FAR 1.2 Income Statement Flashcards
What is the definition of a gain?
An increase in equity from non-operating activities.
*These are event that are not central to the main activities of the business.
What is the definition of a loss?
A decrease in equity from non-operating activities.
*These are event that are not central to the main activities of the business.
Where are gains/losses recorded on the income statement?
In the Non-operating section of the Income (or Loss) from continuing operations.
What are the major components of an Income and retained earnings statement?
IDEA mnemonic:
Income (or Loss) from Continuing Operations
Income (or Loss) from Discontinued Operations
Extraordinary Items
Cumulative Effect of Change in Accounting Principle
How and where do you record the tax effect of discontinued operations?
Reported as Net of Tax after Continuing Operations but before Extraordinary Items.
What are the two type of income statements?
What is the difference?
Multiple step income statement
and
Single step income statement
- *Multiple steps IS - Reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses
- *Single step IS - Total expenses (including income tax expense) are subtracted from total revenues.
When calculating gain/loss from Discontinued Operations, what are the 3 items that should be calculated?
Impairment loss
Gain/loss from operations
Gain/loss on disposal
When is a Discontinued Operations classified as “held for sale”?
Management commits to a plan to sell the component
The component is available for immediate sale in its present condition
The sale of the component is probable and the sale is expected to be completed within one year
What is the definition of an Extraordinary Item?
Abnormal transactions and events that are not related to ordinary operating activities and unlikely to recur in the foreseeable future.
What are the three main criteria of Extraordinary Item?
Material in nature
Unusual in occurrence
Infrequent
What are examples of Extraordinary Item?
Abandonment of, or damage to a plant due to infrequent natural disaster (earthquake, flood etc)
Expropriation of a plant by the government
A prohibition of a product line by a newly enacted law or regulation
Extinguishment of long-term debt (meet the criteria of unusual and infrequent)
What are the three main classification of Accounting principle change?
Changes in accounting estimate (Prospective)
Changes in accounting principle (Retrospective)
Changes in accounting entity (Restate)
What is the definition of a Change in Accounting Principle?
Give an example.
A change in principle is a change from one accounting principle to another.
(i.e., GAAP to GAAP or IFRS to IFRS)
How do you report a Change in Accounting Principle?
What’s the formula?
Changes in accounting principle is accounted for Retrospectively.
(i.e., Adjust beginning R.E. in the earliest period presented for the cumulative effect of the change).
Where is a Change in Accounting Principle reported?
Statements of Retained Earnings
What is the formula to a Change in Accounting Principle when a non-comparative financial statement is presented?
R.E. (Per the new method)
= Cumulative effect adjustment
- Income tax effect
= Cumulative effect Net of Tax
What are the two exception to a change in Accounting Principle that must be treated as a Change in Estimate?
Change in Inventory method to LIFO (considered impractical to try to recalculate the inventory)
AND
Change in Depreciation Method
What is the definition of a Change in Accounting Entity?
The entity being reported on has changed composition
How do you report a Change in Accounting Entity?
Retrospectively and Restated.
Where is a Change in Accounting entity reported?
Statements of Retained Earnings
What is the formula to calculate a Change in Accounting Principle when a comparative financial statement is presented?
ADJUST R.E. FOR EARLIEST PERIOD PRESENTED:
Beginning R.E. (in the period of change)
-
R.E. (Per the new method)
= Cumulative effect adjustment
- Income tax effect
= Beginning Balance (Restated)
RESTATE THE FINANCIAL STATEMENT THEN
Apply new method toward current period R.E Statement
What is the definition of a Correction of errors?
Provide an example of such error?
Mathematical mistakes or mistakes in the application of U.S. GAAP/IFRS in a financial statement.
(i.e., Changes from a non-GAAP/IFRS method of accounting to a GAAP/IFRS method of accounting.
How do you report a Correction of errors?
Changes in accounting entity is accounted for Retrospectively and are Restated.
What is the definition of a Correction of errors?
Mathematical mistakes in the application of U.S. GAAP/IFRS on a Financial Statement.
(i.e., Changes from a non-GAAP/IFRS method to accounting to a GAAP/IFRS method of accounting.
