Income Statements Flashcards
What is an Income Statement?
- Reports a company’s results of operations (profit) during a particular period.
- provided a summarized list of revenues, expenses, gains, and losses
What is “the Bottom Line”
Net income, the result of the income statement
Why is the Income Statement useful?
- The information is the best predictor (highly correlated) with future cash flows.
- Helps differentiate between temporary and permanent earnings.
What are the limitations of the Income Statement?
- Net income does not directly correlate with current cash flow from operations
Why might net income not correlate with cash flow from operations?
- some expenses are non-cash (e.g. bad debt, depreciation)
- often more correlated with future cash flows then current cash flows
What are Revenues?
Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.
What are Expenses?
Expenses are outflows or other using up of assets of an entity or incurrences of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.
What are gains?
Gains are increases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from revenues or investments by owners.
What are losses?
Losses are decreases in equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from expenses or distributions to owners.
How do you set up a Single-Step Income Statement?
- First: List all revenues and gains
- Then: List all expense and losses
- Finally: List income taxes
How do you set up a Multi-Step Income Statement?
- List Sales and COGS
- List operating expenses
- List other income and expenses
- List income tax
Earnings Quality
Ability of reported earnings (income) to predict a company’s future earnings and cash flows
What are Temporary Earnings?
Earnings that result from transactions that:
- Are unlikely to occur again.
- Likely to have a different impact on earnings and future cash flows.
What are permanent earnings?
Results from transactions likely to generate similar profits in the future.
(Included in income from continuing operations)z
What are discontinued operations?
Discontinued operations are reported when a component of an entity or group of components has been sold, disposed of, or is considered held for sale.
This includes any significant parts of a business that are no longer in use.
What does the disposal of a component represent?
Disposal represents a strategic shift that has, or will have, a major effect on a company’s operations and financial results.
This can indicate a change in business focus or strategy.
How is income or loss from discontinued operations reported?
Income or loss from discontinued operations is reported separately, below income from continuing operations, net of tax.
This ensures clarity in financial reporting.
True or False: Discontinued operations can affect a company’s financial results.
True.
Discontinued operations often lead to significant changes in financial performance.
Fill in the blank: Disposal of a component is considered a _______ that has a major effect on a company’s operations.
strategic shift.
Such shifts may involve selling off parts of the business to focus on core operations.
When components are sold before the end of the report period, the income effects are:
Income/loss from the component from the beginning of the disposal period + gain/loss from the sale of the components assets
What are the income effects of a discontinued component that isn’t sold till after the end of the period?
Income or loss from operations of the component from the beginning of the reporting period to the end of the reporting period + An impairment loss if the fair value of assets of component (minus cost to sell) is less than the book value
