FAR 1 - Income Statement Flashcards
What are the uses of the income statements?
Income statement is useful in determining profitability, value for investment purposes, and credit worthiness.
What is reported on the income statement and statement of retained earnings?
Income Statement
1) Income (or loss) from continuing operations - shown once before tax “gross of tax” and then total shown after tax “net of tax”. Includes operating and non operating activities.
2) Income (or loss) from discontinued operations - shown after tax “net of tax.”
State of retained earning
1) Cumulative effect of change in accounting principle - change from one acceptable method of account to another because the new method presents the financial information more fairly. Shown after tax “net of tax”.
How is unusual or infrequent, or both unusual and infrequent extraordinary items reported?
Extraordinary items are now reported either in the face of income state income from continuing operations or in the footnotes.
What are examples of : Inventory cost, selling expense, general & administrative, and non operating?
Inventory cost - Freight in + purchase price
Selling expense - freight out, advertising, salaries and commissions
General & Administrative - Officers’ salary, accounting and legal, and insurance
Non operating - Auxiliary activities (selling pp&e), interest expense.
What is the difference between multiple step and single step income statement?
Multiple step income statement separates operating revenues and expense from non operating revenues and expenses and other gains and loses.
Single step income statement is simply total revenues shown separately from total expenses.
What are the three calculations for discontinued operations?
1) The normal loss from discontinued operations can consist of impairment loss
2) A gain/loss from actual operations
3) A gain/loss on disposal
All above costs are for period in which they occur, not before.
What is a component of an entity? What are synonymous terms U.S. GAAP and IFRS use for component of an entity?
Component of an entity is a “part of an entity.” It has its own assets, liabilities, revenues, expenses, etc.
U.S. GAAP
1) An operating segment
2) A reportable segment (defined in segment reporting)
3) A reporting unit (defined in goodwill impairment testing)
4) A subsidiary
5) An asset group
IFRS
1) A separate major line of business or geographical are of operations
2) A subsidiary acquired exclusively with a view to resale
Define held for sale and all the criteria to be met?
A component of a business (U.S. GAAP) or disposal group (IFRS). Following all need to be met:
1) Management commits to a plan to sell the component.
2) The component is available for immediate sale in its present condition
3) An active program to locate a buyer has been initiated
4) The sale of the component is probable and the sale is expected to be complete within one year.
5) The sale of the component is being actively marketed
6) Actions required to complete the sale make it unlikely that significant changes to the plan will be made or that plan will be withdrawn.
Difference of held for sale for IFRS vs. U.S. GAAP?
Under IFRS before a component can be classified as held for sale, all individual assets and liabilities are measured for impairment. Under U.S. GAAP only the impairment is tested for component.
Accounting rules for held for sale?
Operations of a component of an entity will be reported in discontinued operations if it:
1) has been disposed of; And/OR
2) is classified as held for sale
Disposal of component is reported in discontinued operations if the disposal represent:
1) A strategic shift that has; And/OR
2) will have a major effect on the entity’s operations and financial results
Examples: GEL
1) Disposal of a major geographical area
2) Disposal of a major equity method investment
3) Disposal of a major line of business
Are components that held for sales depreciated or amortized?
NO.
How is a component of held for sale measured?
Measured at lower of its carrying amount OR fair value less costs to sell (NRV).
What are exit or disposal activities - Not necessarily a discontinued operation but downsizing, “closing hub”.
Recognize pv of future payments for following:
Costs associated with exit and disposal activities:
1) Involuntary employee termination benefits
2) Costs to terminate a contract that is NOT a capital lease
3) Other costs associated with exit or disposal activities, including costs to consolidate facilities or relocated employees.
When should liability for exit and disposal activities be recognized?
When ALL following criteria is met:
1) An obligating event has occurred
2) The even results in a present obligation to transfer assets or to provide services in the future
3) The entity has little or no discretion to avoid the future transfer of assets or providing of services.
Where are exit or disposal activities reported?
Exit and disposal activities are reported either in discontinued operations or in income from continuing operations (G/L).
Exit or disposal activities need to be disclosed in notes.
