net assets at the end of an accounting period over the net assets at the beginning of the period, excluding effects of transactions with owners.
Physical Capital Maintenance?
A concept under which income is defined as the excess of physical productive capacity at the end of an accounting period over the physical productive capacity at the beginning of the period, excluding the effects of transactions with owners.
How do you measure a firms well-offness?
As it stands currently, a combination of historical costs, fair values, present values, and other valuation measures are used to measure a firm’s “well-offness.”
What is the most important tasks of accountants?
The recognition, measurement, and reporting (display) of business income and its components are considered by many to be the most important tasks of accountants
Transaction approach or Matching method
A method of determining income by defining the financial statement effects of certain events classified as revenues, gains, expenses, and losses. Also known as the matching method, this is the traditional accounting approach to measuring and defining income.
What are the four Component Elements of Income?
Revenues, Expenses, Gains, and Losses
Define Revenues?
Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
Define Expenses?
Expenses are outflows or other “using up” of assets of an entity or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
Define Gains?
Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.
Define Losses?
Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners.
Revenue Recognition
A basic accounting concept that is applied to determine when revenue should be recognized (recorded). Generally, under this principle, revenues are recognized when two criteria are met: The earnings process is substantially complete, and the revenues are realized, or realizable.
Expense recognition?
The process of determining the period in which expenses are to be recorded. Expense recognition is divided into three categories: (1) direct matching, (2) systematic and rational allocation, and (3) immediate recognition
Define Matching principle.
A basic accounting concept that is applied to determine when expenses are recognized (recorded). Under this principle, expenses for a period are determined by associating or “matching” them with specific revenues over a particular time period.
What is an example of systematic and rational allocation?
The cost of assets such as buildings, equiptment, patents, and prepaid insurance are spread across the periods of expected benefit in some systematic and rational way.
Examples of immediate recognition>
Examples include most administrative costs, such as office salaries, utilities, and general advertising and selling expenses.Examples include losses from disposition of used equipment, losses from natural catastrophes such as earthquakes or tornadoes, and losses from disposition of investments
What is the Multiple-step form?
A format of the income statement that lists operating revenues and expenses first, resulting in operating income. From this figure, gains and losses are then added or subtracted to arrive at income from continuing operations. Irregular and extraordinary items are then added or subtracted to arrive at net income. Example: IBM discloses gross profit, income before taxes, and net income in its income statements.
What does the Comparative FInancial Statements do?
Statements that enable users to analyze performance over multiple periods and identify significant trends that might affect future performance.
What is a consolidated Financial Statement?
Financial statements that combine the financial results of a parent company and its subsidiaries.
What does the income from continuing Operations include?
A measure of the profitability of a firm’s operations. The number is obtained by subtracting expenses and losses from revenues and gains. Income from continuing operations is always disclosed after taxes have been subtracted.
What are the six sections of income from continuing operations?
Revenue Cost of goods sold Operating expenses Other revenues and gains Other expenses and losses Income taxes on continuing operations
What are the four subtotals in Income from Continuing Operations?
- Gross profit (Revenue – Cost of goods sold)
- Operating income (Gross profit – Operating expenses)
- Income from continuing operations before income taxes (Operating income + Other revenues and gains – Other expenses and losses)
- Income from continuing operations (Income from continuing operations before income taxes – Income taxes on continuing operations)
What is Gross Profit?
The difference between revenue from net sales and cost of goods sold. (revenue from net sales-COGS)
Gross Profit Percentage?
Computed by dividing gross profit by revenue from net sales, provides a measure of profobility that allows comparisons from year to year. (Gross Profit/Sales)
Operating Income?
Gross Profit-Operating Expenses. A measure of the performance of a company’s business operations. The formula is revenues minus cost of goods sold and operating expenses. Also called earnings before interest and taxes.
What is a Restructuring Charge?
An estimate of the costs expected to be incurred as a result of a plan to significantly modify a company’s operations.
What is a Intraperiod Income Tax Allocation?
A method of income statement presentation of irregular or extraordinary items in which the tax effect of each of these special items is reported with the individual item rather than in the income tax expense related to current operations.
Discontinued Operations?
The disposal of a separately identifiable component of a business either through sale or abandonment. The operations and cash flows of the component must be clearly distinguishable, both physically and operationally, from other activities of the company.
What are four reasons why Management decide to dispose of a component of a business?
The component may be unprofitable.
The component may not fit into the long-range plans for the company. Management may need funds to reduce long-term debt or to expand into other areas.
Management may be fearful of a corporate takeover by new investors desiring to gain control of the company.
What are Extraordinary according to FASB?
Are events and transactions that are both unusual in nature and infrequent in occurence. Gains or losses resulting from events and transactions that are both unusual in nature and infrequent in occurrence or otherwise defined as an extraordinary item per accounting standards.
Return on Sales?
A measure of the profitability of a company that relates net income to the sales of the company. The formula is net income divided by net sales.(NI/NS)
Earnings Per Share (EPS)
Income for the period reported on a per-share-of-common-stock basis. The presentation of earnings per share on the income statement is required by generally accepted accounting principles. Separate EPS amounts are required for income from continuing operations and for each irregular or extraordinary component of reported income.
How do you compute Basic Earnings per share?
Dividing Income available to the come share holders (net income less dividends paid to or promised to preferred shareholders) by the average number of common shares outstanding during the period.
Earnings per share is often used to calculate a firms price-earnings (p/e) ratio. What is the Ratio?
Market Value per share/Earnings per share=P/E Ratio.
What is Comprehensive Income?
A concept of income measurement and reporting that includes all changes in owners’ equity except investments by and distributions to owners.
What are the three more common adjustments made in arriving at comprehensive income?
(1) foreign currency translation adjustments, (2) unrealized gains and losses on available-for-sale securities, and (3) deferred gains and losses on derivative financial instruments.
What are the two general types of retained earnings adjustments?
1) prior-period adjustments and, as indicated earlier, (2) adjustments arising from some changes in accounting principles.
Define Prior-Period Adjustments?
An adjustment made directly to the retained earnings account to correct errors made in prior accounting periods.
Most companies will report on all or most of these categories/
Revenue Cost of goods sold Gross profit Operating expenses Operating income Other revenues and gains Other expenses and losses Income from continuing operations before income taxes Income taxes on continuing operations Income from continuing operations Discontinued operations Extraordinary items
