Income Statement

Question 1

What is an increase in net assets or settlements of liabilities by providing goods and services?

Answer 1

Revenues. These are related to a company’s primary business

Question 2

What is a decrease in net assets or incurred liabilities through the provision of goods or services.

Answer 2

Expenses. These are related to a company’s primary business. Expenses provide a benefit to the firm. Losses do not

Question 3

What is a net increase in equity or net assets from peripheral or incidental transactions?

Answer 3

Gains

Question 4

What is a decrease in equity or net assets from peripheral or incidental transactions?

Answer 4

Losses. These do not provide benefit or value to the firm

Question 5

What is the current type of Income Statement used under GAAP?

Answer 5

The all inclusive income statement

Question 6

What are the exceptions to the All Inclusive Income Statement?

Answer 6

1. ) Prior Period Adjustments - these are shown on statement of retained earnings
2. ) OCI - Includes Foreign Currency translation, Unrealized holding gains and losses on securities held for sale, Pension plan adjustments, Certain deferred derivative gains and losses.

Question 7

What does comprehensive income include?

Answer 7

Net Income + Other comprehensive income

Question 8

What is the Current Operating Performance Income Statement?

Answer 8

Limits the income statement to normal, recurring items. Many other items would be run through owner’s equity and thus, would escape attention of users who use the income statement to make decisions

Question 9

What is defined as Revenues less expenses plus gains and losses?

Answer 9

Accounting Income. This records transactions, events and adjustments

Question 10

What is defined as the change in net worth of a business enterprise during an accounting period?

Answer 10

Economic Income

Question 11

What is the net worth of a business described as?

Answer 11

Fair Market Value of net assets (Rather than total owners equity per GAAP)

Question 12

How is Economic Income Calculated?

Answer 12

Market Value of Net Assets at Jan 1 + Net Income for the period + Owner Investments - Dividends and stock repurchases = Market value at Dec. 31

Question 13

What two portions is the Income Statement divided into?

Answer 13

1. ) Top Portion - includes routinely occurring items that are part of continuing operations
2. ) Bottom portion - Includes items specifically defined by GAAP as being unrelated to continuing operation

Question 14

What does the Top Portion of the income statement include?

Answer 14

Routinely occurring items from continuing operation.

a. ) Subtotal income from continuing operation
b. ) GAAP is very loose in the top portion of the statement
c. ) Income from continuing operations include all income items other than bottom items

Question 15

What does the Bottom Portion of the income statement include?

Answer 15

Unrelated to continuing operations

a. ) These are not representative of the firm’s ability to generate income
b. ) GAAP is very specific about these items
c. ) Discontinued Operations are presented here. They are major components of an entity that are either sold or planned to be sold.

Question 16

Are there any presentation requirements for continuing operation items on the income statement?

Answer 16

No, there is no prescribed presentation

Question 17

What is the presentation order of Income Statement?

Answer 17

Net Sales
-COGS
=Gross Margin
-Operating Expenses
\+Misc Revenues and gains
-Misc expenses and losses
\+- Unusual or infrequent items
=Income from continuing operations before tax
-Less Income Tax Expense
=Income from continuing operations
\+- Income from Discontinued Operations
=Net Income

Question 18

What is income tax expense related to on the income statement?

Answer 18

Items from continuing operations. The tax effects of items below the continuing operation section are shown along with the item itself in a process called intraperiod tax allocation

Question 19

What items can an intraperiod tax allocation be applied.

Answer 19

a. ) Discontinued Operation
b. ) OCI
c. ) Adjustment for retroactive accounting principle change
d. ) Prior Period Adjustment

Question 20

What two formats are accepted for presentation of continuing operations on the income statement?

Answer 20

Single Step and Multi Step

a. ) Both provide same information, multi-step provides more subtotals and organization
b. ) Income from continuing operations and net income are the same for both
c. ) Format differences affect only the ordering in calculating income from continuing ops

Question 21

What is the Single-Step format for Continuing Operations on the I/S?

Answer 21

Involves a presentation of income from continuing operations that is largely based on a single comparison. Total Revenues and gains are compared with total expenses and losses.

Question 22

What is the Multi-Step format for Continuing Operations on the I/S?

Answer 22

Involves a presentation of income from continuing operations that includes multiple comparisons of revenues, expenses, gains, and losses. This includes the Operating Margin