Income Statement

Question 0

use of income statement

Answer 0

understand performance for period of time

determine profitability, value for investment purposes, and credit worthiness

Question 1

unexpired costs

Answer 1

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

Question 2

gross concept

Answer 2

revenues and expenses

Question 3

net concept

Answer 3

gains and losses

Question 4

presentation order of I/S and statement of RE

Answer 4

“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)

Question 5

multi-step I/S

Answer 5

reports operating activities separately from non-operating activities

Question 6

gross profit/margin

Answer 6

net sales - cost of sales

Question 7

income (loss) from operations

Answer 7

requires separate disclosure

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

Question 8

operating activities

Answer 8

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

Question 9

other revenues and gains

Answer 9

non-operating activities

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

Question 10

other expenses and losses

Answer 10

non-operating activities

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

Question 11

income before unusual items and income tax

Answer 11

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

Question 12

unusual or infrequent items

Answer 12

loss on sale of available-for-sale securities

Question 13

income from continuing operations

Answer 13

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

Question 14

inventory cost

Answer 14

purchase price + freight-in

Question 15

selling expenses

Answer 15

freight-out, salaries and commissions, advertising

Question 16

general & administrative expenses

Answer 16

officers salaries, accounting and legal, insurance

Question 17

non-operating expenses

Answer 17

auxiliary activities, interest expense

Question 18

single-step I/S

Answer 18

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

Question 19

discontinued operations

Answer 19

reported net of tax, 3 calculations:

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

calculated in the period they occur

Question 20

component of entity

Answer 20

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

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

Question 21

component of an entity

GAAP vs IFRS

Answer 21

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

Question 22

business

Answer 22

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

Question 23

non-profit

Answer 23

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

Question 24

held for sale criteria

Answer 24

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

Question 25

held for sale | GAAP vs IFRS

Answer 25

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

Question 26

discontinued operations criteria

Answer 26

- 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 ```

Question 27

discontinued operations calculation

Answer 27

loss from operations gain/loss on sale impairment loss (and subsequent increases in FV) (remember after tax calculation)

Question 28

subsequent increases in FV

Answer 28

recognize gain less costs to sell | limited to amount of previously recognized loss

Question 29

impairment loss

Answer 29

recognized if FV/NRV < BV | recognized on year classified as held for sale

Question 30

depreciation and amortization for held or sale component

Answer 30

not recognized since tested for impairment as a whole

Question 31

measurement and valuation (held for sale component)

Answer 31

measured at lower of CV or FV less costs to sell

Question 32

net realizable value

Answer 32

FV less costs to sell

Question 33

exit or disposal activities

Answer 33

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

Question 34

exit and disposal costs

Answer 34

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

Question 35

liability measurement (exit/disposal activity)

Answer 35

measure at FV, may be adjusted for changes in estimate | changes accounted for prospectively

Question 36

liability recognition criteria (exit/disposal activity)

Answer 36

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

Question 37

I/S presentation of exit/disposal activities

Answer 37

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

Question 38

disclosure for exit/disposal activity

Answer 38

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)

Question 39

extraordinary items

Answer 39

"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)

Question 40

examples of non-extraordinary items

Answer 40

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)

Question 41

material unusual OR infrequent items

Answer 41

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

Question 42

extraordinary items | GAAP vs IFRS

Answer 42

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

Question 43

accounting changes and error corrections

Answer 43

recognized on statement of RE, net of tax

Question 45

change in accounting estimate

Answer 45

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

Question 46

change in accounting principle

Answer 46

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

Question 46

change in useful life

Answer 46

change in estimate

Question 47

change in accounting entity

Answer 47

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)

Question 48

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

Answer 48

change in estimate

Question 49

write downs of obsolete inventory

Answer 49

change in estimate

Question 50

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

Answer 50

change in estimate

Question 51

change of accounting principle inseparable from change in estimate

Answer 51

change in estimate

Question 52

settlement of litigation

Answer 52

change in estimate

Question 53

direct effects

Answer 53

adjustments necessary to restate F/S of prior periods | adjust beginning RE

Question 54

indirect effects

Answer 54

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

Question 55

cumulative effect | non-comparative F/S presented

Answer 55

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

Question 56

cumulative effect | comparative F/S presented

Answer 56

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

Question 58

change to LIFO

Answer 58

PROSPECTIVE | change in accounting principle inseparable from estimate

Question 58

change in accounting entity | GAAP vs IFRS

Answer 58

IFRS does not have concept of change in accounting entity

Question 59

change in depreciation method

Answer 59

change in aPROSPECTIVE | change in accounting principle inseparable from estimateccounting principle, PROSPECTIVE

Question 60

change in accounting principle | non-GAAP/IFRS to GAAP/IFRS

Answer 60

considered an error (restate)

Question 61

error corrections | comparative F/S, if year presented

Answer 61

correct error in those prior F/S

Question 62

error corrections

Answer 62

prior period adjustment/RESTATE

Question 63

error corrections | non-comparative F/S

Answer 63

adjust beg RE (after tax)

Question 64

error corrections | comparative F/S, year is NOT presented

Answer 64

adjust (after tax) beg RE of earliest year presented

Question 66

error corrections | GAAP vs IFRS

Answer 66

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

Question 67

change in AR collection method

Answer 67

PROSPECTIVE | change in accounting principle inseparable from estimate