Chapter 3 Notes
two items to report on the income statement when a company has discontinued operations and how are these items shown?
- gain or loss from the disposal of a component of business and the results of the operations of a the component - net of tax
multi step income statement definition what does it report?
- income statement that shows several steps in determining net income - net sales, gross profit, income from operations, income before tax, and net income
what are limitations of the income statement?
1. Companies omit items from the income statement that they cannot measure reliably 2. Income numbers are affected by the accounting methods employed
discontinued operations occurs when...
1. a company eliminates the results of operations of a component of the business 2. the elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results. A strategic shift included the disposal of (1) a major line of business, (2) a major geographical area, or (3) a major equity method investment
4 examples of non-operating expenses
1. dividend revenue 2. gain on sale of equipment 3. interest on bonds and notes 4. loss on flood
what do investors and creditors use the income statement to do?
1. evaluate past performance of the company 2. provide a basis for predicting future performance 3. help assess the risk or uncertainty of achieving future cash flows
5 steps model for revenue recognition
1. identify the contract with the customer 2. identify the separate performance obligations in the contract 3. determine the transaction price 4. allocate the transaction price to seperate performance obligations 5. recognize revenue when each performance obligation is satisfied
4 types of usual or infrequent gains and losses
1. losses on write-down (impairment) of receivables ex) inventories, PP&E, goodwill or other intangible assets 2. reconstructing charges ex) laying off workers, closing plants, and shifting production to new locations 3. gains and losses from sale or abandonment of pp&e 4. gains and losses on sale of investment securities
2 ways to report comprehensive income
1. one statement approach 2. two statement approach
in 2022, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2022, Hollis had weighted average of 190,000 common shares outstanding. Compute Hollis's 2022 earning per share
3.95
gains
Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.
revenues
Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
expenses
Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.
Write out the proper labels for a multi step income statement (note: this is not everything that is included on a multi step income statement)
Sales xxxxx Net sales cost of goods sold Gross profit operating expenses xxxxx income from operations xxxxx income before income tax income tax net income for the year earnings per common share
what are the two types of operating expenses?
Selling + General & Administrative
does discontinued operations result in a gain or loss?
it can result in both: - a gain happens when the company owes tax on the gain so the income tax effect reduces the gain - a loss happens the company received a tax benefit or reduction in overall income taxes so the "tax savings" reduces the overall loss
what would a prior period adjustment correction for an error in a past period do to retained earnings?
it would be an adjustment to beginning balance of RE and made net of tax
what do number analysts use to asses whether a company has been successful or not?
net income (or loss)
basic formula for EPS
net income- preferred dividends / Weighted - average numbers of common shares outstanding
income from operations results from
ongoing major or central operations
what does a multi-step income statement distinguish between?
operating and non-operating activities
Revenue Recognition Principle
recognize revenue to depict the transfer of goods or services to customers in an amount that reflects consideration that the company receives for a service/good
non-GAAP reporting
reporting of information that has been computed by adjusting GAAP, like EBITDA is NON-GAAP
single step income statement labels
revenues xxxx expenses xxxx net income xxxx
4 elements found on the income statement
revenues, expenses, gains, and losses
comprehensive income
small gain/losses transactions not be reported on income statement. ex) available for sale investments - everything on the income statement plus gains/losses that bypass income statement
Income from continuing operations
the phrase used when a company has discontinued operations, = subtotal - discontinued operations operations sections on the income statement
earnings management
the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income - leads to mismanagement of money
2 provisions of sarbanes-oxley act
top management must certify the accuracy of financial information penalties for fraudulent financial reporting are much more severe
losses
Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.
what is the deciding factor in determining when a performance obligation is satisfied
change in control
labels for discontinued operations portion of income statements
discontinued operations income from operations loss on disposal of xxx division net income per share income from continuing operation income from operations of discontinued division, net of tax loss on disposal of discontinued division, net of tax net income
earnings per share (EPS) measures?
dollars earned by each share of common stock
sales 1,200,000 less: sales discounts (35,000) net sales 1,165,000 cost of goods sold 450,000 gross profit 715,000 administrative expenses 75,000 selling expenses 225,000 income from operations 425,000 other revenues and gains gain on sale of land 80,000 other expenses and losses interest expense 12,000 income before income taxes 483,000 income taxes 101,000 net income 381,570 accountant failed to include discontinued operations section in the income statement. the company discontinued a component of its business in 2022. The discontinued component had income from operations of $55,000 before being sold and the sale resulted in a loss on disposal of $32,000. Assume company's tax rate is 21% and 100,000 shares of common stock are outstanding all year. starting with "income from continuing opera
income from continuing op. before inc. tax 483,000 income tax expense (101,430) income from continuing operations 381,570 discontinued operations inc. from op. (before tax) or net of tax ($11,555) 43,450 loss on disposal, net of taxes of $6,720 (25,280)= 18,170 net income 399,740 eps income from cont. op. (381,570-0)/100,000 $3.82 discontinued operations (18,170/100,000) $.18 net income (399,740.01/100,000) 4.00
increase or decrease on retained earning? net income net loss dividends changes in accounting principles prior period adjustments
increases decreases decreases increase or decrease increase or decrease
conditions that contribute to fraudulent financial reporting
influences in the environment related to poor internal control systems managements poor attitude toward ethics significant liquidity or profitability problems overall business environment (covid)