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FAR 1 > Income Statement > Flashcards

Income Statement Flashcards

1
Q

What is the income statement useful in determining?

A

Profitability, value for investment purposes, and credit worthiness

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2
Q

Unexpired costs

A

Costs that will expire in future periods and be charged against revenues from future periods

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3
Q

What is the presentation order of the major components of an income and retained earnings statement?
(IDA)

A
  1. Income (or loss) from continuing operations
  2. Income (or loss) from Discontinued operations
  3. Cumulative effect of change in Accounting principle
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4
Q

Under FASB, where should income/loss that are unusual or infrequent or both be reported?

A

Separately as part of income from continuing operations and disclosed

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5
Q

Multi-step income statement

A

Reports operating revenues and expenses separately from nonoperating revenues and expenses and other gains and losses

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6
Q

Single step income statement

A

Total expenses (including income tax expense) are subtracted from total revenues

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7
Q

What 3 calculations does loss from discontinued operations consist of?

A
  1. Impairment loss
  2. Gain/loss from actual operations
  3. Gain/loss on disposal
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8
Q

Under GAAP, what are synonymous terms for a “component of an entity”?

A 
Operating segment
Reportable segment
Reporting unit
Subsidiary
Asset group
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9
Q

Under IFRS a component of an entity may be:

A

Separate major line of business/geographical area of operations
Subsidiary acquired exclusively with a view to resale

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10
Q

What criteria must be met for a component or a disposal group to be classified as “held-for-sale”?

A
  1. Mgmt commits to plan to sell
  2. Component is available for immediate sale
  3. Active program to find buyer has been initiated
  4. Sale of the component is probable and expected to be complete within one year
  5. Sale of component is being actively marketed
  6. Unlikely that significant changes to plan will be made
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11
Q

Under US GAAP, what does the classification of a component as held for sale trigger?

A

Impairment analysis of the component

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12
Q

Under IFRS, what must be done before a disposal group can be classified as held for sale?

A

The individual assets/liabilities of the component must be measured in accordance with applicable standards and any resulting gains and losses must be recognized

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13
Q

When will the results of operations of a component(s) of an entity or business/nonprofit activity be reported in discontinued operations?

A

If it:

  1. has been disposed of, or
  2. is classified as held for sale
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14
Q

What are the conditions that must be present in order for a disposal component, group of components, business activity or nonprofit activity to be reported in discontinued operations?

A

The disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results

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15
Q

What is considered to be a major shift that could have an effect on operations and financial results?
(GEL)

A
  1. Disposal of major Geographical area
  2. Disposal of major equity method investments
  3. Disposal of major line of business
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16
Q

What are the types of items included in the results of discontinued operations?

A
  1. Results of operations of the component
  2. Gain/loss on disposal of component upon sale
  3. Impairment loss (and subsequent increase in FV) of component
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17
Q

A gain that is recognized for subsequent increase in FV of a component cannot be in excess of:

A

Previously recognized cumulative loss

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18
Q

When are the results of discontinued operations of a component reported in discontinued operations?

A

In the period the component is either disposed of or held for sale

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19
Q

When are anticipated future gains and losses recognized?

A

When they occur

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20
Q

Where are adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of a component in prior period classified?

A

Current period discontinued operations

21
Q

What must happen for a settlement to be considered directly related to a component?

A

Must:

  • have demonstrated cause-and-effect relationship
  • occur no later than one year after the date of the disposal transaction
22
Q

What is a component classified as held for sale measured at?

A

Lower of its carrying amount or fair value less costs to sell (NRV)

23
Q

Exit or disposal activities

A

Downsizing or “closing hub”

24
Q

What are costs associated with exit/disposal activities?

A

Involuntary employee termination benefits
Costs to terminate contract (not capital lease)
Costs to consolidate facilities/relocate employees

25
Q

What are the criteria for recognizing a liability associated with an exit/disposal activity?

A
  1. Obligating even has occurred
  2. Event results in present obligation to transfer assets
  3. Entity has little/no discretion to avoid the future transfer of assets or providing of services
26
Q

How should the exit/disposal liability be measured?

A

Fair value

27
Q

3 categories of accounting changes

A
  1. Changes in accounting estimate (prospective)
  2. Changes in accounting principle (retrospective)
  3. Changes in accounting entity (restate)
28
Q

Events resulting in estimate changes

A
  1. Changes in lives of fixed assets
  2. Adjustments of year-end accrual of officers’ salaries and/or bonuses
  3. Write-downs of obsolete inventory
  4. Material nonrecurring IRS adjustments
  5. Settlement of litigation
  6. Changes in acct principle that are INSEPARABLE from change in estimate
29
Q

If change in accounting estimate affects several future periods, what action should be taken?

A

Effect disclosed in notes to FS

30
Q

When may an accounting principle only be changed?

A
  1. If required by GAAP/IFRS, or

2. If alternative principle is preferable and more fairly presents the info

31
Q

If noncomparative FS are being presented, what would the cumulative effect of a change in acct principle equal?

A

The difference between the amount of beginning R/E in the period of change and what the R/E would have been if the acct change had been retroactively applied to all prior affected periods

32
Q

How should changes in accounting principles be reported in the FS?

A

Adjusting beginning RE in the earliest period presented for the cumulative effect of the change, and restate prior period FS that are presented

33
Q

Under IFRS, what is required when an accounting principle is being applied retroactively or there is a retrospective restatement?

A

The entity must present 3 B/S and 2 of each of the other FS

34
Q

What are the 2 exceptions to retrospectively applying a change in accounting principles?

A
  1. Impracticable to estimate (change to LIFO)
  2. Change in depreciation method

Handled prospectively

35
Q

Under US GAAP, when does a change in accounting entity occur?

A

When the entity being reported on has changed composition

36
Q

Error corrections include:

A
  • corrections of errors in recognition, measurement, presentation, or disclosure in FS resulting from mathematical mistakes, mistakes in application of GAAP/IFRS, or oversight/misuse of facts
  • changes from non-GAAP/IFRS method to GAAP/IFRS method
37
Q

Once the decision has been made to dispose of a component and that component meets the criteria to be classified as held for sale, how should the operating results be reported?

A

Separately from continuing operations, net of tax

38
Q

If a change in principle is inseparable from a change in estimate, how should the change be handled?

A

Prospectively (no cumulative effect adjustment)

39
Q

How should the effect of a change in accounting estimate be accounted for?

A

In the period of change and future periods if the change affects both

40
Q

Under GAAP, if a material transaction is “infrequent in occurrence” but not “unusual in nature,” where should it be presented if it results in a gain or loss?

A

Separately as a component of “income from continuing operations”

41
Q

How should the correction of an error in the FS of a prior period be reported (net of tax)?

A

In the current statement of retained earnings as an adjustment of the opening balance

42
Q

How should the effect of a new estimate of warranty costs from a prior period be reported?

A

It is a change in estimate and is reported prospectively (in current period income from continuing operations)

43
Q

What type of expense is freight-in?

A

Cost of inventory

44
Q

What type of expense is freight-out

A

Selling expense

45
Q

Should prior period adjustments be reported before tax or net of tax?

A

Net of tax

46
Q

What is included in charitable contributions?

A

Amounts the company gave to recognized charities

47
Q

Under GAAP, how should a gain that is both unusual and infrequent be reported?

A

A separate component of income from continuing operations (before tax)

48
Q

Under IFRS, when an entity records a change in accounting principle, what must (at a minimum) the entity present?

A

3 BS

2 of each other FS

FAR 1 (7 decks)

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