Test 2 Flashcards
What is Income Statement
displays a company’s operating performance, that is, its net profit or loss, during a period. AKA Statement of Operations or Statement of Earnings - A change stmt
What is Comprehensive Income
Not included in Net Income, but the broader concept
How is Comprehensive Income reported
Either in one continuous statement of comprehensive income or 2 separate but consecutive statements (Income Stmt & Stmt of Comprehensive Income)
What is Statement of Cash Flow
Provides info about the cash receipts and disbursements - A change stmt - disclosing the events that caused cash to change during the period
What is Income from Continuing Operations
revenues, expenses (including income tax), gains, and losses, excluding those related to discontinued operations and extraordinary items.
a key player in the way we measure expenses
matching principle
If a causal relationship cannot be established for an expense to revenue, what do you do
we relate the expense to a particular period, allocate it over several periods, or expense it as incurred.
What are some examples of gains & losses
gains and losses from the routine sale of equipment, buildings, or other operating assets and from the sale of investment assets normally would be included in income from continuing operations.
income tax expense
(sometimes called provision for income taxes), it always is reported as a separate expense in corporate income statements.
taxable income
comprises revenues, expenses, gains, and losses as measured according to the regulations of the appropriate taxing authority
Operating income includes
revenues and expenses directly related to the primary revenue-generating activities of the company. For example, operating income for a manufacturing company includes sales revenues from selling the products it manufactures as well as all expenses related to this activity. might also include gains and losses from selling equipment and other assets used in the manufacturing process
Nonoperating income relates to
peripheral or incidental activities of the company. For example, a manufacturer would include interest and dividend revenue, gains and losses from selling investments, and interest expense in nonoperating income. Other income (expense) often is the classification heading companies use in the income statement for nonoperating items.
The single-step format of Income Stmt
A single-step income statement format groups all revenues and gains together and all expenses and losses together. In a departure from that, though, companies usually report income tax expense as a separate last item in the statement. Operating and nonoperating items are not separately classified
The multiple-step format of Income stmt
multiple-step income statement format includes a number of intermediate subtotals before arriving at income from continuing operations. a series of intermediate subtotals such as gross profit, operating income, and income before taxes A primary advantage of the multiple-step format is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends.
earnings quality
the ability of reported earnings (income) to predict a company’s future earnings To enhance predictive value, analysts try to separate a company’s transitory earnings effects from its permanent earnings.
Manipulating Income and Income Smoothing
Many believe that corporate earnings management practices reduce the quality of reported earnings.
How do managers manipulate income?
Two major methods are (1) income shifting and (2) income statement classification.
Income shifting
achieved by accelerating or delaying the recognition of revenues or expenses. For example, a practice called “channel stuffing” accelerates revenue recognition by persuading distributors to purchase more of your product than necessary near the end of a reporting period
income statement classification
manipulation involves the inclusion of recurring operating expenses in “special charge” categories such as restructuring costs (discussed below). This practice sometimes is referred to as “big bath” accounting, a reference to cleaning up company balance sheets. Asset reductions, or the incurrence of liabilities, for these restructuring costs result in large reductions in income that might otherwise appear as normal operating expenses either in the current or future years.
RESTRUCTURING COSTS.
include costs associated with shutdown or relocation of facilities or downsizing of operations recognized in the period the exit or disposal cost obligation actually is incurred.
the initial measurement of a liability associated with restructuring costs.
Fair value; measured by determining the present value of future estimated cash outflows.
Nonoperating Income and Earnings Quality
Gains and losses from the sale of investments often can significantly inflate or deflate current earnings.
pro forma earnings
management’s assessment of permanent earnings
Sarbanes-Oxley Act addressed pro forma earnings
The Sarbanes-Oxley Act requires reconciliation between pro forma earnings and earnings determined according to GAAP.
GAAP requires that certain transactions be reported separately in the income statement, below income from continuing operations.
There are two types of events that, if they have a material effect13 on the income statement, require separate reporting below income from continuing operations as well as separate disclosure: (1) discontinued operations, and (2) extraordinary items
intraperiod tax allocation
The process of associating income tax effects with the income statement components that create them (extraordinary items reported net of tax with note of how much tax was excluded) - issue of presentation not measurement…
discontinued operation
a “component” that either (a) has been disposed of or (b) is classified as held for sale, and represents one of the following: 1.a separate major line of business or major geographical area of operations, 2.part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or 3.a business that meets the criteria to be classified as held for sale on acquisition.
How is discontinued operations reported
the revenues, expenses, gains, losses, and income tax related to a discontinued operation must be removed from continuing operations and reported separately for all years presented The net-of-tax income effects of a discontinued operation are reported separately in the income statement, below income from continuing operations.
When the component is considered held for sale.
If a component to be discontinued has not yet been sold, its income effects, including any impairment loss, usually still are reported separately as discontinued operations.
Extraordinary items
material events and transactions that are both unusual in nature and infrequent in occurrence. - a forced sale of an operation -
Companies often experience unexpected events that are not considered extraordinary items - examples?
The loss of a major customer and the death of the company president the effects of a strike, including those against competitors and major suppliers, and the adjustment of accruals on long-term contracts
Extraordinary gains and losses are reported
presented, net of tax, in the income statement below discontinued operations.
Unusual or Infrequent Items
If the income effect of an event is material and the event is either unusual or infrequent—but not both—the item should be included in continuing operations but reported as a separate income statement component.
Changes in accounting principles
Voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ financial statements. Mandated - report same as voluntary or in extraordinary items, except depreciation, amortization, or depletion method is reported same as change in estimate
Change in Accounting Estimate
A change in accounting estimate is reflected in the financial statements of the current period and future periods.
Correction of Accounting Errors
Prior period adjustment - adj asset/liability and RE
earnings per share (EPS),
amount of income earned by a company expressed on a per share basis computed by dividing income available to common shareholders (net income less any preferred stock dividends) by the weighted-average number of common shares outstanding (weighted by time outstanding) for the period
cumulative total of OCI (or comprehensive loss) is reported
accumulated other comprehensive income (AOCI), an additional component of shareholders’ equity that is displayed separately
Other comprehensive income
Ex: If the shares are not sold, the unrealized gain
Operating activities
inflows and outflows of cash related to the transactions entering into the determination of net operating income. Cash inflows include cash received from: 1.Customers from the sale of goods or services. 2.Interest and dividends from investments. Cash outflows include cash paid for: 1.The purchase of inventory. 2.Salaries, wages, and other operating expenses. 3.Interest on debt. 4.Income taxes.
