Study Unit 2 Financial Statements Flashcards
In the income statement, gains from extinguishment of debt are most likely classified in
Income from continuing operations
Income from continuing operations. Gains from extinguishment of debt are included in income from continuing operations (net income if no discontinued operation is reported) in the income statement.
Foreign currency translation adjustments are initially recognized as components of
OCI
Foreign currency translation adjustments for a foreign operation that is relatively self-contained and integrated within its environment do not affect cash flows of the reporting entity. Thus, they are initially reported in OCI.
Comprehensive income consists of
Net income and OCI
Comprehensive income includes all changes in equity of a business during a period except those from investments and distributions to owners. It includes all components of (a) net income and (b) other comprehensive income (OCI).
An entity presents a full set of statements and is required to report comprehensive income. Accordingly, comprehensive income must be displayed in
One continuous statement or two separate but consecutive statements.
An entity that presents a full set of financial statements but has no items of OCI need not report OCI or comprehensive income. Otherwise, an entity must present all items of comprehensive income recognized for the period either in (a) one continuous financial statement or (b) two separate but consecutive statements.
Cash dividends declared reduce
Retained earnings.
Dividends declared are recorded by reclassifying a portion of retained earnings as a payable. The journal entry is to debit retained earnings and credit dividends payable. Accordingly, retained earnings decreases.
At the end of each reporting period, other comprehensive income is closed to
Accumulated OCI.
The components of OCI are recorded initially in a temporary (nominal) account. The total OCI for a period must be transferred to a component of equity (a permanent or real account) separate from retained earnings and additional paid-in capital. The component must have a descriptive title, e.g., accumulated OCI.
In Year 1, an entity recognized an unrealized holding loss on bonds. The decline in the fair value below amortized cost was not due to credit losses. These bonds were classified as available-for-sale securities in the balance sheet. In Year 2, the bonds were sold at a loss. The pre-tax entry to record the sale is
Debit loss and credit OCI.
If a gain or loss on available-for-sale securities is realized in the current period, the prior recognition of an unrealized holding gain or loss must be eliminated from accumulated OCI.
The pre-tax entry is
Unusual material gain on assets donated to a business entity.
Separate component of income from continuing operations.
A material event or transaction that an entity considers to be unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.
Increase in the fair value of available-for-sale securities.
Component of other comprehensive income.
In the balance sheet, available-for-sale (AFS) securities are measured at fair value. Unrealized holding gains resulting from the remeasurement to fair value of AFS securities are reported in other comprehensive income.
Earthquake damage to real estate holdings in New York City.
Separate component of income from continuing operations.
An earthquake in New York City is unusual in nature and infrequent in occurrence. A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of taxes.
Loss on a foreign subsidiary’s operations due to significant currency devaluation by foreign government.
Component of other comprehensive income.
Gains and losses on foreign currency devaluations are translation adjustments. They are items of OCI reported in the consolidated financial statements.
Operating losses of discontinued component of an entity from beginning of year to measurement date.
Separately reported component of income, net of tax.
The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.
Loss on disposal of a discontinued component of an entity.
Separately reported component of income, net of tax.
The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.
