Chapter 4 Intermediate Accounting I: Vocabulary - Income Statement and Related Information

Companies often restrict retained earnings to comply with contractual requirements, board of directors' policy, or current necessity. Generally, companies disclose in the notes to the financial statements the amounts of restricted retained earnings. In some cases, companies transfer the amount of retained earnings restricted to an account titled __. The retained earnings section may therefore report two separate amounts—(1) retained earnings free (unrestricted) and (2) retained earnings appropriated (restricted). The total of these two amounts equals the total retained earnings.

Appropriated Retained Earnings

__ are inherent in the accounting process. For example, companies estimate useful lives and salvage values of depreciable assets, uncollectible receivables, inventory obsolescence, and the number of periods expected to benefit from a particular expenditure. Not infrequently, due to time, circumstances, or new information, even estimates originally made in good faith must be changed. A company accounts for such __ in the period of change if they affect only that period, or in the period of change and future periods if the change affects both.

Changes in accounting estimates, changes in estimates

Changes in accounting occur frequently in practice because important events or conditions may be in dispute or uncertain at the statement date. One type of accounting change results when a company adopts a different accounting principle. __ include a change in the method of inventory pricing from FIFO to average-cost, or a change in accounting for construction contracts from the percentage-of-completion to the completed-contract method. A company recognizes a __ by making a retrospective adjustment to the financial statements. Such an adjustment recasts the prior years' statements on a basis consistent with the newly adopted 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.

Changes in accounting principle, change in accounting principle

__ includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. __, therefore, includes the following: all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders' equity. These items—non-owner changes in equity that bypass the income statement—are referred to as __.

Comprehensive income, Comprehensive income, other comprehensive income

multiple-step income statement 7. __ is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding.18

Earnings per share

__ are nonrecurring material items that differ significantly from a company's typical business activities. __ items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence.

Extraordinary items, extraordinary items

The most common alternative to the transaction approach is the __ to income measurement. Under this approach, a company determines income for the period based on the change in equity, after adjusting for capital contributions (e.g., investments by owners) or distributions (e.g., dividends). The main drawback associated with the __ is that the components of income are not evident in its measurement.

capital maintenance approach, capital maintenance approach

A __ occurs when two things happen: (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.

discontinued operations

multiple-step income statement 4. __. Material gains or losses resulting from the disposition of a component of the business.

discontinued operations

What is __? It is often described as the planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings.

earnings management

multiple-step income statement 5. __. Unusual and infrequent material gains and losses.

extraordinary items

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

income statement

multiple-step income statement 3. __ . A section reporting federal and state taxes levied on income from continuing operations.

income tax

Companies report discontinued operations on the income statement net of tax. The allocation of tax to this item is called __, that is, allocation within a period. It relates the income tax expense (sometimes referred to as the income tax provision) of the fiscal period to the specific items that give rise to the amount of the income tax provision.

intraperiod tax allocation

The accounting profession has adopted a __. In this approach, companies record most items, including unusual or irregular ones, as part of net income. In addition, companies are required to highlight these items in the financial statements so that users can better determine the long-run earning power of the company. These income items fall into four general categories: 1. Unusual gains and losses 2. Discounted operations 3. Extraordinary items 4. Noncontrolling interest

modified all-inclusive concept

A company like The Coca-Cola Company owns substantial interests in other companies. Coca-Cola generally consolidates the financial results of these companies into its own financial statements. In these cases, Coca-Cola is referred to as the parent, and the other companies are referred to as subsidiaries. __ is then the portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

noncontrolling interest

multiple-step income statement 6. __. Allocation of income to __ shareholders.

noncontrolling interest, noncontrolling

multiple-step income statement 2. __ SECTION. A report of revenues and expenses resulting from secondary or auxiliary activities of the company. In addition, special gains and losses that are infrequent or unusual, but not both, are normally reported in this section. Generally these items break down into two main subsections: (a) Other Revenues and Gains. A list of the revenues recognized or gains incurred, generally net of related expenses, from __ transactions. (b) Other Expenses and Losses. A list of the expenses or losses incurred, generally net of any related incomes, from __ transactions.

nonoperating, nonoperating, nonoperating

multiple-step income statement 1. __SECTION. A report of the revenues and expenses of the company's principal operations. (a) Sales or Revenue Section. A subsection presenting sales, discounts, allowances, returns, and other related information. Its purpose is to arrive at the net amount of sales revenue. (b) Cost of Goods Sold Section. A subsection that shows the cost of goods that were sold to produce the sales. (c) Selling Expenses. A subsection that lists expenses resulting from the company's efforts to make sales. (d) Administrative or General Expenses. A subsection reporting expenses of general administration.7

operating

What are the seven sections of a multi-step income statement?

operating, non-operating, income tax, discontinued operations, extraordinary items, noncontrolling interest, earnings per share

Companies correct errors by making proper entries in the accounts and reporting the corrections in the financial statements. Corrections of errors are treated as __, similar to changes in accounting principles. Companies record a correction of an error in the year in which it is __. 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.

prior period adjustments, discovered

Earnings management negatively affects the __ if it distorts the information in a way that is less useful for predicting future earnings and cash flows.

quality of earnings

The impact of changes in accounting principle and error corrections are debited or credited directly to __ for the amounts related to prior periods.

retained earnings

The __ statement consists of just two groupings: revenues and expenses.

single-step

In addition to a comprehensive income statement, companies also present a __ (often referred to as statement of changes in stockholders' equity). This statement reports the changes in each stockholders' equity account and in total stockholders' equity during the year.

statement of stockholders' equity

Net income results from revenue, expense, gain, and loss transactions. The income statement summarizes these transactions. This method of income measurement, the __, focuses on the income-related activities that have occurred during the period.

transaction approach