Income Statement

Question 1

Uses of the Income Statement

Answer 1

Useful in determining profitability, value for investment purposes, credit worthiness, and future cash flows.

Question 2

“IDA”

Answer 2

I - Income (Loss) From Continuing Operations: gross and net of tax
D - Income (Loss) From Discontinued Operations: net of tax
A - Cumulative Effect of Change in Accounting Principle: net of tax, on RE

Question 3

Discontinued Operations (3 types)

Answer 3

• Impairment loss
• Gain/loss from actual operations
• Gain/loss on disposal

All are included in discontinued operations in the period in which they occur.

Question 4

Component of an Entity

Answer 4

Part of an entity (the lowest level) for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity.
- operating segment, reportable segment, reporting unit, subsidiary, asset group

Question 5

Held for Sale

Answer 5

Criteria (need all):

• Mgt commits to a plan to sell the component
• Component is available for immediate sale in its present condition
• Active program to locate a buyer
• Sale of component is probable and sale is expected to be complete within one year
• Sale of component is actively marketed
• Actions required to complete sale make it unlikely that there will be changes to the plan

Question 6

US GAAP vs IFRS - Held for Sale

Answer 6

IFRS - tests individual assets and liabilities before classification of held for sale
GAAP - does impairment analysis of the whole component (all), instead of each individual asset.

Question 7

Entities to be reported as Discontinued Operations

Answer 7

• component has been disposed of

- classified as held for sale

Question 8

Conditions needed to be Discontinued Operations

Answer 8

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations IF the disposal represents a “strategic shift” that has or will have a major effect on an entity’s operations and financial results.

Question 9

“GEL”

examples of strategic shift/major effect on operations

Answer 9

G - Disposal of a major Geographical area
E - Disposal of a major Equity method investment
L - Disposal of a major Line of business

Question 10

Types of Items included in Results of Discontinued Operations

Answer 10

1) Results of operations of the component
2) Gain or loss on disposal of the component (upon sale)
3) Impairment loss of the component

Question 11

Initial and Subsequent Impairment Losses

Answer 11

A loss is recognized for recording the impairment of the component
Ex: SP/NRV = 7 and BV = 10, so there is an impairment of -3 and a write-down to 7.

Question 12

Subsequent Increases in Fair Value

Answer 12

A gain is recognized for any subsequent increase in fair value minus the cost to sell (but not in excess of the previously recognized cumulative loss).
Ex: SP/NRV = 11 and CV = 7, so there is a gain of +4 but can only recognized gain to the amount of previous impairment of -3…so limited to gain of +3.

Question 13

Held for Sale measurement/valuation

Answer 13

A component classified as held for sale is measured at the lower of its carrying amount or fair value less costs to sell.

Question 14

Accounting Changes (3 types)

Answer 14

• Changes in accounting estimate (prospective)
• Changes in accounting principle (retrospective)
• Changes in accounting entity (restate)

Question 15

Changes in Accounting Estimate

Answer 15

• not an error
• done prospectively
• affects current and future income from continuing operations
• disclosed in the notes to the financial statements

Question 16

Changes in accounting principle that are inseparable from a change in estimate…

Answer 16

treated as a change in accounting estimate (prospective)

Question 17

Changes in Accounting Principle

Answer 17

• done retrospectively
• GAAP to GAAP (IFRS to IFRS), if non-GAAP to GAAP then it is an error
• only change if required by GAAP/IFRS or if alternative principle is preferable/presents more fairly

Question 18

Cumulative effect of a change in accounting principle on NONcomparative financial statements

Answer 18

Equal to the difference between the amount of beginning RE in the period of change and what the RE would have been if the accounting change had been retroactively applied to all prior affected periods.

Question 19

Cumulative effect of a change in accounting principle on Comparative financial statements

Answer 19

Equal to the difference between beginning RE in the first period presented and what RE would have been if the new principle had been applied to all prior periods.

Question 20

Reporting changes in the accounting principle

Answer 20

Adjust beginning RE in the earliest period presented for the cumulative effect.

Question 21

Exceptions to the GR for Change in Accounting Principle

Answer 21

Change to LIFO or change in depreciation method…then treated Prospectively

Question 22

Changes in Accounting Entity

Answer 22

• restate/retrospective
• occurs when the entity being reported on has changed composition (consolidated)
• all previous FS presented in comparative FS along with the current year should be restated to reflect the info for the new reporting entity
• full disclosure of cause and nature of the change
• IFRS does not include the concept of change in accounting entity

Question 23

Error Correction

Answer 23

• prior period adjustment/restate
• Ex: cash to accrual would be an error
• change from Non-GAAP to GAAP
• correct the error, if the year is presented
• adjust beginning RE of the earliest year presented, if the year is not presented
• if not comparative FS, then adjust the opening balance of RE (net of tax)