Accounting Chapter 4

Where are Discontinued operations reported after

"Income from Continuing Operations" (previously where NI would be listed)

EPS formula

(Net income - Preferred Dividends)/ Weighted Avg # of shares outstanding

Corrections of errors result from: (3)

* Mathematical Mistakes * Mistakes in application of accounting principles * Oversight or misuse of facts.

Intraperiod tax allocation on the Income Statement is used for: (3)

1) Income from continuing operations 2) Discontinued operation 3) Extraordinary items

What DECREASES Retained Earnings Statement (4)

1) Net Loss 2) Dividends 3) Change in accounting principles 4) Prior period Adjustments

The four general categories of the Modified All inclusive Concept

1. Unusual gains and losses 2. Discontinued operations 3. Extraordinary items 4. Non-controlling Interest

Companies must display the components of other comprehensive income in one of two ways:

A single continuous statement (one statement approach) or two separate, but consecutive statements of net income and other comprehensive income (two statement approach).

cumulative gain or loss to date resulting from other comprehensive income items

Accumulated Other Comprehensive Income

What are the Advantages of the one statement approach of Comprehensive Income

Advantage - does not require the creation of a new financial statement.

Comprehensive income includes:

All revenues/gains, and expenses/losses reported in net income AND all gains/losses that bypass net income but still affect Stockholders' equity.

In some cases, companies transfer the amount of retained earnings restricted to an account titled

Appropriated Retained Earnings

Accounted for in the period of change or the period of change and future future periods if change affects both.

Changes in Estimate

Changes in estimate are considered errors or extraordinary items. True False

Changes in Estimate are NOT considered errors or extraordinary items.

Change in _____ are handled retrospectively, where changes in ____ are not.

Changes in Principle ARE handled retrospectively, where changes in Estimate are not.

Limitations of the Income Statement

Companies omit items that cannot be measured reliably Income is affected by the accounting methods employed. Income measurement involves judgement.

The lowest level at which the company can clearly distinguish the operations and cash flows from the rest of the company

Component.

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

Comprehensive Income

Occurs when a) a company eliminates the results when a company eliminates the results of operations and cash flows of a component AND b) there is no significant continuing involvement in that component after the disposal.

Discontinued Operations

Refers to the disposal of a significant component of a business; The elimination of a major class of customers OR and entire activity

Discontinued operations

Usefulness of the Income Statement

Evaluate past performance Predicting future performance Help assess the risk or uncertainty of achieving future cash flows

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations; reported gross.

Expenses

Effects of a newly enacted law or regulation, such as a condemnation action are generally reported as a

Extraordinary Item

Material events and transactions that meet two conditions: Unusual in nature AND Infrequent in occurrence.

Extraordinary Items

Nonrecurring material items that differ significantly from a company's typical business activities.

Extraordinary Items.

Cost of goods sold are NOT considered an expense account? True False

False, COGS ARE considered an expense account.

Costs incurred as a result of Sep 11th events is generally reported as an Extraordinary Item. True False

False, the costs of 9-11 are generally NOT reported as an extraordinary item.

EPS disclosure on the Income statement in optional True False

False. EPS MUST be disclosed on the income Statement

You must be able to clearly identify the continuing and discontinuing parts of the company for the current year. True False

False. Must be able to clearly identify the continuing and discontinuing parts of the company for ALL YEARS presented.

The Income Statement heading:

For The Year Ended

Increase in equity (net assets) from peripheral or incidental transactions; reported net.

Gains

Gains are reported _______.

Gains are reported Net.

Revenues are reported __________.

Gross

Income Statement basics

Income Before Income Taxes -Income Tax Expense =Income from Continuing Operations +/-Discontinued Operations =Income Before Extraordinary Items +/-Extraordinary Items =Net Income -Non-controlling Interest =Income Attributable to Majority owner EPS

Lists revenues and expenses for a specific period of time: month, quarter, year

Income Statement

Reports operating success or failure for a period

Income Statement

What sections go on BOTH SS and MS Income Statements? (5)

Income Tax Discontinued Operations Extraordinary items Non-controlling interest Earnings per Share

Extraordinary Items are reported after

Income from continuing operations.

Helps users understand the impact of income taxes on the various components of net income

Intraperiod Tax Allocation

The allocation of tax within a period

Intraperiod Tax Allocation

The Statement of Stockholders' Equity discloses the following items:

Issuances of shares and distributions (dividends) to owners. Reconciliation of the carrying amount of each component of stockholders' equity from the beginning to the end of the period.

Decrease in equity (net assets) from peripheral or incidental transactions; reported net

Losses

Companies have incentives to manage income to meet or beat wall street expectations, so that:

Market price of stock increases Value of stock options increases

In this approach, companies record most items, including unusual or irregular ones, as part of net income.

Modified All Inclusive Concept

Losses are reported _______.

Net

What INCREASES Retained Earnings Statement (3)

Net Income Change in Accounting Principle Prior Period Adjustments

Comprehensive Income =

Net Income + Other Comprehensive Income items

When a company owns substantial interests (generally > 50%) in another company, GAAP requires that the financial statements of both companies be consolidated together into one set of financials.

Non-controlling Interest

_________ is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company

Noncontrolling Interest

What sections are in the non-operating section of the Multi-step I/S?

Other Revenues, Other Expenses

How do you do the 2-statement approach of Comprehensive Income

Prepare the income statement in the normal Manner then prepare a separate stand alone statement of Comprehensive Income.

Corrections of Errors are treated as ______

Prior Period Adjustments

Companies have incentives to manage income to meet or beat wall street expectations, so that market price of stock increases and value of stock options increase

Quality of Earnings

Intraperiod Tax allocation must also show tax effect on specific items reported on the _________ and ______

Retained Earnings Statement and Statement of Comprehensive Income

Corrections of Errors Is an adjustment to the beginning balance of ________.

Retained Earnings.

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations. Reported gross.

Revenues

What sections are in the Operating section of the Multi-step I/S

Sales, COGS, Operating expenses(selling & General Admin)

Multi-step income statement: does 4 things

Separates operating transactions from non-operating transactions. Matches costs and expenses with related revenues. Highlights certain components of income that analysts use to assess financial performance. Highlights important relationships.

Reports the changes in each stockholders' equity account and total equity for the period.

Statement of Stockholders' Equity

The Income Statement is also known as:

The Statement of Operations The Profit & Loss Statement The Statement of Earnings

Discontinued Operations must be reported "Net of Tax" True False

True

Extraordinary items are reported "Net of Tax" True False

True

Sales are a revenue account? True False

True

Depreciation expense is considered and expense account True False

True, depreciation expense IS considered and expense account.

Material items that are unusual or infrequent, BUT NOT BOTH.

Unusual Gains and Losses

Discontinued operations consists of two items

a) Gain or loss from operating the component during the current period b) Gain or loss from the disposal of the component. (both reported net of tax)

When deciding if something is an Extraordinary Item, companies must consider the _______ in which it operates.

environment

Unusual Gains and Losses Should be reported

in a separate section above "Income from Continuing operations before income taxes" (not reported Net-of-tax)

The non-controlling interest amounts are not an expense or dividend, but are allocations of

net income (loss) to the non-controlling interest.

What are the disadvantages of the one Statement approach of Comprehensive Income

net income buried as a subtotal on the statement.

Restrictions on Retained Earnings is disclosed in

notes to the financial statements.

Discontinued Operations must be separately disclosed _________ - not a part of __________.

on the I/S - not a part of continuing activities

Quality of earnings is reduced if earnings management

results in information that is less useful for predicting future earnings and cash flows.

Gains and losses can result from:

sale of investments or plant assets settlement of liabilities write-offs of assets

Regardless of the display format used, the accumulated other comprehensive income is reported in _______

the stockholders' equity section of the balance sheet.