Interm Acct Ch 4

Cash inflows include cash received from: .

Customers from the sale of goods or services. Interest and dividends from investments

Cash outflows include cash paid for:

The purchase of inventory. Salaries, wages, and other operating expenses. Interest on debt. Income taxes.

"Special Charge" practice sometimes is referred to as...

"big bath" accounting, a reference to cleaning up company balance sheets.

Two major methods of income manipulation are...

(1) income shifting and (2) income statement classification.

Investing activities involve the acquisition and sale of :

(1) long-term assets used in the business and (2) nonoperating investment assets.

Toward this end, the statement of cash flows classifies all transactions affecting cash into one of three categories:.

(1) operating activities, (2) investing activities, and (3) financing activities

2 income statement formats:

1. single-step 2. multiple-step

Restructuring costs are 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

other unusual items:

Goodwill impairments and asset impairments.

the presentation of discontinued operations is mandated as follows:

Income from continuing operations before income taxes $xxx Income tax expense xx Income from continuing operations xxx Discontinued operations, net of $xx tax (expense)/benefit xx Net income $xxx

_________ often is the classification heading companies use in the income statement for nonoperating items.

Other income (expense)

intraperiod tax allocation-

The process of associating income tax effects with the income statement components that create those effects is referred to as

The multiple-step format reports ...

a series of intermediate subtotals such as gross profit, operating income, and income before taxes.

"channel stuffing" -

accelerates revenue recognition by persuading distributors to purchase more of your product than necessary near the end of a reporting period

Income shifting is achieved by ...

accelerating or delaying the recognition of revenues or expenses

Pro forma earnings -

actual (GAAP) earnings reduced by any expenses the reporting company feels are unusual and should be excluded.

• Accumulated other comprehensive income (AOCI) -

amount of other comprehensive income (non-owner changes in equity other than net income) accumulated over the current and prior periods.

The payment of interest to a creditor is classified as...

an operating activity

A component is ....

any part of the company, such as an operating segment or subsidiary, that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.

The assets and liabilities of the component considered held for sale are reported ...

at the lower of their book value or fair value minus cost to sell; because it's not in use, an asset classified as held for sale is no longer reported as part of property, plant, and equipment or intangible assets and is not depreciated or amortized.

A primary advantage of the multiple-step format is that...

by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. Similarly, the classification of expenses by function also provides useful information

financing activities Cash inflows occur when...

cash is borrowed from creditors or invested by owners.

financing activities Cash outflows occur when...

cash is paid back to creditors or distributed to owners.

Statement of cash flows (SCF) -

change statement summarizing the transactions that caused cash to change during the period.

gains and losses result from ...

changes in equity that do not result directly from operations but nonetheless are related to those activities

We make adjustments for changes in assets and liabilities that indicate that ...

components of net income are not the same as cash flows.

Deferred gains (losses) from derivatives are sometimes called...

derivative mark-to-market adjustments or changes in fair value of derivative

Two generally accepted formats can be used to report operating activities, the:

direct method and the indirect method.

By the direct method, the cash effect of each operating activity is reported ...

directly in the SCF.

A component or group of components that has been sold or disposed of in some other way, or is considered held for sale, is reported as a ________________________ if the disposal represents a strategic shift that has, or will have, a major effect on a company's operations and financial results

discontinued operation

Any significant noncash investing and financing activities (that is, noncash exchanges) are reported ....

either on the face of the SCF or in a disclosure note

Restructuring costs are recognized in the period the _________ obligation actually is incurred

exit or disposal cost

Single-step -

income statement format that groups all revenues and gains together and all expenses and losses together.

Multiple-step -

income statement format that includes a number of intermediate subtotals before arriving at income from continuing operations.

we include the ______________ in a separate presentation for ___________ rather than report it as part of __________ related to continuing operations.

income tax effect; discontinued operations; income tax expense

Gains and losses are...

increases or decreases in equity from peripheral or incidental transactions of an entity.

Operating activities -

inflows and outflows of cash related to the transactions entering into the determination of net operating income.

Revenues are ...

inflows of resources resulting from providing goods or services to customers

The purpose of the SCF is to provide ...

information about the cash receipts and cash disbursements of an enterprise that occurred during a period.

information about cash flows from operating activities, when combined with information about cash flows from other activities, can provide...

information helpful in assessing future profitability, liquidity, and long-term solvency

Investing activities -

involve the acquisition and sale of long-term assets used in the business and non-operating investment assets.

Comprehensive income includes ...

net income as well as a few gains and losses that are not part of net income and are considered other comprehensive income items instead.

When a discontinued component is held for sale (sold within 1 yr), The income effects of the discontinued operation still are reported, but the two components of the reported amount are modified as follows:

o 1. Income or loss from operations (revenues, expenses, gains and losses) of the component from the beginning of the reporting period to the end of the reporting period. o 2. An "impairment loss" if the book value, sometimes called carrying value or carrying amount, of the assets of the component is more than fair value minus cost to sell.

When the discontinued component is sold before the end of the reporting period, the reported income effects of a discontinued operation will include two elements

o 1. Income or loss from operations (revenues, expenses, gains, and losses) of the component from the beginning of the reporting period to the disposal date. o 2. Gain or loss on disposal of the component's assets

In the indirect method, two types of adjustments to net income are needed:

o First, components of net income that do not affect cash are reversed. That means that noncash revenues and gains are subtracted, while noncash expenses and losses are added o Second, 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

Financing Cash outflows include cash paid to:

o Owners in the form of dividends or other distributions. o Owners for the reacquisition of shares previously sold. o Creditors as repayment of the principal amounts of debt (excluding trade payables that relate to operating activities).

Financing Cash inflows include cash received from:

o Owners when shares are sold to them. o Creditors when cash is borrowed through notes, loans, mortgages, and bonds.

Cash outflows from investing activities include cash paid for:

o The purchase of long-lived assets used in the business. o The purchase of investment securities like stocks and bonds of other entities (other than those classified as cash equivalents and trading securities). o Loans to other entities.

cash inflows from these transactions are considered investing activities:

o The sale of long-lived assets used in the business. o The sale of investment securities (other than cash equivalents and trading securities). o The collection of a nontrade receivable (excluding the collection of interest, which is an operating activity).

Expenses are ...

outflows of resources incurred while generating revenue

Interest and dividend _________ usually are reported as financing activities.

payments

Nonoperating income relates to ...

peripheral or incidental activities of the company.

The Sarbanes-Oxley Act requires reconciliation between...

pro forma earnings and earnings determined according to GAAP.

The purpose of the statement of cash flows is to ...

provide information about the cash receipts and cash disbursements of an enterprise that occurred during the period.

Income tax expense -

provision for income taxes; reported as a separate expense in corporate income statements.

Interest and dividends _________ normally are classified as investing activities.

received

Earnings quality -

refers to the ability of reported earnings (income) to predict a company's future earnings.

Diluted EPS -

reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised

Operating income includes...

revenues and expenses directly related to the primary revenue-generating activities of the company

The components of income from continuing operations are ...

revenues, expenses (including income taxes), gains, and losses, excluding those related to discontinued operations

Taxable income comprises ...

revenues, expenses, gains, and losses as measured according to the regulations of the appropriate taxing authority.

• the ______, ________, ______, _______, and _______ related to a ______________ must be removed from continuing operations and reported separately for all years presented

revenues, expenses, gains, losses, and income tax; discontinued operation

earnings per share (EPS) -

shows the amount of income earned by a company expressed on a per share basis.

Restructuring costs include costs associated with ...

shutdown or relocation of facilities or downsizing of operations.

Gains and losses from the sale of investments often can ...

significantly inflate or deflate current earnings

By the indirect method we arrive at net cash flow from operating activities indirectly by :

starting with reported net income and working backwards to convert that amount to a cash basis.

Interest and gains or losses are only _______ related to normal operations. These we refer to as __________.

tangentially ; nonoperating items

An example of a significant noncash investing and financing activity is:

the acquisition of equipment (an investing activity) by issuing either a long-term note payable or equity securities (a financing activity).

report accumulated other comprehensive income (AOCI) in ...

the balance sheet

we report unusual and infrequent events that have a material impact on a company's financial statements by...

the before-tax effect as a line item included in continuing operations with no separate earnings per share disclosure

By the direct method, we report ...

the components of net income on a cash basis.

Discontinued operations -

the discontinuance of a component of an entity whose operations and cash flows can be clearly distinguished from the rest of the entity.

Financing activities relate to ...

the external financing of the company.

The most common income statement classification manipulation involves ...

the inclusion of recurring operating expenses in "special charge" categories such as restructuring costs

The two income elements can be combined or reported separately, net of their tax effects; if the amounts are combined and there is an impairment loss...

the loss must be disclosed, either parenthetically on the face of the statement or in a disclosure note

A revenue issue affecting earnings quality is ...

the timing of revenue recognition

Comprehensive income -

the total change in equity for a reporting period other than from transactions with owners; traditional net income plus other non-owner changes in equity.

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

Goodwill impairments and asset impairments involves....

what is referred to as impairment losses or charges.

When do companies often voluntarily provide a pro forma earnings number ?

when they announce annual or quarterly earnings.