FAR 1.2 Income Statement

Question 1

What is the definition of a gain?

Answer 1

An increase in equity from non-operating activities.

*These are event that are not central to the main activities of the business.

Question 2

What is the definition of a loss?

Answer 2

A decrease in equity from non-operating activities.

*These are event that are not central to the main activities of the business.

Question 3

Where are gains/losses recorded on the income statement?

Answer 3

In the Non-operating section of the Income (or Loss) from continuing operations.

Question 4

What are the major components of an Income and retained earnings statement?

Answer 4

IDEA mnemonic:
Income (or Loss) from Continuing Operations

Income (or Loss) from Discontinued Operations

Extraordinary Items

Cumulative Effect of Change in Accounting Principle

Question 5

How and where do you record the tax effect of discontinued operations?

Answer 5

Reported as Net of Tax after Continuing Operations but before Extraordinary Items.

Question 6

What are the two type of income statements?

What is the difference?

Answer 6

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.

Question 7

When calculating gain/loss from Discontinued Operations, what are the 3 items that should be calculated?

Answer 7

Impairment loss

Gain/loss from operations

Gain/loss on disposal

Question 8

When is a Discontinued Operations classified as “held for sale”?

Answer 8

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

Question 9

What is the definition of an Extraordinary Item?

Answer 9

Abnormal transactions and events that are not related to ordinary operating activities and unlikely to recur in the foreseeable future.

Question 10

What are the three main criteria of Extraordinary Item?

Answer 10

Material in nature

Unusual in occurrence

Infrequent

Question 11

What are examples of Extraordinary Item?

Answer 11

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)

Question 12

What are the three main classification of Accounting principle change?

Answer 12

Changes in accounting estimate (Prospective)

Changes in accounting principle (Retrospective)

Changes in accounting entity (Restate)

Question 13

What is the definition of a Change in Accounting Principle?

Give an example.

Answer 13

A change in principle is a change from one accounting principle to another.

(i.e., GAAP to GAAP or IFRS to IFRS)

Question 14

How do you report a Change in Accounting Principle?

What’s the formula?

Answer 14

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).

Question 15

Where is a Change in Accounting Principle reported?

Answer 15

Statements of Retained Earnings

Question 16

What is the formula to a Change in Accounting Principle when a non-comparative financial statement is presented?

Answer 16

R.E. (Per the new method)

= Cumulative effect adjustment

• Income tax effect

= Cumulative effect Net of Tax

Question 17

What are the two exception to a change in Accounting Principle that must be treated as a Change in Estimate?

Answer 17

Change in Inventory method to LIFO (considered impractical to try to recalculate the inventory)

AND

Change in Depreciation Method

Question 18

What is the definition of a Change in Accounting Entity?

Answer 18

The entity being reported on has changed composition

Question 19

How do you report a Change in Accounting Entity?

Answer 19

Retrospectively and Restated.

Question 20

Where is a Change in Accounting entity reported?

Answer 20

Statements of Retained Earnings

Question 21

What is the formula to calculate a Change in Accounting Principle when a comparative financial statement is presented?

Answer 21

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

Question 22

What is the definition of a Correction of errors?

Provide an example of such error?

Answer 22

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.

Question 23

How do you report a Correction of errors?

Answer 23

Changes in accounting entity is accounted for Retrospectively and are Restated.

Question 24

What is the definition of a Correction of errors?

Answer 24

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.

Question 25

How do you report a Correction of errors?

Answer 25

Changes in accounting entity is accounted for Retrospectively and are Restated.

Question 26

Where is a “correction of errors” reported?

Answer 26

Retained earning

Question 27

What is the formula for impairment loss?

Answer 27

Carrying Value (aka Book Value)
= Impairment Loss

*There’s an impairment loss when the fair value is lower than the carrying value.

Question 28

What is the formula for Discontinued operations?

Answer 28

Impairment Loss
\+
Gain/Loss from Operations
\+
Gain/Loss from Disposal
= Discontinued Operations

Question 29

What is the minimum IFRS requirement (Types of Financial statements) when presenting a change in accounting principle?

Answer 29

3 Balance sheet (end of current period, end of prior period, and beginning of prior period)

2 of each other financial statement (current period and prior period)

Question 30

What is IFRS rule on reporting Discontinued operation and extraordinary Items?

Answer 30

IFRS does not permit the reporting of Discontinued operation and extraordinary Items.

Question 31

What are the criteria for recognizing a liability with exit or disposal activities?

Answer 31

Obligating event has occurred

Obligation to transfer assets or to provide services in the future

The entity unable to avoid the future transfer of asset or provide services