Income Statement - I, D & E

Question 1

Income Statement - If an item is Infrequent and Unusual, and also belongs to a Discontinued Segment, where should it be reported under the “IDEA” mnemonic ?

Answer 1

Whether it was Loss from Operations or Loss/Gain from disposal , it should be recorded under “Discontinued Operations”.

Question 2

Income Statement - where would Interest Income and Interest expense be reported on the income statement ?

Answer 2

"Interest Income"
   Income Statement
   Income from Cont. Op's.
   Non Operating Activities
   Other Rev's and Gains
   Interest Income

"Interest Expense"
   Income Statement
   Income from Cont. Op's.
   Non Operating Activities
   Other Exp's and Losses
   Interest Expenses

Question 3

Income Statement - what is Net Income?

Answer 3

Net Income is the BOTTOM LINE amount after all has been considered on the income statement.

It is after Considering all of the following:

• Income from Cont. Op’s.
• Discontinued operations
• Extraordinary Items
• Tax Provision

Hint: In general Accounting Changes are Error Correction go directly to Retained Earnings (not to net income of the period).

Question 4

Income Statement | Discontinued Operations - What is the criteria to classify a segment of a business under Discontinued Operations ?

Answer 4

For business to classify a segment under Discontinued Operations the segment should be “Held for Sale” or already “Disposed Off”. To be classified under “Held for Sale”, business should complete the following steps:

1- Prepare the Asset Group for sale
2- Set a plan for sale
3- Actively pursue the plan to complete the sale

Question 5

Income Statement | Discontinued Operations - How would a Separate Component of Business be qualified to be reported under Discontinued Operations ?

Answer 5

A qualifying component of business is the lowest level for which operations and cash flows can be clearly distinguished from the rest of the entity, both operationally and for financial information purposes.
If the component does not fulfill this description it would otherwise be reported under “I” Income from Continuing operations.

Question 6

Income Statement | Discontinued Operations - For a segment classified under Discontinued Operations what are the 3 items that must be reported?

Answer 6

1- Impairment Loss
2- Gain and Loss from operations of the discontinued unit.
3-Gain and Loss on Disposal, and any other termination costs.

Question 7

Income Statement - Discontinued Operations - What is the time range of the reported losses under discontinued operations?

Answer 7

When deciding to discontinue a segment of a business, operating and non-operating losses of the segment must be included in Discontinued Operations section since the “Beginning of the Year”.

Question 8

Income Statement | Discontinued Operations - What is the proper treatment for assets held for sale?

Answer 8

1- Classified as “Assets Held for Sale”
2- No longer valued at historical cost, but instead valued at the lower of NBV or NRV.
3- No longer depreciated.
4- If it is thought that it would be sold in less than one year, it would be classified as a Current Asset on B/S.

Question 9

Income Statement - What is the proper treatment for extraordinary (unusual and Infrequent) items under IFRS ?

Answer 9

IFRS prohibits the reporting of extraordinary items, therefore any Gains or Losses, Revenues or expenses must be reported as Income from continuing operations or discontinued operations, whichever is more suitable.

Question 10

Income Statement - What is the income Statement classification for “Insurance Expense”?

Answer 10

Income Statement

• Income from continuing operations
• Operating activities
• General and Administrative Expenses
• Insurance Expense

Question 11

Income Statement - How would an a Contingent Gain and Contingent Loss be recognized on the Income Statement?

Answer 11

A contingency could be Probable, Possible or Remote

• Contingent Gain : No Recognition at all
• Contingent Loss : Only recognized when “Probable”

Question 12

Income Statement - At what form would each of the following be recognized?

• operating profits or losses (net income)
• non-operating gains or losses

Answer 12

-Operating Income is the outcome of Revenues and Expenses which both are reported at the Gross concept.

Revenues
Expenses

Shown as two line items on the income statement.

-Gains and Losses which are from non-operating activities are reported by the net concept:

Proceed - BV = “Gain/Loss”

which is a one line item under non-operating activities.

Question 13

Income Statement - What goes under General and Administrative Expenses ?

Answer 13

1- Accounting and legal fees
2- Officer’s Salaries
3- Insurance Premiums

Question 14

Income Statement - What is the classification of Advertising Expense in the income statement?

Answer 14

Income Statement

• Income from continuing operations
• Operating Activities
• Selling Expenses
• Advertising Expense

Question 15

Income Statement - What is the Classification of Interest Expense in the income statement ?

Answer 15

Income Statement

• Income from Continuing Operations
• Non-operating activities
• Other expenses and losses
• Interest Expense

Question 16

Income Statement - What is the classification of both “Freight-in” and “Freight-out” expenses?

Answer 16

• “Freight-in” is capitalized as part of the cost of inventory
• “Freight-out” is part of the selling expenses (under operating activities)

Question 17

Income Statement - Define both of “Revenues” and “Expenses”

Answer 17

Revenues: are inflows (increases) of assets, or settlement (decreases) of liabilities resulting from the entity’s ONGOING OPERATIONS.

Expenses: are outflows (decreases) of assets, or increases in liabilities, resulting from ONGOING OPERATIONS.

Question 18

Income Statement - Define both “Gains” and “Losses”

Answer 18

Gains: are inflows (increases) of assets, or settlement (decreases) of liabilities resulting from the entity’s INCIDENTAL OPERATIONS.

Losses: are outflows (decreases) of assets, or increases in liabilities, resulting from INCIDENTAL OPERATIONS.

Question 19

Income Statement - What is the general form of the Single Step Income Statement?

Answer 19

Under a Single Step Income Statement both of Discontinued Operations Income, and Extraordinary Items are still shown on separate lines of the statement.

Single Step Income Statement

Revenues and Gains
Expenses and Losses
Discontinued Operations Items
Extraordinary Items
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income

Hint: Tax is part of Expenses

Question 20

Income Statement - Does writing off an uncollectable account effect the Income Statement?

Answer 20

According to the Matching Principle Bad debt expense is recognized in the period of sale, therefore in the period when the Bad Debt is realized only balance sheet accounts are effected.

Elaboration: to write off an uncollectable account
1- write down A/R (crediting)
2- write down Allowance for uncollectable accounts (debiting)

Income statement is not effected according to that.

Question 21

Income Statement - What is the difference between “Physical Capital Maintenance” and the “Financial Capital Maintenance” ?

Answer 21

Physical Capital Maintenance: is concerned with the proper maintenance of the capital equipment owned or operated by a business, that is to keep a steady level of production.

Financial Capital Maintenance: is an accounting concept stating that a profit should not be recognized unless a business has at least maintained the amount of its Net Assets during an accounting period. For that this means that profit is essentially the increase of Net Assets during a period.( From a practical perspective this is rarely done)