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CPA FAR > Income Statement > Flashcards

Income Statement Flashcards

0
Q

use of income statement

A

understand performance for period of time

determine profitability, value for investment purposes, and credit worthiness

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1
Q

unexpired costs

A 
costs that be charged against revenues from future periods
inventory (to COGS)
prepaid expenses (to insurance/rent expense)
fixed assets (to depreciation expense)
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2
Q

gross concept

A

revenues and expenses

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3
Q

net concept

A

gains and losses

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4
Q

presentation order of I/S and statement of RE

A

“IDEA”

income from continuing operations (before tax, then after tax)
income from discontinued operations (after tax)
extraordinary items (after tax)
accounting principle changes > statement of RE (after tax)
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5
Q

multi-step I/S

A

reports operating activities separately from non-operating activities

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6
Q

gross profit/margin

A

net sales - cost of sales

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7
Q

income (loss) from operations

A

requires separate disclosure

gross profit/margin - SG&A and depreciation (separate disclosure)

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8
Q

operating activities

A

net sales, cost of sales, SG&A, depreciation

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9
Q

other revenues and gains

A

non-operating activities

  • interest income
  • gain on sale of fixed assets
  • other income
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10
Q

other expenses and losses

A

non-operating activities

  • interest expense (separate disclosure)
  • loss on sale of fixed assets
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11
Q

income before unusual items and income tax

A

income (loss) from operations + other revenues/gains - other expenses/losses

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12
Q

unusual or infrequent items

A

loss on sale of available-for-sale securities

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13
Q

income from continuing operations

A

“net income” (if no extraordinary items or discontinued operations)
includes operating and non-operating activities

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14
Q

inventory cost

A

purchase price + freight-in

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15
Q

selling expenses

A

freight-out, salaries and commissions, advertising

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16
Q

general & administrative expenses

A

officers salaries, accounting and legal, insurance

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17
Q

non-operating expenses

A

auxiliary activities, interest expense

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18
Q

single-step I/S

A

total revenues - total expenses (including income tax expense)
no need for additional classification

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19
Q

discontinued operations

A

reported net of tax, 3 calculations:

  • impairment loss
  • gain/loss from actual operations
  • gain/loss on disposal

calculated in the period they occur

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20
Q

component of entity

A

(lowest level) or which operation and cash flows can be clearly distinguished

i.e. operating/reportable segment, reporting unit, subsidiary, asset group

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21
Q

component of an entity

GAAP vs IFRS

A

GAAP - part of an entity that is clearly distinguishable (operations and for financial reporting)

IFRS - separate major line of business or geographical area of opearations, or subsidiary acquired for resale

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22
Q

business

A

conducted and managed for purpose of providing a return to investors, owners, etc. (profit)

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23
Q

non-profit

A

conducted and managed for purpose of providing benefits OTHER THAN goods or services at a profit

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24
Q

held for sale criteria

A

there’s a PLAN to sell component
available for IMMEDIATE sale
active program to LOCATE buyer
sale is PROBABLE, expected to be sold within 1 year
actively MARKETED
unlikely to have significant changes to plan will be made or withdrawn

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25
Q

held for sale

GAAP vs IFRS

A

GAAP - component of business (see criteria)
- does not require re-measurement of INDIVIDUAL assets/liabilities before classified as held for sale but entire component is subject to impairment analysis

IFRS (disposal group)

  • INDIVIDUAL assets/liabilities must be measured in accordance with applicable standards and any gains/losses must be recognized
  • reported at lower of carrying value or fair value less costs to sell
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26
Q

discontinued operations criteria

A
  • has been disposed of
  • classified as held for sale
"GEL"
disposal represents strategic shift and/or MAJOR effect on entity's operation
- geographic
- equity method investment
- line of business
27
Q

discontinued operations calculation

A

loss from operations
gain/loss on sale
impairment loss (and subsequent increases in FV)

(remember after tax calculation)

28
Q

subsequent increases in FV

A

recognize gain less costs to sell

limited to amount of previously recognized loss

29
Q

impairment loss

A

recognized if FV/NRV < BV

recognized on year classified as held for sale

30
Q

depreciation and amortization for held or sale component

A

not recognized since tested for impairment as a whole

31
Q

measurement and valuation (held for sale component)

A

measured at lower of CV or FV less costs to sell

32
Q

net realizable value

A

FV less costs to sell

33
Q

exit or disposal activities

A

“downsizing or closing a hub”

NOT a discontinued operation
recognize liability of PV of future payments for costs associated with exit or disposal activity

34
Q

exit and disposal costs

A

involuntary employee termination benefits
costs to terminate contract (NOT a capital lease)
other costs, including costs to consolidate facilities or relocate employees

35
Q

liability measurement (exit/disposal activity)

A

measure at FV, may be adjusted for changes in estimate

changes accounted for prospectively

36
Q

liability recognition criteria (exit/disposal activity)

A

exit or disposal plan

ALL MUST BE MET:
obligating event has occurred (profits < budget)
event results in a present obligation (transfer assets/provide service)
entity has little or no discretion to avoid future obligation

future operating losses expected to be incurred as part of exit/disposal activity are recognized in period incurred

37
Q

I/S presentation of exit/disposal activities

A

reported in discontinued operations OR income from continuing operations depending on costs associated with exit/disposal activity

disclosed in the notes

38
Q

disclosure for exit/disposal activity

A

disclosed in notes

  • description of activity
  • major costs associated with activity (expected and actual)
  • line items in I/S where costs are aggregated
  • liability not recognized because FV cannot be estimated (and reason why)
39
Q

extraordinary items

A

“after tax”
material
unusual AND infrequent

(natural disasters, expropriation (theft by government), prohibition, certain gains/losses from early retirement of LT debt specifying unusual and infrequent)

40
Q

examples of non-extraordinary items

A

gain/loss from sale/abandoned PPE used in business
write-downs or write-offs (AR, inventory, intangibles, LT securities)
gain/loss from foreign currency transactions/translations
losses from major employee strikes
early retirement of LT debt (not unusual and infrequent)

41
Q

material unusual OR infrequent items

A

reported in income from continuing operations (non-operating section) before tax

42
Q

extraordinary items

GAAP vs IFRS

A

IFRS has no such thing as extraordinary items in statement of comprehensive income, I/S, or notes to F/S

43
Q

accounting changes and error corrections

A

recognized on statement of RE, net of tax

45
Q

change in accounting estimate

A

not an error, PROSPECTIVE (do not restate prior periods)
affects current and future income from continuing operations
disclosed if it affects several future periods, income before extraordinary, net income and EPS

change in ordinary acctg estimate do not have to be disclosed unless they are material

46
Q

change in accounting principle

A

general rule, RETROSPECTIVE
record changes to statement of RE in beg RE of earliest period presented
change must be like to like (GAAP to GAAP, IFRS to IFRS)

changes allowed if it’s justified (GAAP/IFRS requirement, etc.)
not allowed for transactions/event that has been terminated/non-recurring

46
Q

change in useful life

A

change in estimate

47
Q

change in accounting entity

A

RETROSPECTIVE (restate to earliest period presented if comparative F/S)
full disclosure of cause and nature of change (including income before extraordinary items, net income and RE)

48
Q

adjustments of year-end accrual of officers salaries and/or bonuses

A

change in estimate

49
Q

write downs of obsolete inventory

A

change in estimate

50
Q

change of accounting principle inseparable from change in estimate (depreciation method)

A

change in estimate

51
Q

change of accounting principle inseparable from change in estimate

A

change in estimate

52
Q

settlement of litigation

A

change in estimate

53
Q

direct effects

A

adjustments necessary to restate F/S of prior periods

adjust beginning RE

54
Q

indirect effects

A

differences in items based on earnings that would have occurred if new principle had been used in prior periods

55
Q

cumulative effect

non-comparative F/S presented

A

difference b/w amount of beginning RE
VS. amount of what RE would have been if change applied to prior periods

adjust RE by the difference

56
Q

cumulative effect

comparative F/S presented

A

difference b/w beginning RE in first period presented
VS. what RE would have been if principle was applied to all prior periods

adjust RE by the difference

58
Q

change to LIFO

A

PROSPECTIVE

change in accounting principle inseparable from estimate

58
Q

change in accounting entity

GAAP vs IFRS

A

IFRS does not have concept of change in accounting entity

59
Q

change in depreciation method

A

change in aPROSPECTIVE

change in accounting principle inseparable from estimateccounting principle, PROSPECTIVE

60
Q

change in accounting principle

non-GAAP/IFRS to GAAP/IFRS

A

considered an error (restate)

61
Q

error corrections

comparative F/S, if year presented

A

correct error in those prior F/S

62
Q

error corrections

A

prior period adjustment/RESTATE

63
Q

error corrections

non-comparative F/S

A

adjust beg RE (after tax)

64
Q

error corrections

comparative F/S, year is NOT presented

A

adjust (after tax) beg RE of earliest year presented

66
Q

error corrections

GAAP vs IFRS

A

IFRS - if impractical to determine period-specific or cumulative effect of an error, restate information prospectively from earliest date that’s practical

GAAP - no impracticality exemption for error corrections

67
Q

change in AR collection method

A

PROSPECTIVE

change in accounting principle inseparable from estimate

CPA FAR (24 decks)

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