Income Statement

Question 1

The current income statement under GAAP is mostly an all-inclusive one, as essentially all revenues, expenses, gains and losses are shown on the income statement and included in the NI calculation.

Answer 1

Exceptions to all inclusive income statement:

1. OCI: Foreign currency translation adjustment, unrealized holding gains and losses on securities available for sale, pension and post-retirement benefit plan cost adjustments, certain derivative gains and losses.
2. Prior period adjustments are shown on the Statement of Retained Earnings and are the correction of accounting errors affecting income of prior years.
3. Retrospective changes in accounting principle affecting income. These are treated as direct adjustments to retained earnings.

Question 2

Multi-step income statement

Answer 2

In a multi-step income statement, gross profit (margin), operating profit (margin) and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit (margin) is shown as a separate item. A multi-step income statement is not required, but is prepared because it is a more meaningful presentation of revenue and expenses.

Question 3

A material loss should be presented separately as a component of income from continuing operations when it is

Answer 3

Not unusual in nature but infrequent in occurrence.

Question 4

No items in income from continuing operations are shown net of tax because the income tax expense account is used for reporting taxes on income from continuing operations.

Answer 4

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Question 5

Contingencies are accrued and recognized as liabilities when the occurrence of the liability is probable and the amount can be reasonably estimated.

If the occurrence is reasonably possible, but not probable, the liability would be disxlosed but not accrued.

Answer 5

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Question 6

Discontinued operations are not revenue. Discontinued operations are a special item of disclosure found below income from continuing operations on the income statement.

Answer 6

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Question 7

In a multi-step income statement, gross profit, operating profit, and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit is shown as a separate item.

Answer 7

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Question 8

Interest Expense and Advertising Expense result from very specific activities and are frequently material in amount, so they should be separately identified. They are NOT part of sg&a. Interest is identified with specific financing activities, and advertising with specific promotional activities.

Answer 8

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Question 9

What is Gross Profit?

Answer 9

Gross Profit = Sales - COGS