ACCT (3110) - Chapter 4

Quality of Earnings

Earnings management might negatively affect this if it distorts information in a way that is less useful for predicting future earnings and cash flows.

Appropriated Retained Earnings

Earnings that may be restricted.

Unusual Gains & Losses

Effects of a strike are classified as what irregular item?

evaluate the past performance of the company

Examining revenues and expenses on the income statement helps users...

Transaction Approach

Focuses on the income-related activities that have occurred during the period.

In the year discovered, they report the error as an adjustment to the beginning balance of retained earnings.

How are prior period adjustments handled?

In the period of change if they affect only that period, or in the period of change and future period if the change affects both. WE DO NOT RETROSPECT CHANGE IN ESTIMATES AS THEY ARE NOT ERRORS**

How does a company account for change in estimates?

A retrospective adjustment; the company records the cumulative effect of the change for prior periods as an adjustment to beginning retained earnings of the earliest year presented.

How does a company recognize change in accounting principles?

Comprehensive Income

Includes all changes in equity during a period except those resulting from investment by owners and distributions to owners.

Gains

Increases in equity from peripheral or incidental transactions of an entity 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 major operations.

provide a basis for predicting future performance

Information about past performance helps users to determine trends that might...

the risk or uncertainty of achieving cash flows

Information on various components of income - revenues, expenses, gains and losses - might highlight...

[1] REVENUES: (a) Sales (b) Less Sales Discounts/Allowances (c) Less Sales Returns (d) Net Sales [2] Cost Of Goods Sold [3] GROSS PROFIT [4] OPERATING EXPENSES: (4a) Selling Expenses (4b) Admin Expenses [5] INCOME FROM OPS [6] NonOperating Income (6a) Other Revenues/Gains (6b) Other Losses/Expenses (6c) INCOME BEFORE INCOME TAX [7] Income Tax [8] NET INCOME [9] EARNINGS PER SHARE

List the general items found under the operating section of the multi-step income statement

[1] Operating Activities [2] Nonoperating Activities [3] Income Tax [4] Discontinued Operations [5] Noncontrolling Interest [6] Earnings Per Share **Extraordinary Items removed by FASB 12/31/15. These are now listed under other items (gains/losses)

List the major categories of a Multi-Step Income Statement

Unusual Gains & Losses

Loss on the write-down or write off of receivables is classified as what irregular item?

prior reporting adjustments

Making proper entries in the accounts to correct errors and reporting the corrections.

Change in estimates

Normal, recurring corrections and adjustments such as depreciable life

Discontinued Operations

Occurs when (1) a company eliminates the results of operations of a component of the business and (2) there is no significant involvement in that component after the disposal transaction.

Expenses

Outflows or other using-up of assets of an entity or incurrences of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's major operations.

Restructuring Charge

Relates to a major reorganization of company affairs, such as costs associated with employee layoffs, plant closing costs, write-off of assets, and so on.

Non controlling Interest

Reported as a separate item below net income or loss as an allocation of the net income or loss.

Statement of Stockholder's Equity

Reports the changes in each stockholders' equity account and in total stockholders' equity during the year

Unusual Gains & Losses

Restructuring charges are classified as what irregular item?

Extraordinary Items (now other gains/losses)

Results from a major casualty, expropriation, or a prohibition under a newly enacted law or regulation.

Unusual gains or losses

Shown in separate section above income before income before income tax.

Discontinued Operations

Shown in separate section after continuing operations but before other net income; shown net of tax

Current Operating Performance approach

Some analysts argue that the most useful income measure reflects only regular and recurring revenue and expense elements; that some irregular items do not reflect a company's future earning power.

Intraperiod Tax Allocation

The allocation of tax to an item within a period.

Unusual Gains & Losses

The exchange of currency relating to major devaluation and revaluations is classified as what irregular item?

Earnings Per Share

The net income minus preferred dividends, divided by the weighted average of common shares outstanding

Earnings Management

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

Non controlling Interest

The portion of equity interest in a subsidiary not attributable to the parent company.

Income Statement

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

Capital Maintenance Approach

Under this approach, a company determines income for the period based on the change in equity after adjusting for capital contributions.

Modified All-Inclusive Concept

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

[1] Companies omit items that cannot be reliably measured. [2] Income numbers are affected by the accounting methods used. [3] Income measurement involves judgement.

What are limitations of the income statement?

[1] Unusual Gains & Losses [2] Discontinued Operations [3] Noncontrolling Interest

What are the 3 categories of irregular items on the income statement?

Information that helps them predict the amounts, timing, and uncertainty of future cash flows

What does the income statement provide investors and creditors with?

[1] Sales Revenue [2] Cost of Goods Sold [3] Gross Profit [4] Operating Expenses [5] Net Income [6] Other comprehensive income [7] Comprehensive income

What's listed on a single step comprehensive income statement?

Changes in accounting principle

A change in the method of inventory pricing from FIFO to average-cost, or a change in construction contracts from % of Completion to the completed-contract method.

Unusual Gains & Losses

Adjustments of accruals on long-term contracts are classified as what irregular item?

Change in accounting principle

Change from one generally accepted accounting principle to another.

Changes in accounting estimates

Companies changing the useful life of depreciable assets, uncollectible receivables, inventory obsolescence, is referred to as change in....

Losses

Decreases in equity from peripheral or incidental transactions of an entity except those that result from expenses or distribution to owners.

Component

the lowest level at which a company can clearly distinguish the operations and cash flows from the rest of the company's operations.