Income Statement

Question 1

Definition of Revenues, Expenses, Gains, Losses

• Revenues - i_____ in equity or net assets or s______ of liabilities by providing goods and services (primary business operations).
• Expenses - d______ in equity or net assets or i______ of liabilities through the provision of goods or services (primary business operations). Expenses provide b_____ to the firm. Losses do not.
• Gains - i______ in equity or net assets from peripheral or incidental transactions.
• Losses - d_____ in equity or net assets from peripheral or incidental transactions. Losses do not provide b______ to the firm.

Answer 1

• increases; settlements
• decreases; incurrence; benefit
• increases
• decreases; benefit

Question 2

Exceptions to all-inclusive income stmt. What are the 3 items that are not included in the income stmt?

• 1. Prior Period Adjustment
     * 1. what is PPA?
     * 2. how is PPA recorded?
• 2. Other Comp Income
     * 1. what are the 4 OCI items?
     * 2. how is OCI recorded?
• 3. Change in Accounting Principle
     * 1. it is r___ change in accounting principle.
     * 2. it is recorded as ___.
     * 3. example: cumulative effect of change from FIFO to LIFO is recorded as RE of the OE section of balace sheet.

NOTE - Change in Estimate

• 1. it is p___ change impacting current and future year income.
• 2. it is recorded as ___.
• 3. example: effect of change in estimate of useful life for a plant asset is recorded as income from continuing operations of income statement.

Answer 2

• 1.
  
  • 1. correction of errors affecting income of prior years.
  • 2. adjustment to the beginning balance of RE and in the year the error is discovered.
• 2.
  
  • 1.
    
    • 1. unrealized gains/losses on AFS securities.
         * NOTE - realized gains/losses on AFS sec. and realized or unrealized gains/losses on trading sec. are income from continuing operations.
    • 2. pension-oriented adjustment.
    • 3. foreign currency translation adjustment.
    • 4. hedge accounting.
  • 2. in the stmt of comp income and in AOCI of the balance sheet.
• 3.
  
  • 1. retrospective.
  • 2. an adjustment to RE.

NOTE

• 1. prospective.
• 2. income from continuing operations of income stmt.

Question 3

Structure of the Income Statement:

• top portion - ___________, that is, routinely occurring items and other items.
  
  • GAAP is very loose in the top portion with regard to presentation.
• bottom portion - items unrelated to continuing operations (e.g., ___________).
  
  • they are unique items that will not be repeated. However, they are components of _________.
  • GAAP is very specific about the measurement and presentation of items in the bottom portion.
  • discontinued operations are presented at the bottom portion. They are either sold or planned to be sold and thus are no longer part of continuing operations.
  • discontinued operations must be recorded “______”.
• NOTE
  
  • income tax expense is attributable only to ___________. The tax effects of items below continuing operations are shown along with the item itself in a process called ____________.
  • to make it simpler, tax effect for income from continuing operations and tax effect for discontinued operations are shown separately.

Answer 3

• top portion - income from continuing operations
• bottom portion - e.g., discontinued operations
  
  • net income
  • “net of tax”
• NOTE
  
  • income from continuing operations; intraperiod tax allocation

Question 4

What is the order of income statement presentation?

Answer 4

1. income from continuing operations.
2. Income from discontinued operations (net of tax).
3. net income.

Question 5

Unusual or Infrequent Income Items:

• GAAP requires that unusual and/or infrequent items must be ___________ if material as a component of _______________.
• NOTE - No more extraordinary items. Unusual and/or infrequent items are classified as _____________.
• Example: the loss from effect of a new law goes to __________.

Answer 5

• separately reported; income from continuing operations.
• other gains/losses under income from continuing operations.
• other losses.

Question 6

Formats Leading to Income from Continuing Operations:

• income from continuing operations can be presented in 2 formats: the _____ format or the ______ format. EPS is shown at the bottom of the income statement.
• multiple-step:
  
  • Sales - COGS = Gross profit.
  • Gross profit - operating expenses = income from operations (or operating margin).
  • Income from operations + or − other inc./exp. = pretax income from continuing operations.
  • Pretax income from continuing operations − inc. tax = income from continuing operations (this would be net income if no discontinued operations).
• single-step:
  
  • total revenues & gains - total expenses & losses
• NOTE
  
  • a multi-step Income Statement is not required but is prepared because it is a more m_______ p_______ of revenues and expenses.
  • both formats provide ______ information although the multiple-step format provides more subtotals and organization.
  • income from continuing operations and net income are _______ regardless of the format used.
  • the presentation below income from continuing operations stays ________ regardless of the format used.
  • the format differences affect only the ______ in calculating _____________.

Answer 6

• single-step; multiple-step
• NOTE
  
  • meaningful presentation
  • the same
  • the same
  • the same
  • ordering; income from continuing operations

Question 7

Accounting vs. Economic income:

• economic income = change in net worth of a business during an accounting period.
  
  • net worth of a business = fair market value (FMV) of net assets (rather than total owners’ equity per GAAP).
  • Thus, economic income = _______________.
• accounting income = ________________.
  
  • GAAP requires transaction-based reporting.
  • Thus, accounting income reflects recorded transactions and adjustments.
  • Unlike economic income, accounting income does not reflect changes in FMV of many assets & liabilities, because GAAP requires many assets & liabilities to be recorded at historical cost.

Answer 7

• economic income = change in net worth = change in FMV of net assets = ending FMV - beginning FMV.
• accounting income = revenues - expenses + gains - losses.