aCCt 3311 chapter 4

changes in accounting estimates

-Accounted for in the period of change or the period of and the future periods if the change affects both. -Not handled retrospectively, don't go back and change things -Not considered errors. examples: useful lives and salvage values of depreciable assets allowance for uncollectible receivables inventory obsolescence summary: criteria--normal, recurring corrections and adjustments placement on income statement--show change only in the affected accounts in current and future periods (not shown net of tax)

retained earnings statement

-Increased by: Net income Change in accounting principle Prior period adjustments -Decreased by: Net loss Dividends Change in accounting principles Prior period adjustments

correction of errors

-Result from: mathematical mistakes. mistakes in application of accounting principles. oversight or misuse of facts. -Corrections treated as prior period adjustments. -Adjustment to the beginning balance of retained earnings.; companies record a correction of error in the year in which it was discovered. they report the error in the financial statements as an adjustment to the beginning balance of retained earnings;if a company prepares comparative financial statements, it should restate the prior statements for the effects of the error. summary: criteria--mistake, misuse of facts placement on income statement--treat as prior period adjustment; restate prior years; income statements to correct for error (shown net of tax)

changes in accounting principle

-Retrospective adjustment. -Cumulative effect adjustment to beginning retained earnings; such an adjustment recasts the prior years statements on a basis consistent with the new principle; the company records the cumulative effect of the change for prior periods as an adjustment to beginning retained earnings of the earliest year presented -Approach preserves comparability across years. -examples: change from FIFO to average cost change from percentage of completion to completed contract method summary: criteria--change from one generally accepted accounting principle to another placement on income statement--recast prior years' income statement on the same basis as the newly adopted principle (shown net of tax)

multiple step income statement

-Separates operating (revenues, expenses) transactions from nonoperating transactions (gains, losses). -Matches costs and expenses with related revenues. -Highlights certain components of income that analysts use assessing financial performance

Common types of unusual or infrequent gains and losses:

-losses on write down (impairment) or receivables, inventories, property, plant and equipment, good will or other intangible assets -restructuring charges -gains and losses from sale or abandonment of property, plant and equipment -effects of a strike -gains and looses on extinguishment (redemption) of debt obligations -gains and losses related to casualties such as fired, floods and earthquakes -gains or losses on sale of investment securities

quality of earnings

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 is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows the income statement is useful for evaluating future aspects of a company but is not perfect tool

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. gains and losses result form the sale of investments or plant assets, settlement of liabilities, and write offs of assets due to impairments or casualty

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. examples: sales, fees, interest, dividends, rents the key is that revenues are our primary source of business

one statement approach

Net income is a subtotal, with total comprehensive income shown as a final total; Advantage - does not require the creation of a new financial statement. Disadvantage - net income buried as a subtotal on the statement.

which of the following is not a selling expense

Office salaries expense

infrequency of occurrence of gains and losses

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 statements

Usefulness: Evaluate past performance Predicting future performance Help assess the risk or uncertainty of achieving future cash flows limitations: companies omit items they cannot measure reliably income is affected by the accounting methods employed income measurement involves judgment; these are not exact numbers and decisions have to be made

if plant assets of a manufacturing company are sold at a gain of 1,640,000 less related taxes of 500,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as a. a gain of 1,640,000 and an increase in income tax expense of 500,000 b. operating income net of applicable taxes 1,140,000 c. a prior period adjustment net of applicable taxes 1,140,000 d. an extraordinary item net of applicable taxes 1,140,000

a

during the year 2020, Siska Corporation had the following information available: disbursements for purchases: 630,000 increase in trade accounts payable: 80,000 decrease in merchandise inventory: 25,000 cogs is:

a; amount paid for puchases + increase in trade payables + decrease in inventory = cogs

which of the following items would be presented in the income statement only in the account affected (not in a separate section)

a; changes in estimates

when a manufacturing company sells one of its plant assets at a price in excess of its book value it should recognize

a; gain

one of the primary benefits of the multiple step income statement over the single step income statement is that the

a; multiple step income statement shows gross margin and recognizes different types of costs and expenses

discontinued operations of a component of a business are classified as a separate item in the income statement

after income from continuing operations

comprehensive income

all changes in equity during a period except those resulting from investments by owners and distributions to owners includes: -all revenues and gains, expenses and losses reported in net income and -all gains and losses that bypass net income but affect stockholder's equity other comprehensive income: -unrealized gains and losses on available for sale securities -translation gains and losses on foreign currency -others; in general, it will be unrealized -reported separately as accumulated other comprehensive income in Stockholder's Equity companies must display the components of other comprehensive income in one of two ways: 1. a single continuous statement (one statement approach) 2. two separate, but consecutive statements of net income and other comprehensive income (two statement approach) Regardless of reporting in one statement or two, accumulated other comprehensive income is reported in the stockholder's equity section of the balance sheet

single step income statement

all revenues-all expenses = net income; no implication that one type of revenue or expense item has priority over another

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as

an amount after continuing operations

Material gains or losses resulting from the disposition of a segment of the business should be reported separately as a component of income

b; after results from continuing operations the effects of discontinued operations are shown net of tax as a separate category in the income statement after continuing operations

changing the basis of inventory pricing from FIFO to average cost is an example of a

b; change in principle

correction of errors:

b; should be treated as prior period adjustments, similar to changes in accounting principles

which of the following should not be reported on the income statement as an unusual or infrequent gain/loss

b; the sale of a component that is an equity investment that represents 30 percent of a company's total assets

In general, the basic difference between the concepts of revenues and gains concerns:

b; whether the event giving rise to the item relates to the typical activity of the enterprise

companies use intraperiod tax allocation for all of the following items except a. discontinued operations b. extraordinary items c. changes in accounting estimates d. income from continuing operations

c

when a company changes from one accounting principle to another accounting principle

c; a retrospective adjustment should be made to the financial statements

those who favor the philosophy that the most useful income measure reflects only regular and recurring revenues and expenses adhere to

c; current operating performance concept; this statement reflects a philosophy of current operating performance. these analysts believe that including only regular and recurring revenues and expenses results in the most useful income measure

companies report earnings per share either on the face of the income statement or in the notes for

c; net income and discontinued operations

the primary reason the income statement is so important to investors and creditors relates to its ability to provide information helpful in

c; predicting the amount, timing, and uncertainty of future cash flows

The occurrence that most likely would have no effect on 2014 net income is the a. sale in 2014 of an office building contributed by a stockholder in 1961. b. collection in 2014 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. d. stock purchased in 1996 deemed worthless in 2014.

c; prior period adjustments should be charged or credited to the opening balance of retained earnings and excluded from the determination of net income

which of the following is true of accounting for changes in estimates

changes in estimates are not carried back to adjust prior years

intermediate components

common to present some or all of the following sections and totals within the income statement 1. operating section -Sales-Cost of goods sold= gross profit -operating expenses: -selling expenses -administrative expenses gross profit-operating expenses=income from operations 2. nonoperating section -other revenues and gains -other expenses and losses =income before income tax 3. income tax 4. discontinued operations 5. noncontrolling interest =net income for the year 6. earnings per share required by FASB

reporting various income items

companies are required to report unusual and infrequent items as part of net income so users can better determine the long run earning power of the company; four general categories: 1. unusual gains and losses 2. discontinued operations 3. noncontrolling interest 4. earnings per share modified all inclusive concept

which of the following is not a generally practiced method of presenting the income statement

d; including prior period adjustments in determining net income

The concept adopted by the accounting profession that reports most unusual or infrequent gains or losses in the income statement is called:

d; modified all inclusive concept

the income statement reveals

d; net earnings (net income) of a firm for a period of time.

which of the following asset disposals would qualify as a disposal of a segment

d; sale by a transportation company of its bus operations but not its airline operations

which of the following would represent the least likely use of an income statement prepared for a business enterprise

d; use by investors interest in the financial position of the entity

restrictions on retained earnings

disclosed in notes to the financial statements as an account called appropriated retained earnings; the retained earnings section may therefore report two separate accounts: 1. retained earnings unrestricted and 2. retained earnings appropriated; the total of these two accounts equals the total retained earnings

which of the following items would be reported net of tax on the face of the income statement

discontinued operations

two statement approach

displays comprehensive income as a separate statement that immediately follows the income statement; reporting comprehensive income in a separate statement indicates that the gains and losses identified as other comprehensive income have the same status as traditional gains and losses

a correction of an error should not be made to prior year statements even if shown for comparative purposes and the effect of the error took place in those prior yers

false

intraperiod tax allocation causes a reduction in total tax income expense for the period in which it is used

false

the effect on net income of adopting a new accounting principle should be disclosed as a separate item following discontinued operations in the income statement

false

the presentation of earnings per share is affected by the existence of prior period adjustments

false

the results of operations of a segment that has been or will be disposed of need not be separated from the results of continuing operations as long as the gain or loss from the disposal is shown separately

false

the advocates of the current operating performance concept include special gains and losses that are infrequent or unusual in the calculation of net income

false; advocates argue that the net income figure should show only the regular recurring earnings of the business based on its normal operations

phasing out of a product line or class of service that represents 10 percent of a company's total revenues is a disposal of assets that qualifies as a disposal of a segment of a business

false; must be 15 %

from a bank loan officer's point of view, the single step income statement is preferable to the multiple step income statement

false; the multiple step income statement allows the user to observe numerous relationships among revenue and expense data

the retained earnings statement shows the total change in stockholders equity for a specified period

false; the statement of retained earnings presents a reconciliation of the balance of the retained earnings account from the beginning to the end of the year. this statement does not include information about the other accounts that appear in an entity's section

condensed income statements

format of income statement that might include only totals of expense groups and also prepares supplementary schedules to support the totals

unusual gains and losses

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 in which it operates

comprehensive income includes all of the following except

investments by owners

which of the following is true about intraperiod tax allocation

its purpose is to relate the income tax expense to the items which affect the amount of tax

which one of the following types of losses is excluded from the determination of net income in income statements

material losses resulting from correction of errors related to prior periods

a statement of stockholder's equity includes a column for each of the following except

net income

earnings per share

net income - preferred dividends / weighted average common shares outstanding -a significant business indicator -measures the dollars earned by each share of common stock -must be disclosed on the income statement

discontinued operations

occurs when two things happen: 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 operation and financial results; a major shift generally includes the disposal of 1. a major line of business, 2. a major geographical area, or 3. a major equity method investment discontinued operations are reported net of tax and shown below the line of Income from continuing operations; -the tax effect will always be subtracted (from either loss or gain) -a company that reports a discontinued operation must report on the income statement the per share effect of income from continuing operations and net income. it must also report earnings per share for discontinued items either on the income statement or in the notes -discontinued operations are reported after Income from Continuing Operations; without a discontinued operations, Income from Continuing Operations would be Net Income

the accountant for the Lintz Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. The January 1, 2012 merchandise inventory balance will appear a. only as an asset on the balance sheet b. only in the cost of goods sold section of the income statement c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet

only in the costs of goods sold section of the income statement

expenses

outflows or the using up of assets or incurrences of liabilities 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 examples: cost of goods sold, depreciation, interest, rent, salaries, wages, taxes expenses are not the same thing as costs;

statement of stockholders' equity

report changes in each stockholder's equity account and total equity for the period discloses: -contributions (issuances of shares) and distributions (dividends) to owners -reconciliation of carrying amount of each component of stockholder's equity from beginning to end of period reported in columnar form, using columns for each account and a total; contains columns of each element of stockholder's equity: common stock, accumulated other comprehensive income, retained earnings

the major elements of the income statement are

revenues, expenses, gains, and losses

which of the following is an example of managing earnings down

revising the estimated life of equipment from 10 years to 8

intraperiod tax allocation

the allocation of tax within a period, helps users understand the impact of income taxes on the various components of net income used for: 1. income from continuing operations 2. discontinued operations "let the tax follow the income"

earnings per share data are required on the face of

the income statement

gains and losses identified as other comprehensive income have the same status as traditional gains and losses under

the two statement approach

a change in accounting principle is considered appropriate only when it is demonstrated that the newly adopted principle is preferable to the old one

true

a manufacturer of computer hardware who sells a computer manufacturing facility located in a foreign country that represents 25 percent of a company's total assets can record the transaction as a disposal of a segment

true

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

true

a prior period adjustment results from the correction of an error in the financial statements of a prior period discovered subsequent to their issuance

true

according to the FASB, companies can display the components of other comprehensive income using a single continuous statement or two separate, but consecutive statements

true

adjustments that grow out of the use of estimates in accounting are not classified as prior period adjustments

true

because of its importance, earnings per share is required to be disclosed on the face of the income statement

true

intraperiod tax allocation helps financial statement users better understand the impact of taxes on various components

true

one of the limitations of the income statement is that items that cannot be measured reliably are not reported in the income statement

true

prior period adjustments should be charged or credited to the opening balance of retained earnings and thus excluded from the determination of net income for the current period

true

the multiple step income statement recognizes a separation of operating transactions from nonoperating transactions and matches costs and expenses with related revenues

true

the primary advantage of the single step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another

true

the retained earnings statement provides a reconciliation of the retained earnings account from the beginning of the year to the end of the year

true

which of the following is an example of managing earnings up?

underestimating warranty claims

noncontrolling interest

when a company owns substantial interests (generally greater than 50%) of another company, they essentially can control that company, therefore GAAP generally require that the financial statements of both companies be consolidated together into one set of financial; if they do not own 100% of the company, they have to disclose that someone else owns the other portion; this is called Noncontrolling interest; Noncontrolling interest: the portion of equity (net assets) interest in a subsidiary not attributable to the parent company Consolidated net income less: net income attributable to noncontrolling interests =net income attributable to stockholders of the controlling company