Ch. 4 The Income Statement, Comprehensive Income, and the Statement of Cash Flows
EPS
(net income less any preferred stock dividends)/(common shares outstanding (weighted by time outstanding))
what are the requirements of a voluntary change in accounting principles
-GAAP requires that voluntary accounting changes be accounted for retrospectively by revising prior years' financial statements
what is the difference in comprehensive income between GAAP and the IFRS
-an additional OCI item, changes in revaluation surplus, is possible under IFRS. GAAP prohibits revaluations for gains/losses.
What constitutes a (discontinued) operation? When is a component held for sale or disposed of in some other way reported as a discontinued operation?
-in 2014 FASB issued an ASU that defines a discontinued operation as a component of an entity or a group of components. -a component is any part of the company that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company -if the disposal represents a strategic shift that has, or will have, a major effect on a company's operations and financial results
show how a component that is held for sale is reported on the income statement
-loss from operations of discontinued component from begining of reporting period to end of reporting period (including impairment loss if the book value is more more than fair value minus cost to sell) -Income tax benefit (expense) -Loss on discontinued operation note: here the term impairment gain/loss is used over disposal gain/loss
show how a component that has been sold is reported on the income statement
-loss from operations of discontinued component from begining of reporting period to end to disposal (including gain/loss on disposal of the asset) -these two components can be combined or reported seperately -Income tax benefit (expense) -Loss on discontinued operations
What are the four items that show up on the statement of comprehensive income?
-net unrealized holdings gains and losses on investments -gains (losses) from and amendments to post-retirement benefit plans -Deferred gains (losses) from derivatives -gains (losses) from foreign currency translation
What are the minimum disclosure items in interim reporting
-sales, income taxes, and net income -earnings per share -seasonal rev., costs, and expenses -significant changes in estimates for income taxes -discontinued operations and unusual items -contingencies -changes in accounting principles or estimates -information about fair value of financial instruments and the methods and assumptions used to estimate fair values -significant changes in financial position
what are the requirements of a mandated change in accounting principles
-the accounting is either reported retrospectively or FASB may also allow companies to report the cumulative effect on the income of previous years from having used the old method rather than the new method in the income statement of the year of change as a separately reported item below discontinued operations.
gives some special examples of when GAAP must maintain a discrete interim reporting
-treatment of unusual items such as discontinued operations should be reported on the quarter in which they were incurred. -EPS is reported discretely -accounting changes are reported retrospectively in interim reports
it what was is GAAP not discrete in its interim reporting, but rather, is integral
-when an expenditure clearly benefits more than just the period in which it is incurred, the expense should be allocated among the periods benefited on an allocation basis consistent with the company's annual allocation procedures.
What are there difference between IFRS and GAAP requirements of the income statement
1) International standards require certain minimum information to be reported on the face of the income statement. U.S. GAAP has no minimum requirements. 2) International standards allow expenses to be clasified either by function (cost of goods sold, general and administrative) or by natural description (salaries, rent, ect..). SEC regulation require that expenses be classified by function 3) In the United States, the "bottom line" of the income statement is usually called net income or net loss. The descriptive term for the bottom line of the income statement prepared according to international standards is either profit or loss.
What two ways do managers manipulate income
1) income shifting- accelerating/delaying expenses and revenues. Accelerating revenue is know as "channel stuffing" 2) income statement classification- often know was "the big bath," this method moves expenses from the operating section to other sections to "clean up" the balance sheet
what are three categories of accounting changes
1. change in accounting principle 2. change in estimate 3. change in reporting entity
what are the three categories on the statement of cash flows?
1. operating 2. investing 3. financing
true or false? Under GAAP there is a separate classification for extraordinary items.
False, GAAP no longer merits for the reporting of extraordinary items. This was in part because of the confusion around the concept and in part because of GAAP efforts to converge with IFRS, which does not recognize extraordinary items.
true or false: continuing operations strictly report permanent earnings
False: it would be a mistake to assume income from continuing operations reflect permanent earnings entirely. In other words, there may be transitory earnings effects included in income from continuing operations. In a sense, the phrase "continuing" is misleading.
what is the differences between GAAP and IFRS in the statement of cash flows with regards to interest and dividends
GAAP operation activity: dividends received, interest received, interest paid, Investing Activity: Financing Activity: dividends paid IFRS Operating activity: Investing activity: Dividends received, interest received Financing activity: dividends paid, interest paid
difference between GAAP and IFRS interim reporting (see last slide of chapter 4).
IFRS takes a more discrete approach because it requires it requires that a company apply the same accounting policies in its interim financial statements as it applies in its annual financial statements
prior period adjustment
When a material error is found from a previous period, a journal entry that adjusts any balance sheet accounts to their appropriate levels and would account for the income effects of the error by increasing or decreasing the beginning retained earnings balance in a statement of shareholders' equity. (this accounts for the error's effect on prior periods' net income). -prior period adjustments are explicitly stated in the statement of shareholder's equity. -In addition to reporting the prior period adjustment to retained earnings, previous years' financial statements that are incorrect as a result of the error are retrospectively restated to reflect the correction. Also, a disclosure note communicates the impact of the error on prior periods' net income.
restructuring costs
costs associated with shutdown or relocation of facilities or downsizing of operations. This is incurred in connection with: "a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted. -recognized in the period the exit or disposal cost obligation actually is incurred
what are the two methods for reporting the statement of cash flows operating section
direct: cash effect of each operating activity is reported directly in the statement Indirect method: (1) components of net income that do not affect cash are reversed. That means that non-cash revenues and gains are subtracted, while non-cash expenses and losses are added. (2) we make adjustments for changes in operating assets and liabilities during the period that indicate that amounts included as components of net income are not the same as cash flows for those components.
how can comprehensive income be reported
either in a single continuous income statement or two separate, but consecutive statements
what is objective for initial measurement of liability
fair value
when is a component considered "held for sale"
if the situation indicates that the component is likely to be sold within a year
Where is the difference between direct and indirect method of cash flows found
in the operating section only
cash flows from investing activities
include inflows and outflows of cash related to the acquisition and disposition of long-lived assets used in the operations of the business (such as property, plant, and equipment) and investment assets (except those classified as cash equivalents and trading securities).
gains and losses
increases or decreases in equity from peripheral or incidental transactions of an entity
revenues
inflows of resources resulting from providing good or services to customers
pro forma earnings
management's assessment of permanent earnings
what is the difference between inflows and outflows of operating cash?
net cash flows from operating activities
note: when tax rules and GAAP differ regarding the timing of revenue or expense recognition, the actual payment of taxes may occur in a period different from when income tax expense is reported in the income statement.
note: when tax rules and GAAP differ regarding the timing of revenue or expense recognition, the actual payment of taxes may occur in a period different from when income tax expense is reported in the income statement.
What are the two main sub-heading from income from continuing operations
operating income and non-operating income
expenses
outflows of resources incurred while generating revenue. They represent the costs of providing goods or services.
what does non-operating (other) income relate to?
peripheral or incidental activities of the company
How do we account for changes in accounting estimate
prospectively- in current period and in future periods -if the effect of the change is material, a disclosure note is needed to describe the change and its effect on both net income and EPS.
cash flows from financing activities
relate to external financing of the company
How do we account for changes in depreciation, amortization, or depletion method
that is reported prospectively. There must be a clear justification for the change.
How does the Sarbanes-Oxley act affect pro forma
the Sarbanes-Oxley act requires reconciliation between pro forma earnings and earnings determined according to GAAP.
earnings quality
the ability of reported earnings (income) to predict a company's future earnings.
how is other comprehensive income expressed on the statement of shareholder's equity
the cumulative total of OCI is reported as accumulated other comprehensive income (AOCI), an additional component of shareholders' equity that is displayed separately.
what is the fundamental debate regarding interim reporting
the fundamental debate regarding interim reporting centers on the choice between the discrete and integral part approaches.
intraperiod tax allocation
the process of associating income tax effects with the income statement components that create those effects
comprehensive income
the total change in equity for a reporting period other than from transactions with owners
what is the purpose of the statement of cash flows
to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period
what is the purpose of the income statement
to summarize the profit-generating activities that occurred during a particular reporting period
transitory earnings
transitory earnings effects result from transactions or events that are not likely to occur again in the foreseeable future or that are likely to have a different impact on earnings in the future.
true or false. When net income and comprehensive income are identical, a statement of comprehensive income is not required.
true
true or false? Companies must report both net income and comprehensive income and reconcile the difference between the two
true
true or false? net income is a part of comprehensive income
true
true or false? the extraordinary income has now been eliminated from GAAP
true
true or false? when an estimate is changed, the company should record the effect of the change in the period the estimate is changed rather than by restating prior years' financial statements to correct the estimate
true
true or false? in addition to reporting OCI that occurs in the current reporting period, we must also report these maounts on a cumulative basis in the balance sheet.
true, this is consistent with the way we report net income that occurs in the current reporting period in the income statement and also report accumulated net income (that hasn't been distributed as dividends) in the balance sheet as retained earnings under SE. -OCI is reported on the balance sheet as accumulated other comprehensive income (AOCI).
when does a tax benefit occur within a discontinued operations
when there is a loss, which reduces taxable income
how does a component "held for sale" shift its position/nature on the balance sheet
a component held for sales is reports its assets and liabilities both as current "held for sale" and depreciation and amortization does not occur. They are classified as current because the company expects to complete the transfer of these assets and liabilities i the next fiscal year.
non-cash investing and financing activities with regard to the SCF
any significant non-cash investing and financing activities are reported either on the face of the SCF or in a disclosure note. -example: acquisition of equipment for a note payable
