Intermediate Accounting I C248 Chapter 4 & 5

Assets include all of the following sub classifications except Intangibles. Noncontrolling interest. Long-term investments. Other.

Noncontrolling Interest (Assets include 5 sub classifications: current, long-term investments, PP & E, intangibles, and other. Noncontrolling interest is a section in the stockholders' equity section of the balance sheet.)

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Which of the following statements about IFRS and GAAP accounting and reporting requirements for the balance sheet is not correct? Both IFRS and GAAP distinguish between current and non-current assets and liabilities. The presentation formats required by IFRS and GAAP for the balance sheet are similar. Both IFRS and GAAP require that comparative information be reported. One difference between the reporting requirements under IFRS and those of the GAAP balance sheet is that an IFRS balance sheet may list long-term assets first.

The presentation formats required by IFRS and GAAP for the balance sheet are similar.

Josie Corporation reported the following information for 2014: Sales revenue $1,000,000 Cost of goods sold 700,000 Operating expenses 110,000 Unrealized holding gain on available-for-sale securities 40,000 Cash dividends received on the securities 4,000 For 2014, Josie would report comprehensive income of

$1,000,000 less $700,000 less $110,000 plus $40,000 plus $4,000 equals $234,000.

Noncontrolling Interest (Minority Interest)

A portion of the equity of subsidiaries not wholly owned by the reporting company.

Which of the following is an acceptable method of presenting the income statement? A classified income statement. A current operating performance income statement. A condensed income statement. None of these answer choices are correct.

Acceptable presentations of the income statement include a single-step income statement, a multiple-step income statement, and a condensed income statement.

___________ lists assets, by sections, on the left and liabilities and stockholders' equity, by sections, on the right. May require two facing pages.

Account Form

What are the 2 forms used to prepare a Balance Sheet?

Account Form Report Form

Which of the following is not one of the classifications in owners' equity? Capital stock. Noncontrolling interest. Accumulated capital. Retained earnings.

Accumulated Capital (Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital, and noncontrolling interest (minority interest)

What are the advantages of the Single Step Income Statement?

Advantages: Easy to prepare. Less recordkeeping. Allocations of expense to different functions are not necessary.

What are the advantages of the Multiple Step Income Statement?

Advantages: Provides more detailed information so users can evaluate financial health. Investors can determine gross margin and profit margin.

Accumulated Other Comprehensive Income

Aggregate amount of the other comprehensive income items. Unrealized gains or losses on available-for-sale investments and unrealized gains and losses on certain derivative transactions. Component of the owner's equity section of the balance sheet.

Which of the following is a limitation of the balance sheet? All of these answer choices are correct. Many items that are of financial value are omitted. Current fair value is not reported. Judgments and estimates are used.

All of these answer choices are correct.

What is the Non Controlling Interest section of the Income Statement?

Allocation of income to noncontrolling shareholders.

Which statement is correct regarding IFRS? An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary. The function-of-expense approach never requires arbitrary allocations. An advantage of the function-of-expense method is that allocation of costs to the varying functions is rarely arbitrary. IFRS requires use of the nature-of-expense approach.

An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary.

What are the three major classifications of the balance sheet?

Assets, Liability and Equity

Describe Multiple Step Income Statements

For multi-step statements, there are further classifications: Results for operating activities separated from nonoperating activities. Expenses classified by function - merchandising/manufacturing, selling, administration

Describe Single Step Income Statements

For single-step statements, there are groupings for revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss. Income tax is frequently reported as the last item before net income.

What are 4 types of Long Term Investments/Securities?

Four types: 1. Investments in bonds, common stock, long-term notes, or other securities. 2. Investments in tangible fixed assets not used in operations, like land. 3. Investments set aside in special funds - pension fund, plant expansion fund. Includes cash surrender value of life insurance. 4. Investments in unconsolidated subsidiaries or affiliated companies.

Which of the following occur from peripheral or incidental transactions? Sales revenue. Cost of goods sold. Gain on the sale of equipment. Operating expenses.

Gains and losses result from peripheral or incidental transactions. (Gain on the sale of equipment.)

Classification as an extraordinary item on the income statement would be appropriate for the gain or loss on disposal of a component of the business. substantial write-off of obsolete inventories. loss from a strike. gain from condemnation settlement.

Gains from condemnation settlements meet the unusual nature and infrequency of occurrence requirements.

Explain how current assets such as short term investments are reported and valued on the balance sheet.

Generally presented at fair value.

Explain the usefulness of the balance sheet.

Helps predict amount, timing, and uncertainty of future cash flows. A way to compute rates of return and evaluate the capital structure of the enterprise. Allows analysts to assess risk and future cash flows.

In the single-step income statement: interest revenue and rental revenue are reported as other revenues and gains. just two groupings exist - revenues and expenses. expenses are classified by functions, such as merchandising, selling and administration. an income from operations figure is presented.

Just two groupings exist in the single-step income statement - revenues and expenses.

With the exception of________, these assets are depreciated (buildings, equipment) or depleted (timber, oil reserves).

Land

Which of the following is not included in the operating section of a multiple-step income statement? Cost of goods sold. Income tax expense. Administrative expenses. Sales.

Income tax expense.

Gains

Increases in equity (net assets) from peripheral or incidental transactions of an entity, except those that result from revenues or investments by owners. Examples: Net proceeds from sale of investments or plant assets. McDonalds: Income from the sale of land.

Revenues

Inflows or 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. McDonalds - Selling Big Macs

Which of the following is an intangible asset? Restricted cash. Deferred income taxes. Prepaid pension costs. Customer lists.

Intangible assets include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

Explain how current assets (Inventories) are reported and valued on the balance sheet.

Inventories Presented at lower of cost or market value. Company must disclose basis for valuation (lower of cost-or-market) and the cost flow assumption used - LIFO or FIFO. Manufacturing firms also denote the state of completion - raw materials, work in progress, or finished products.

Which of the following would be reported as a long-term investment at December 31, 2014? Land held for speculative purposes. Trademark. Trading securities. Equipment used in the manufacturing process.

Land held for speculative purposes is reported as a long-term investment.

How are liabilities classified?

Liabilities are classified as current or long-term.

Current assets are presented on the balance sheet in order of __________.

Liquidity

Obligations a company does not reasonably expect to liquidate within the normal operating cycle.

Long-Term (Noncurrent) Liabilities

Describe how noncurrent assets (Long Term Investments & Securities) are presented on the balance sheet.

Long-Term Investments / Securities Companies expect to hold long-term investments for many years. They are presented below current assets on the balance sheet, in the investments section. NOT trading securities.

________________ require the most disclosure. Companies provide supplementary disclosures for long-term liabilities related to the covenants and restrictions for the protection of lenders.

Long-term liabilities

What is the Discontinued Operations part of the Income Statement?

Material gains or losses resulting from the disposition of a component of the business.

What should be included in net income, and where to report it?

Modified all-inclusive concept: Companies record most items, including unusual or irregular ones, as part of net income.

What is the Earnings Per Share section of the Income Statement?

Net Income, less preferred dividend, divided by outstanding common shares.

A correction of an error in prior periods' income will be reported In the income statement Net of tax No Yes Yes No Yes Yes No No

No Yes

Which of the following should be reported as a prior period adjustment? Change in Estimated Lives Mistakes in the Application of Depreciable Assets Accounting Principles Yes Yes No Yes Yes No No No

No Yes

What is the order for current liabilities on the Balance Sheet?

No prescribed order for current liabilities, but common to see notes payable, accounts payable, or short-term debt as first item. Income taxes payable, current maturities of long-term debt, or other current liabilities are commonly listed last.

Intangible Assets

Non-financial instruments that lack physical substance. Patents, copyrights, franchises, goodwill, trademarks, customer lists. Limited life intangible assets are amortized over their useful lives. Infinite life intangibles (like goodwill) are periodically assessed for impairment. Often ignored by financial analysts because valuation is difficult.

The nature-of-expense method is simple to apply. is viewed as more relevant. identifies the major cost drivers of the company. all of these answer choices are correct.

The nature-of-expense method is simple to apply because allocations of expense to different functions are not necessary.

Capital Stock

The par or stated value of the shares issued. Authorized, issued, and outstanding share amounts are also disclosed. Component of the owner's equity section of the balance sheet.

How to report Non Controlling Interest on income statements.

The portion of equity (net assets) not attributable to the parent company. (Example: Parent company owns 70% stake in subsidiary). GAAP requires net income for subsidiary to be allocated to controlling and noncontrolling interest. Where to Report: Separately, below consolidated net income. Below net income or loss.

Which of the following is prohibited under IFRS? Classifying expenses by nature. A single-step income statement. The presentation of extraordinary items. All of these answer choices are correct.

The presentation of extraordinary items. Extraordinary items are prohibited under IFRS.

The balance sheet format listing liabilities and stockholders' equity directly below assets is called the: account form. financial position form. report form. solvency form.

The report form lists liabilities and stockholders' equity below assets on the same page.

The ____________ focuses on income-related activities that have occurred during the period. It requires the use of revenue, expense, gain, and loss accounts.

transaction approach

Intraperiod tax allocation is used for all of the following except: changes in accounting principle. discontinued operations. extraordinary items. unusual gains/losses.

unusual gains/losses. Unusual gains and losses are not reported net of tax.

Barger Enterprises has an extraordinary loss of $300,000, an unusual gain of $700,000, and a tax rate of 30%. At what amount should Barger report each item? Extraordinary loss Unusual gain (300,000) 490,000 (210,000) 700,000 (210,000) 490,000 (300,000) 700,000

$300,000 less 30% of $300,000, or $210,000 as an extraordinary loss and $700,000 as an unusual gain.

Franco Company uses IFRS and owns property, plant, and equipment with a historical cost of $5,000,000. At December 31, 2013, the company reported a valuation reserve of $690,000. At December 31, 2014, the property, plant, and equipment was appraised at $5,325,000. The valuation reserve will show what balance at December 31, 2014? $365,000. $325,000. $690,000. $0.

$325,000

Earnings per share (EPS) is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding. True False

(True) EPS is calculated by dividing income available to common stockholders by the weighted average of common shares outstanding.

Contractual Situations

- Companies should disclose contractual situations, if significant, in the notes to financial statements. Example: essential provisions of lease contracts, pension obligations, and stock option plans. Explanation of certain restrictions or covenants attached to specific assets or, more likely, to liabilities.

Depreciation disclosures

- Disclose depreciation expense for the period, accumulated depreciation by major classes of depreciable assets or in total, and balances of major classes of depreciable assets by nature and function. Disclosing detailed calculation methods not needed.

Fair Values

- GAAP calls for expanded disclosures of fair value measurements. Disclosures of fair values, particularly for financial instruments. For major groups of assets and liabilities, companies must disclose the fair value measurement and the fair value hierarchy level of the measurements as a whole, as Level 1, 2, or 3:

Accounting Policies

- GAAP recommends disclosure of all significant accounting principles and methods that involve selection from among alternatives and those that are peculiar to a given industry. Explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries, etc. Companies may also disclose info about nature of ops, use of estimates in preparing statements, significant estimates, and vulnerabilities due to certain concentrations.

Contingencies

- Material events that have an uncertain outcome. Examples: tax operating-loss carryforwards, company litigation against another party, environmental issues, government investigations. Recorded with debit to loss account and credit to liability account.

Z Score

- Predicts financial distress. Greater than 3 - unlikely to fail. Below 1.8 - Likely to fail.

cross-reference

- Used instead of a note when one line item on a balance sheet explains another line item on the balance sheet.

Operating Cycle

- the average time between when a company acquires materials and supplies and when it receives cash for sales of the product.

What are the Limitations of income statements?

1. Companies omit items they cannot measure reliably. 2. Income numbers are affected by the accounting methods employed. (Depreciation method, etc.) 3. Income measurement involves judgement. 4. Companies may attempt earnings management - planning the timing of revenues, expenses, gains, and losses to smooth out earnings. 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 measures the success of a company's operations for a given period of time. It helps financial statement users predict future cash flows by:

1. Evaluating the past performance of the company and comparing its performance to its competitors. (Comparing performance of Ford and Toyota, for example) 2. Predicting future performance. 3. Helping to assess risk or uncertainty in achieving future cash flows. Information about the components of income (revenues, expenses, gains, and losses) highlights the relationships among them.

Four categories of unusual or irregular items must be highlighted in statements:

1. Unusual gains and losses 2. Discontinued operations 3. Extraordinary items 4. Noncontrolling interest

Companies are required to highlight certain items in the financial statements so that users can better determine the long-run earning power of the company. Which of the following is not one of those items? Unusual gains and losses. Noncontrolling interest. Changes in accounting principle. Discontinued operations.

A change in accounting principle is recognized by making a retrospective adjustment to the financial statements. The four items companies are required to highlight include unusual gains and losses, extraordinary items, discontinued operations, and noncontrolling interest.

Describe the components of the owner's equity section of the balance sheet.

Can be a difficult section to prepare and understand. Capital stock agreements can be complex; restrictions on stockholders' equity imposed by state corporation laws, liability agreements, and boards can add to challenges. Generally 6 sections. Capital Contribution is preferred stock, common stock, and paid in capital, Retained Earnings, Accumulated other Comprehensive Income, Treasury Stock, Non Controlling Interest

How are expenses classified under IFRS?

Can be by nature or function, must be presented with analysis.

What is considered Cash and Cash Equivalents?

Cash and cash equivalents include currency, coin, checks received but not yet deposited, checking accounts, money market accounts, and short-term, highly liquid investments that mature within 3 months or less, such as T-Bills.

A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an): part of discontinued operations. extraordinary item. change in accounting principle. change in estimate.

Changes in accounting principle include a change in the method of inventory pricing.

Which of the following statements is correct regarding income reporting under IFRS? IFRS does not permit revaluation of property, plant, and equipment, and intangible assets. IFRS provides the same options for reporting comprehensive income as GAAP Companies must classify expenses either by nature or function

Companies must classify expenses either by nature or function

How can companies change accounting principles?

Company can change principles, but must demonstrate new principle is preferable to old one. Examples: ● Change in method of inventory pricing from FIFO to average cost. ● Change in accounting of construction contracts from the percentage of completion method to the completed-contract method. Retrospective adjustment. Adjust through retained earnings. How to recognize: Make a retrospective adjustment. Recast the prior years' income statement on the same basis as the newly adopted principle. Preserves compatibility across years. (Shown net of tax.)

What is Comprehensive Income?

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. It is the change in net assets during a period from transactions and other events and circumstances from non-owner sources.

Company must disclose the basis it uses to value property, plant, and equipment, any liens against the properties, and accumulated depreciation. Usually in the notes to the financial statements. Under GAAP, the basis is __________.

Cost

How to report unusual or irregular items in income statements. Discontinued Operations

Criteria: 1. Company must eliminate the results of operations of a component of the business, and 2. There is no significant involvement in the component after the disposal transaction. Where to Report: Separately, after continuing operations. Examples: ● A company with several product groups disposes of one product group and discontinues its involvement in it. The operations and cash flows associated with the disposal would be reported in the discontinued operations section. ● A company is experiencing losses with a product group, and decides to sell that product group. It will discontinue involvement in the product group. The operations and cash flows are reported as a discontinued operation. ● A highly diversified company decides to discontinue its electronics division. It disposes of the division and discontinues involvement in it after the disposal.

● Available-for-sale

Current Assets (Short Term Investments)- Debt and equity securities not classified as held-to-maturity or trading securities. Report at fair value.

● Trading

Current Assets (Short Term Investments)- Debt equity and securities bought and held primarily for sale in the near term to generate income on short-term price differences. Report at fair value.

● Held-to-maturity

Current Assets (Short Term Investments)- Debt securities that a company has the positive intent and ability to hold to maturity. Report at amortized cost.

Losses

Decreases in equity (net assets) from peripheral or incidental transactions of an entity, except those that result from revenues or investments by owners. Examples: Net losses from sale of investments or plant assets, write-offs of assets due to impairment or casualty, settlements of liabilities. McDonalds: Loss realized when a piece of equipment sells for less than book value. Distinction between revenues and gains, and between expenses and losses, depends on the typical activities of a company.

___________________ = allocate costs to the periods benefited; ____________ _____________ is a contra asset acct.

Depreciation; Accumulated Depreciation

If a potential investor wants to assess the ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities, the investor is assessing: Profitability. Financial flexibility. Liquidity. Solvency.

Financial flexibility

What are the differences between GAAP and IFRS standards for Balance Sheet Presentation?

Differences ● Presentation formats differ. ● IFRS requires classified statement of financial position in most cases. Under GAAP, public companies must follow SEC regulations, which require specific line items. GAAP mandates certain forms of reporting for the info. ● GAAP classifies current assets from most liquid to least liquid. ● IFRS - classifies current assets from least liquid to most liquid. ● Cash first in GAAP, last in IFRS. ● GAAP - Current assets are listed before long-term assets. ● IFRS - Non-current assets may be reported before current assets ● GAAP uses "common stock" ● IFRS uses "Share capital - ordinary" ● IFRS has many terminology differences. ● GAAP - not supposed to use the term "reserve". It's used in IFRS ● GAAP and IFRS differ in the IFRS provision for balance sheet revaluations of PP&E.

What are the disadvantages of the Multiple Step Income Statement?

Disadvantages: More difficult and time consuming to prepare. Categorization is much more important.

What are the disadvantages of the Single Step Income Statement?

Disadvantages: Thin on information Difficult to understand profitability. Often uses nature of expense classification method, which is simple to apply but can't be used to calculate gross profit.

How to report unusual or irregular items in income statements. Discontinued Operations

Discontinued operations are reported in a separate income statement category, after income from continuing operations, and show effects on net tax as a separate category. Showing discontinued operations net of tax helps users understand the impact of taxes on the various components of net income. "Income from continuing operations" is only used when there is a discontinued operations section to report gains or losses there. If no discontinued operations, it's just "Net income"

Expenses include all of the following except: dividends. cost of goods sold. taxes. depreciation.

Dividends are not an expense. Expenses include cost of goods sold, depreciation, interest, rent, taxes, and salaries and wages.

Which of the following earnings per share figures must be disclosed on the face of the income statement? The effect on EPS from unusual items. EPS for gross profit. EPS for income before taxes. EPS for income from continuing operations.

EPS for income from continuing operations.

What is Earnings Per Share?

Earnings per share is considered the most significant business indicator. Measures the number of dollars earned by each share of common stock. Does not represent amount of dividends paid. Must be disclosed on income statement.

Earnings per share represents the dollar amount paid to stockholders in the form of dividends. measures the number of dollars earned by each share of common stock. can be reported either on the face of the income statement or in the notes to the financial statement. all of these answer choices are correct.

Earnings per share measures the number of dollars earned by each share of common stock. It does not represent the dollar amount paid to stockholders in the form of dividends. Companies must disclose EPS on the face of the income statement.

Where do you recognize correction of errors?

Errors can include mathematical mistakes, improperly applied accounting principles, or misuse of facts. How to recognize: Not shown in income statement. Shown net of tax. Adjust through retained earnings. Treat as prior period adjustment. Make corrections and report them in the financial statements. Restate prior statement affected by the error.

What is an example of a change in estimate?

Example: Change in equipment estimated useful life and salvage value. Simply calculate new depreciable base (net book - salvage) and new useful life (years left), to calculate current year's depreciation. No adjustments to prior years is required.

What are some examples of Current Liabilities?

Examples: 1. Payables from acquisition of goods & services: Accts or wages payable, taxes payable 2. Collections received in advance of delivery of goods or services: Unearned rent revenue, unearned subscriptions revenue. 3. Other liabilities that will be liquidated during the reporting cycle: The portion of long-term bonds to be paid in the current period. Short-term obligations arising from the purchase of equipment.

What are some examples of Comprehensive Income?

Examples: ● Unrealized holding gains/losses on investments that are classified as available for sale ● Unrealized gains/losses on hedge/derivative financial instruments ● Foreign currency translation adjustments ● Unrealized gains/losses on postretirement benefit plans

What are examples of Long Term (Non Current) Liabilities?

Examples: Bonds payable, notes payable, deferred income tax amounts, lease obligations, pension obligations. Three types: 1. Obligations from specific financing situations, such as the issuance of bonds, long-term lease obligations, and long-term notes payable. 2. Obligations arising from the ordinary operations of the company, such as pension obligations and deferred income tax liabilities. 3. Obligations that depend on the occurrence or non-occurrence of one or more future events to confirm the amount payable, the payee, or the date payable, such as service or product warranties, or other contingencies.

Which of the following is not reported in an income statement under IFRS? Discontinued Operations Extraordinary Items Cost of Goods Sold Income Tax

Extraordinary Items

Which of the following is not reported in an income statement under IFRS? Discontinued operations. Extraordinary items. Cost of goods sold. Income tax.

Extraordinary items

Extraordinary items must be either unusual in nature or infrequent in occurrence. True False

False (Both criteria must be met in order for an item to be considered extraordinary.)

Explain how to report comprehensive income.

How to Report: Show on income statement, on statement of stockholders equity (separate column) and on balance sheet (below retained earnings.)

Which of the following statements is correct regarding income reporting under IFRS? IFRS does not permit revaluation of property, plant, and equipment, and intangible assets. IFRS provides the same options for reporting comprehensive income as GAAP. Companies must classify expenses by nature. IFRS provides a definition for all items presented in the income statement.

IFRS provides the same options for reporting comprehensive income as GAAP.

Which statement is correct regarding IFRS? IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left. IFRS uses the same process for recording transactions as GAAP. The chart of accounts under IFRS is different because revenues follow assets. None of the these statements are correct.

IFRS uses the same process for recording transactions as GAAP.

How is income reported under IFRS?

Income Reporting Under IFRS, companies report all revenues, gains, expenses and losses on income statement. Subtotals for gross profit, income from ops, income before tax, net income. Discontinued operations are separate item. Other income & expenses are separate.

What are some Income statement reporting issues under IFRS

Income Reporting Under IFRS, companies report all revenues, gains, expenses and losses on income statement. Subtotals for gross profit, income from ops, income before tax, net income. Discontinued operations are separate item. Other income & expenses are separate.

What is the Income Tax Section of the Income Statement?

Income Tax A section reporting federal and state taxes levied on income from continuing operations.

Which of the following is not considered an irregular item on the income statement? Income tax expense. Extraordinary gains. Discontinued operations. Extraordinary losses.

Income tax expense is a regular item on the income statement.

How are current assets presented on the balance sheet?

Presented in order of liquidity: Cash, Investments, Accts Receivable, Inventories, Prepaid

Noncontrolling interest Is not shown on the face of the income statement. Is reported as a separate item below net income or loss. Is shown in a separate section of the income statement after continuing operations but before extraordinary items, net of tax. Is shown in a separate section of the income statement after extraordinary items, net of tax.

Noncontrolling interest is reported as a separate item below net income or loss as an allocation of the net income or loss (that is, it is not an item of income or expense).

What is the Non - Operating Section of the Income Statement and what are its parts?

Nonoperating Section Reports the revenues and expenses resulting from secondary activities. Also reports special gains and losses that are either infrequent or unusual (not both). A. Other Revenues and Gains - Lists of revenues recognized or gains incurred, net of related expenses, from nonoperating transactions. B. Other Expenses and Losses - Lists expenses or losses incurred, net of any related income, from nonoperating transactions.

How can companies do a change in estimate?

Normal part of accounting process. Companies must estimate useful lives and salvage values of depreciable assets, uncollectible receivables, inventory obsolescence, and the number of periods expected to benefit from an expenditure. Changing circumstances and new information can require changes in estimates. How to recognize: Not retrospective. No change to retained earnings needed. Recognize in period of change if affects only that period. Recognize in period of change and future periods if change affects both. Don't change prior years. (Not shown net of tax.)

Current Liabilities

Obligations the company expects to liquidate through the use of current assets or the creation of other current liabilities.

Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles? On the face of the balance sheet. On the face of the income statement. On the face of the statement of retained earnings (or, statement of stockholders' equity.) In the footnotes to the financial statements.

On the face of the income statement.

Items are only presented as current assets if the company expects to realize them within ______________ or the operating cycle.

One Year

Liabilities payable within________ are not included in current liabilities if the company intends to refinance the debt through another long-term issue or to retire it out of noncurrent assets.

One Year

What is the Operating Section of the Income Statement and what are its parts?

Operating Section Reports the revenues and expenses of the company's principal operations. A. Sales or Revenue Section - Presents sales, discounts, allowances, returns, and other related information to arrive at Net Sales Revenue. B. Cost of Goods Sold Section - Shows the cost of the goods that were sold to produce the sales. C. Selling Expenses - Lists expenses resulting from company's efforts to make sales. D. Administrative or General Expenses - Reports expenses of general administration.

What are the sections of the Income Statement?

Operating Section Non - Operating Section Income Tax Discontinued Operations Extraordinary Items Noncontrolling Interest Earnings Per Share

Ostriker Company uses IFRS and has property and equipment on an historical cost basis of $3,600,000. At the end of the year, Ostriker appraises its property and equipment and determines it had a revaluation increase of $67,000. Ostriker records this revaluation under IFRS with A decrease to property and equipment and a decrease on the income statement. An increase to property and equipment and an increase to a valuation reserve in equity. An increase to property and equipment and a decrease to accumulated depreciation. An increase to property and equipment and an increase on the income statement.

Ostriker records this revaluation under IFRS with an increase to property and equipment as well as a valuation reserve in equity.

What is other Comprehensive Income?

Other Comprehensive Income is non-owner changes in equity that bypass the income statement. Changes don't affect retained earnings or net income. Changes impact accumulated other comprehensive income, a component of stockholders' equity.

Explain how to report other comprehensive income. 2 Approaches.

Other comprehensive income can be reported on income statement using two approaches: 1. The One Statement Approach - One statement is called the Statement of Comprehensive Income. Good because it doesn't require separate statement, but bad because net income gets buried in a subtotal. 2. The Two Statement Approach - Income Statement, followed by Comprehensive Income Statement. Allows net income to be bottom line of income statement.

Gains and losses that bypass net income but affect stockholders' equity are referred to as: comprehensive income. other comprehensive income. prior period income. unusual gains and losses.

Other comprehensive income includes gains and losses that bypass net income.

Expenses

Outflows, or 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 ongoing major or central operations. Examples: Cost of goods sold, depreciation, interest, rent, salaries, wages, taxes. McDonalds - Two all beef patties, special sauce, lettuce, cheese

Explain how current assets (Prepaid Expenses) are reported and valued on the balance sheet.

Prepaid expenses Presented at cost. Included in current assets if it will receive benefits within one year or within the operating cycle, whichever is longer. Reported at amount of unexpired/unconsumed cost. Example: prepayment of insurance policy, prepaid rent, prepaid office supplies.

Explain how current assets such as cash and cash equivalents are reported and valued on the balance sheet.

Presented at fair value. Restrictions or commitments related to the availability of cash must be disclosed.

How to report Extraordinary Items in income statements.

Rare! Criteria: Material, unusual AND infrequent. Where to Report: Separately, after discontinued operations, before net income. Nonrecurring material items that differ significantly from typical business activities. These events and transactions are distinguished by their unusual nature and infrequency. Highly dependent on circumstances. This type of reporting is prohibited under IFRS. Examples: ● Mt. St. Helens Eruption - Weyerhaeuser had $36M timber loss ● Expropriation - state taking property for public use or benefit ● Prohibition under newly enacted law or regulation ● Yes - A company selling the only security investment it ever owned. ● No - A company with a portfolio of securities selling one of them. ● Yes - A rare hailstorm damaging tobacco crops ● No - Frost damage to Florida citrus (Too frequent, doesn't count.) ● FASB ruled that 9-11 wasn't extraordinary!

Explain how current assets (Receivables) are reported and valued on the balance sheet.

Receivables Presented at estimated amount collectible. Company must clearly identify any anticipated loss due to uncollectibles, the amount and nature of nontrade receivables (income tax refund, award in lawsuit that's coming), and receivables used as collateral. Receivables from unusual transactions (sale of property, loan to affiliate) should be separately classified as long-term unless payment is expected in a year.

_____________lists sections one above the other, on the same page.

Report Form

Statement of Stockholders' Equity.

Reports changes in each stockholders' equity account and total equity for the period. Discloses issuances of shares and dividends (distributions) to owners. Reconciles carrying amount of each component of stockholders' equity from beginning to end of period.

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.

What is reported on the Retained Earnings Statement?

Retained Earnings Statement Increases include net income, changes in accounting principles, prior period adjustments. Decreases include net losses, dividends, changes in accounting principles, prior period adj.

Multiple-Step Income Statement

Reveals gross profit, and operating profit. Gross Profit = Sales - COGS Separates operating transactions from nonoperating transactions. Matches costs and expenses with related revenues.

Explain how to report unusual or irregular items in income statements. (Modified All-Inclusive Concept)

Separate disclosure in income statement to help users predict amounts, timing, and uncertainty of future cash flows.

What are some examples of current assets (short term investments) and how are they recorded on the balance sheet?

Short-term investments ● Held-to-maturity - Debt securities that a company has the positive intent and ability to hold to maturity. Report at amortized cost. ● Trading - Debt equity and securities bought and held primarily for sale in the near term to generate income on short-term price differences. Report at fair value. Available-for-sale - Debt and equity securities not classified as held-to-maturity or trading securities. Report at fair value.

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? Shown as a separate item in nonoperating revenues or expenses if material and supplemented by a footnote if deemed appropriate. Shown in operating revenues or expenses if material but not shown as a separate item. Shown net of income tax after ordinary net earnings but before extraordinary items. Shown net of income tax after extraordinary items but before net earnings.

Shown as a separate item in nonoperating revenues or expenses if material and supplemented by a footnote if deemed appropriate.

What are the similarities between GAAP and IFRS standards for Balance Sheet Presentation?

Similarities ● OK to call it balance sheet or statement of financial position. (IFRS likes second one) ● Both require disclosures about accounting policies followed, judgements management made, and key assumptions and estimation uncertainty. ● Both require presentation of noncontrolling interests in equity section of balance sheet. ● Both distinguish between current and noncurrent liabilities. ● Both require reporting of comparative financial statements.

Single Step Income Statement

Straightforward and simple - all revenues gains are at top, all expenses and losses below. (Revenue + Gains) - (Expenses + Losses) = Net Income Better for businesses with a simple structure - sole proprietorships, partnerships.

What is the purpose of the Income Statement?

The income statement summarizes the revenue, expense, gain, and loss transactions.

Describe how noncurrent assets (Property, Plant & Equipment - Tangible, Long-Lived Assets or Fixed Assets) are presented on the balance sheet.

Tangible long-lived assets used in the regular operations of the business. Land, buildings, machinery, furniture, tools, and wasting resources (timberland, minerals). With the exception of land, these assets are depreciated (buildings, equipment) or depleted (timber, oil reserves). (Depreciation = allocate costs to the periods benefited; accumulated depr is a contra asset acct.) Company must disclose the basis it uses to value property, plant, and equipment, any liens against the properties, and accumulated depreciation. Usually in the notes to the financial statements. Under GAAP, the basis is COST.

Which of the following are acceptable balance sheet formats? Condensed form and multiple step form. Report form and account form. Multiple step form and account form. Condensed form and report form.

The acceptable formats for the balance sheet are the account form and the report form.

Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? Report form. Single step form. Account form. Multiple step form.

The account form lists assets on the left and liabilities and stockholders' equity on the right.

Income reporting follows which of the following approaches? Current operating performance. Modified all-inclusive. All-inclusive. Modified current operating performance

The accounting profession has adopted a modified all-inclusive concept for income reporting and requires application of this approach in practice.

Treasury Stock

The amount of ordinary shares repurchased. Shown as a reduction of stockholders' equity. A contra-equity account. When company buys back own stock. Component of the owner's equity section of the balance sheet.

What is the balance sheet?

The balance sheet, or statement of financial position, reports the assets, liabilities, and stockholders' equity of a business enterprise at a specific date.

What is the IFRS Transition Date?

The beginning of the earliest period for which full comparative IFRS information is presented.

Retained Earnings

The corporation's undistributed earnings. Can be divided between unappropriated (available for dividend distribution) and restricted (bond indentures or other loan agreements). Component of the owner's equity section of the balance sheet.

The correct order to present current assets is Cash, accounts receivable, prepaid items, inventories. Cash, accounts receivable, inventories, prepaid items. Cash, inventories, accounts receivable, prepaid items. Cash, inventories, prepaid items, accounts receivable.

The correct order is cash, accounts receivable, inventories, prepaid items.

Additional Paid-In Capital

The excess of amounts paid in over the par or stated value. Subtotals are informative if additional sources of capital are varied and material. Component of the owner's equity section of the balance sheet.

The ________ approach focuses on the income-related activities that have occurred during the period.

The transaction approach focuses on the income-related activities that have occurred during the period. These activities include revenue and expense transactions, and gain and loss transactions.

One of the primary advantages of the single-step income statement is the absence of any implication that one type of revenue or expense has priority over another. True False

True

A liability that is payable within the next year is sometimes included in long-term debt. True False

True (A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets.)

Companies frequently use judgments and estimates in valuing items on the balance sheet. True False

True (Companies use judgments and estimates to determine many of the items reported on the balance sheet.)

Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid. True False

True (Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.)

How does IFRS present current assets?

Under IFRS, current assets are presented in reverse order of liquidity.

Which of the following is included in comprehensive income? Unrealized gains on available-for-sale securities Investments by owners Changes in accounting principles Distributions to owners

Unrealized gains on available-for-sale securities

What is the Extraordinary Items section of the Income Statement?

Unusual and infrequent material gains and losses.

Condensed Income Statement

Used when a single income statement cannot possibly present all desired expense detail. A condensed statement includes only the totals of expense groups, and has supplementary schedules with the details.

Excess of total current assets over total current liabilities is ___________ __________. Not typically disclosed on balance sheet, but computed as indicator of short-run liquidity.

Working Capital

The non-controlling interest section of the income statement is: required under GAAP but not under IFRS. required under IFRS but not under GAAP. required under IFRS and GAAP. not reported under GAAP or IFRS.

required under IFRS and GAAP.

Where on the Income Statement do you report the Earnings Per Share?

Where to report: On the face of the income statement. For discontinued operations or extraordinary items, can be on face of statement or in notes. Earnings per share should always be shown separately for income before extraordinary items.

Other Assets

Widely varied. Long-term prepaid expenses, prepaid pension costs, noncurrent receivables. Assets in special funds, deferred income taxes, property held for sale, restricted cash or securities. This section should be limited to only unusual items sufficiently different from the assets in the other categories.

Which of the following is not an acceptable way of displaying the components of other comprehensive income under IFRS? Within the statement of retained earnings Second Income Statement Combined statement of comprehensive income All of the above are acceptable

Within the statement of retained earnings

Which of the following is not an acceptable way of displaying the components of other comprehensive income under IFRS? Within the statement of retained earnings. Second income statement. Combined statement of comprehensive income. All of these choices are acceptable.

Within the statement of retained earnings.

A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as: land expense. property, plant, and equipment. an intangible asset. a long-term investment.

a long-term investment.

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as an increase in depreciation expense for the year in which the error is discovered. an extraordinary item for the year in which the error was made. a prior period adjustment. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.

a prior period adjustment.

Information in a company's first IFRS statements must: have a cost that does not exceed the benefits. be transparent. provide a suitable starting point. all of these are correct.

all of these are correct.

Krista Company prepares a consolidated income statement that includes its subsidiary, Edward Co. Krista's income statement shows $23,500 of net income attributable to the noncontrolling interest which is presented as an item of income. an item of expense. an allocation of net income. a gain attributable to the noncontrolling interest

an allocation of net income. The net income attributable to the noncontrolling interest is an allocation of net income. It is not reported as an item of income or expense, or as a gain or loss.

Balance sheet information is useful for all of the following except to evaluate capital structure. analyze cash inflows and outflows for the period. assess future cash flows. compute rates of return.

analyze cash inflows and outflows for the period.

Current Assets

are cash and other assets a company expects to convert to cash, sell, or consume either in one year or within the operating cycle, whichever is longer.

Current assets under IFRS are listed generally: by importance. in the reverse order of their expected conversion to cash. by longevity. alphabetically.

in the reverse order of their expected conversion to cash.

Earnings per share should always be shown separately for net income and gross margin. income before extraordinary items. net income and pretax income. extraordinary items and prior period adjustments.

income before extraordinary items.

Other comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. is reported pre-tax, with tax expense shown as a separate line item. is non-owner changes in equity that bypass the income statement. all of these answer choices are correct.

is non-owner changes in equity that bypass the income statement. Other comprehensive income is non-owner changes in equity that bypass the income statement. Comprehensive income includes net income plus other comprehensive income. Items of comprehensive income are reported net of tax.

Companies that use IFRS: may report all their assets on the statement of financial position at fair value. are not allowed to net assets (assets 2 liabilities) on their statement of financial positions. may report non-current assets before current assets on the statement of financial position. do not have any guidelines as to what should be reported on the statement of financial position.

may report non-current assets before current assets on the statement of financial position.

The balance sheet is useful for analyzing all of the following except liquidity. solvency. profitability. financial flexibility

profitability.

Using the Balance Sheet analyst can assess ______________ The ability of an enterprise to take appropriate actions to alter the amounts and timing of cash flows to respond to needs and opportunities. Liquidity and solvency affect financial flexibility. Higher financial flexibility = lower risk of failure.

● Financial Flexibility

What are some differences between GAAP and IFRS standards for income statement presentation.

● GAAP Income statement can be single-step or multi-step. IFRS does not specify. ● Reporting of extraordinary items is required under GAAP, not under IFRS ● IFRS requires expenses to be classified by nature or function. GAAP does not follow IFRS classification requirement; SEC requires function ○ Nature of expense - simply to apply, allows reporting of unallocated expenses. ○ Function-of-expense - More relevant than other method. Identifies major cost drivers and their appropriateness to generate revenue. ● IFRS has minimum income statement item requirements. GAAP does not. SEC requires more rigor. ● GAAP does not allow for revaluation of PPE and intangible assets. ● IFRS does not define key measures (income from operations, etc.). SEC defines key measures, provides requirements & limitations for non-GAAP IFRS info. ● IFRS permits revaluation of PPE and limited-life intangible assets, reported as other comp inc. Net effect is more transactions affecting equity but not net income. (Increase in PPE valuation shown as increase in PP&E line item, increase to a valuation reserve in equity) ● Other comprehensive income cannot be displayed within the statement of retained earnings under IFRS.

What are some similarities between GAAP and IFRS standards for income statement presentation.

● Income statement is a required statement in both GAAP and IFRS ● Content and presentation are similar for both ● Both require companies to indicate net income attributable to noncontrolling interest ● Both follow same presentation guidelines for discontinued operations; IFRS defines more narrowly. Working toward joint standard, ● Both have items recognized in equity as part of comprehensive income that do not affect net income. ● Similar options for reporting comprehensive income - Both allow one-statement or two-statement approach for preparing the statement of comprehensive income ● Similar treatment of accounting for impairments of assets held for disposal. ● Similar treatment of accounting for intangibles acquired in a business combination. ● Similar treatment for accounting purposes of costs associated with research and development activities (they are segregated into the two components.)

For major groups of assets and liabilities, companies must disclose the fair value measurement and the fair value hierarchy level of the measurements as a whole, as Level 1, 2, or 3. What are the 3 levels?

● Level 1 - least subjective - based on observable inputs - market prices for identical assets, etc. ● Level 2 - based on market prices for similar assets, etc. ● Level 3 - based on unobservable inputs or company's own data.

Using the Balance Sheet analyst can assess ______________The amount of time expected to elapse until an asset is realized or otherwise converted into cash, or until a liability has to be paid. Higher liquidity = lower risk

● Liquidity

Explain the limitations of the balance sheet.

● Most assets and liabilities are reported at historical cost. May not be as relevant as fair value for some items. ● Judgements and estimates are used to determine many of the items reported in the balance sheet. ● Items of financial value left off - Intangible assets and liabilities left off - Many items are omitted because they cannot be recorded objectively, such as knowledge and skill of employees.

Using the Balance Sheet analyst can assess ______________ The ability of a company to pay its debts as they mature. Higher debt = more risk

● Solvency