Unit 3 - Income Statement Items

Question 1

Accounting Changes & Errors:
How are ERROR CORRECTIONS made in previous years adjusted?

Answer 1

Error corrections in single-period statements are reflected net of applicable income taxes as changes in the opening balance in the statement of retained earnings of the current period.

Question 2

Change in Reporting Entity = ________ Application

Answer 2

Restrospective - change to all prior periods presented to report information for the new entity

Note: A business combination or consolidation of variable interest entity is not a change in the reporting entity.

Question 3

Accounting Changes & Errors:
How is the effect in accounting estimated accounted for?

Answer 3

The effect of a change in accounting estimate is accounted for in the period of change, if the change affects that period only, or in the period of change and future periods, if the change affects both.

Question 4

Earnings per Shares (EPS)
BEPS Equation is

Answer 4

BEPS = Income available to common shareholders /
Weighted-average # of common shares outstanding

Question 5

Earnings per Shares (EPS)
Numerator part of EPS equation
INCOME AVAILABLE TO SHAREHOLDERS /
Weighted-average # of CS OS

Answer 5

Income statement amount
- Dividends on preferred stock for the current period
(cumulative or declared noncumulative)
= Income available to common shareholders

Question 6

Calculation of DEPS (Dilutive Earnings per Share)

DEPS = BEPS numerator + Effect of dilutive PCS /

         BEPS denominator + Effect of dilutive PCS

Answer 6

1. The BEPS denominator is increased to include the weighted-average number of additional shares of common stock that would have been outstanding if dilutive PCS had been issued.
2. The BEPS numerator is adjusted to add back any dividends on convertible preferred stock and the after-tax interest expense (an amount that includes amortization of discount or premium) related to any convertible debt.

Question 7

Revenue from Contracts with Customers:
If the standalone prices is not directly observable, it must be estimated, what are those approaches:

Answer 7

1 - ADJUSTED MARKET ASSESSMENT. An entity evaluates the market in which it sells goods or services and estimates the price that a customer in that market would be willing to pay for them.
a. For example, the prices of competitors for similar goods or services adjusted for the entity’s costs and margins are estimates of standalone selling prices.
2 - EXPECTED COST PLUS AN APPROPRIATE MARGIN. An entity forecasts its expected costs of satisfying a performance obligation and adds an appropriate margin for that cost.
3 - RESIDUAL. An entity estimates the standalone selling price by reference to the total transaction price minus the sum of the observable standalone selling prices of other goods or services promised in the contract. The residual approach may be used only in limited circumstances.

Question 8

Revenue is recognized when…

Answer 8

when a performance obligation is satisfied by transferring a promised good or service to a customer. It happens when the customer obtains control of the good or service (i.e., an asset).

Control of an asset is transferred to the customer when the customer (1) has the ability to direct the use of the asset and (2) obtains substantially all of the remaining benefits (potential cash flows) from the asset.

Question 9

Revenue from Contracts with Customers:
Incremental Costs of Obtaining a Contract

Answer 9

The incremental costs of obtaining a contract with a customer must be capitalized (recognized as an asset) if the entity expects to recover them. These costs would not have been incurred if the contract had not been obtained. The cost capitalized (asset recognized) must be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.

Question 10

Recognition of Revenue over Time
Input Method

Answer 10

The input method recognizes revenue on the basis of (a) the entity’s inputs to the satisfaction of the performance obligation relative to (b) the total expected inputs to the satisfaction of that performance obligation.
Examples of input include:
1- Costs incurred,
2 - Labor hours expended,
3- Resources consumed,
4-Time elapsed, or
Machine hours used.

Question 11

An entity recognizes revenue from a long-term contract over time. However, early in the performance of the contract, it cannot reasonably measure the outcome, but it expects to recover the costs incurred. Revenue should be recognized based on

Answer 11

When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the performance obligation are expected to be recovered, revenue must be recognized only to the extent of the costs incurred. Revenue recognized is based on a ZERO PROFIT MARGIN until the entity can reasonably measure the outcome of the performance obligation.