Chapter 4 -Income Statement, Comprehensive Income and Statement of Cash Flows

Two statement approach:

1) Income Statement 2) Statement of Comprehensive Income

One statement approach :

1) Statement of Comprehensive Income

Comprehensive Income

Change in equity from owner and non-owner transactions including revenues, expenses, gains, losses and in addition all of those that bypass net income but affect stockholder's equity

Other Comprehensive Income

Change in equity of a business entity from NON-OWNER sources -Other comprehensive income may include certain "unrealized holding gains and losses"

Losses:

Decrease in equity from peripheral or incidental transactions of a business entity

Prepare discontinued operations section for Impairment Loss

Income from discontinued operations = before-tax Income x (100% -tax rate) Impairment Loss= [(Book value- cost to sell) x (100%-tax rate)] Results from discontinued operations= Income -Loss/+Gain

Gains:

Increase in equity from peripheral or incidental transactions of a business entity

Revenues:

Inflows or enhancements of assets of a business entity settlement of its liabilities

MD & A :

Management Discussion Analysis Disclosure

Formula for Net cash of Operating activities=

Net Income +Depreciation +Amortization +Loss from PPE or Investments - Gains +Decreases in Current Assets -Increase in Current Assets +Increase in Current Liabilities -Decrease in Current Liabilities

Comprehensive Income =

Net Income + Other Comprehensive Income/Loss(net tax)

What are the two ways of presenting comprehensive income?

One statement approach Two statement approach

Expenses:

Outflows or other uses of assets from a business entity incurrence of liabilities

Single Step Income statement

Revenues & Gains -Expenses & Losses =Income -taxes =Net Income

What are the Elements of the Income Statement ?

Revenues, Expenses, Gains, Losses

Multiple Step Income statement

Sales Revenue -COGS =Gross Profit -Operating Expenses -Other Income Expenses =Income -taxes -income tax expense =Net Income

Accumulated and Other comprehensive income is a part of which statement ?

Statement of Shareholder's equity

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a a. change in accounting principle. b. change in accounting estimate. c. prior period adjustment. d. correction of an error.

b. change in accounting estimate affected by accounting principle

Investing Activities include:

cash flows from lending collecting loans, acquiring/selling long-term investments and PPE

Financing activities include:

cash flows from obtaining resources from owners and providing them with return of their investment as well with creditors.

Prior period adjustments

corrections of material error in the financial statements of a prior period

Operating Activities include:

net cash flow from acquiring, producing, selling and delivering goods for sale as well as providing services -excludes capital stock payments(dividends)

Cumulative effects of accounting changes

retrospective adjustment to the beginning retained earnings on the statement of R/E

Indirect Method:

starts with net income and works backwards to convert to cash

What is the purpose of the Income Statement?

summarizes the results from company operations

Direct Method:

the cash effect of each operating activity is reported directly in the SCF