Accounting 310 CH.4

C. Dividends Paid to Stockholders

Comprehensive Income excludes changes in equity resulting from which of the following? (Becker) a. Loss from discontinued operations b. Prior period error correction c. Dividends paid to stockholders d. Unrealized loss on investments in noncurrent marketable equity securities

The decision usefulness of earnings information

Quality of Earnings is the ____________________________________________

d. It must be reported in two separate but consecutive statements or in one continuous statement

Which of the following describes how comprehensive income is reported under US GAAP? (Gleim) a. No specific format is required b. It should be disclosed in the notes but not reported in the financial statements c. It may be reported in a statement of equity d. It must be reported in two separate but consecutive statements or in one continuous statement

Reasons for OCI

Why Other Comprehensive Income (OCI)? Traditional financial accounting used Historical costs and classified incomes, resulting in less relevant reporting Fair values can be misleading; Adopting Comprehensive Income (i.e., using Capital Maintanence Method) may impose huge challenges to users The compromise was to: Keep the traditional definition and presentation of . Net Income Show relevant items directly in B/S (i.e., bypass I/S) . Companies display each component of N/I and . each component of OCI and report both income . numbers

$140,000

A company reports the following information as of December 31: Sales Revenue $800,000 COGS 600,000 Operating Expenses 90,000 Unrealized Gain on AFS securities, net of tax 30,000 What amount should the company report as Comprehensive Income as of 12/31? (Gleim) a. $30,000 b. $110,000 c. $140,000 d. $200,000

b. a multiple-step but not a single-step income statement

A separation of operating and non operating activities of a company exists in: a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement

One and Two Statement

Approaches for Presenting Comprehensive Income: __________________________ and __________________________________ approach

The Multistep Income Statement The Principle of Full Disclosure

Companies frequently use ______ to itemize details of I/S elements. (Why? ____)

unusual or infrequent

Companies that have ______________ G/L Are required to disclose this information in the I/S or in the notes to the F/S Additional disclosure is often needed in the notes

Revenues and Gains - Other Comprehensive Income

Components of Comprehensive Income all _________________________, expenses and losses reported in net income (Traditional NI), and ____________________________________

-Net income attributable to the Noncontrolling Interests Attributable to Shareholders

Consolidated Net Income less: ___________________________________________________ = Net Income ______________________________________________________________

Net of taxes After Taxes

Discontinued Operations are reported _______ of tax, Meaning ___________ Taxes

Such a elimination represents a strategic shift, having a major effect on the company's operations and financial results

Discontinued Operations occurs when: A company eliminates the results of operations of a component of the business, and _________________________________________ The Per Share effect must be reported

Revenues, Gains

Elements of the Income Statement - ___________________ - Expenses - _____________ -Losses

Discontinued Operations

Examples of ____________________________ A major line of business A major geographical area A major equity method investment Equity method is used when investor has significant influence, but not legal control, over the investee

- Materiality - Unusual In Nature - Infrequency of occurrence

Extraordinary Items (Now prohibited) - Nonrecurring material items that differ significantly from a company's typical business activities ______________ is a basic requirement for any accounting information to be Relevant Must meet both of the following criteria: ________________ __________________ Previously, US GAAP allowed special reporting for extraordinary items, creating many loopholes and confusions.

Available for Sale - Foreign Currency - Certain Hedge

Factors of Other Comprehensive Income: - Adjustments related to Pensions - Unrealized Gains or Losses on _______________________________ Securities - Translation G/L on ________________________________ - Unrealized G/L on ______________________ Transactions

OCI

Gains and Losses that Bypass Net Income but affect OE are referred to as: a. Comprehensive Income b. OCI c. Prior Period Income d. Unusual Gains or Losses

Unusual in Nature

High degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment where it operates

Owners Equity

Issuances of shares and distributions (dividends) to owners is shown in what statement?

- Reliable and faithful - The Monetary Unit Assumption - High Legal Cost

Limitations (Potential Problems) of Income Statement Companies omit items that cannot be reliably measured, even if they are _____ (due to ______ Assumption; more so in the US. Why? ______________) Income is affected by the accounting methods employed (Comparability) Income measurements involve judgment and thus are subjective and manipulatable (verifiability)

Allocations of Net income to the Noncontrolling Interest

Noncontrolling Interest Amounts are: - Expenses - Allocations of Dividends to the Noncontrolling Interest - Equity amounts - Allocations of Net income to the Noncontrolling Interest

- before -Other Revenues and Gains or Other Expenses and Losses

Presentation of Unusual Gains & Losses Should be reported as part of income __________ income taxes In practice, companies generally itemize each gain or loss on the I/S or show one amount for all these items and then itemize these items in the notes For homework purposes, itemize and report in ________________________ or ____________________________

Pro: No creation of new Financial Statement Con: Net income is Buried as a subtotal on the statement

Pros and Cons to One Statement Approach:

-Losses - Dividends

R/E Decreases due to - Net _____________________ - _________________________ - Change in Principle - PPA

Stockholders Equity

Reconciliation of the carrying amount of each component of stockholders' equity from the beginning to the end of the period is disclosed in what Statement?

Accumulated Other Comprehensive Income (AOCI)

Regardless of the display format, ____________________________________ must be reported in the Balance Sheet

amount, timing, and risk

The Goal of the income statement is to help investors and creditors evaluate the ___________, ____________, and _____________ of future cash flows

Matching and Full Disclosure Income from continuing operations and from Discontinued Operations

The Intraperiod tax Allocation is an application of __________________ and ____________________ Principles and is used for: - _____________________________ and ______________________________

An expense or dividend

The Noncontrolling interest amounts are not _________________________

Functional Expense Class

The ___________________________________ Class: Retailing Administrative/ Occupancy/ Publicity/ Buying/ Selling

b. retained earnings statements as an adjustment of the opening balance

The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current (Gleim) a. retained earnings statement after net income but before dividends b. retained earnings statements as an adjustment of the opening balance c. income statement after income from continuing operations and before extraordinary items d. income statement after income from continuing operations and after extraordinary items

Confirmative and Predictive Values

The income statement has _____________ and ______________ values

Earnings Management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings

The Income Statement

The report that measures the success of company operations for a given period of time

b. total revenues and total expenses.

The single-step income statement emphasizes: a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items more than it is emphasized in the multiple-step income statement. d. the various components of income from continuing operations

True

True or False - The following items may need separate disclosure in the income statement: • Losses on write-down (impairment) of assets • Restructuring charges • Effects of a strike, including those against competitors and major suppliers - Other gains and losses from sale or abandonment of PP&E • Gains and losses on extinguishment (redemption) of debt obligations. • Gains and losses related to casualties such as fires, floods, and earthquakes. • Gains or losses on sale of investment securities.

Transaction Approach and Capital Management Approach

Two Methods to determining the Net Income:

Consecutive of Net income

Two Statement Approach: Two Separate, but __________________ of ____________________________ and OCI

Infrequency in Nature

Type of transaction that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates.

Income from Continuing Operations

Use the Phrase _______________________________________________ to separate Operating Expenses from those of Discontinued operations

The impact of income taxes on the various components of Net income

What does the Intraperiod Tax Allocation help users better understand?

Modified All-Inclusive

What to include in the _________________ income statement? • Unusual and Infrequent Gains and Losses • Discontinued Operations • Noncontrolling Interest to • Earnings per Share

Consolidated into one set of financials

When a company owns substantial interests (generally > 50%) in another company, GAAP requires that the financial statements of both companies be _________________ together into _________________________

Gains

_____________ Increases in equity (net assets) from peripheral or incidental transaction

Expenses

_____________ are Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations

Revenues

______________ are Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations

Higher quality earnings

______________ more faithfully represent the features of the firm's fundamental earnings process

Losses

________________ Decreases in equity (net assets) from peripheral or incidental transactions

Materiality

_________________ The Basic requirement for any accounting material to be relevant

Gains and Losses

_________________ and ________________ Result from: Sale of investments or plant assets, Settlement of liabilities, Write-offs of asset

Retained Earnings Statement

____________________: A Reconciliation statement explaining the changes in a company's retained earnings over the reporting perio

Statement of Stockholders' Equity

_____________________: A reconciliation statement reporting changes in each stockholders' equity account and total equity for the period

Natural Expense Class

________________________ include Manufacturing/Wholesale and Selling/Administrative Expenses

- Transaction - income-related - Inflows and Outflows

_________________________ Approach - Focuses on the __________ activities (i.e., Flows ) that have occurred during the period - Net Income is the difference between income-related ______ and ______

Usefulness past predicting future assess the risk

__________________________ of the income statement is: - To evaluate the _______ performance of the company To provide a basis ___________ performance To help____________of uncertainty of achieving future cash flows

Intraperiod Tax Allocation

___________________________: Relating the income tax expense of the fiscal year to the specific items that give rise to the amount of the income tax provision

Noncontrolling Interest

_______________________________ is the portion of equity interest in a subsidiary not attributable to the parent company

The Capital Management Approach - Equity - capital contributions - Distributions - Comprehensive Income - IRS

___________________________________ approach - focuses on change in _____________ after adjusting for _______________ like investment by owner, and ________________________ - _________________________ is the non-owner-related changes in equity - _________________ to identify Unreported Income

Other Comprehensive Income

___________________________________: All Gains and Losses that bypass the income statement, but directly enter Balance Sheet affecting Stockholders Equity

Comprehensive Income

___________________________________________ is All changes in equity during a period except those resulting from investments by owners and distributions to owners

R/E statement

a ___________________________is: Provide detailed information Not a mandatory financial statement R/E are often restricted due to contractual requirement, BOD policy, or current necessity Disclose the R/E restrictions in the footnote Separate R/E into two parts Retained Earnings Free (Unrestricted) Retained Earnings Appropriated (Restricted)