Intermediate Accounting 3313 (Elsie Ameen) Ch. 4

20. What is the formula for basic earnings per share? (pg 188)

(Net Income - Preferred Dividends) / Weighted average shares of C/S outstanding Public companies are required to report EPS on the face of the income statement.

2. The book (page 172) describes the income statement as a change statement. What does this mean? What change does the income statement report?

A change statement reports changes that occurred during a particular reporting period. The income statement reports the changes in shareholders' equity (retained earnings) that occurred during the reporting period as a result of revenues, expenses, gains and losses.

12. The FASB defines a discontinued operation as a component of an entity or a group of components. What is a component? (pg 183)

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.

13. List several examples of disposal that represent possible strategic shifts. (page 183)

A strategic shift has or will have a major effect on a company's operations and financial results. Examples: disposal of operations in a geographical area, a major line of business, a major equity method investment, or other major parts of the business.

21. How are net income, other comprehensive income and comprehensive income related? (pg 189) (The actual items included in other comprehensive income are not covered in ACCT 3313.)

Comprehensive income = total change in equity for a reporting period other than from transactions with owners. Comprehensive income = Net Income + Other Comprehensive Income (OCI) OCI = other gains and losses that change owners' equity but are not included in traditional net income. Examples of OCI: Unrealized holding gains/losses on Available for Sale Securities; gains/losses from changes to pension plans; deferred gains/losses on derivatives; gains/losses from foreign currency translation.

15. What two elements are reported on the income statement if the component has not been sold by the end of the period? (pg 184)

Income/loss from operations of component from beginning to end of reporting period. An impairment loss if: Book Value (Carrying value) > Fair value minus cost to sell

14. What two elements are reported on the income statement if the component has been sold by the end of the period? (pg 183)

Income/loss from operations of the component from beginning of the reporting period to the disposal date. Gain/Loss on disposal.

16. If a component is classified as held for sale (likely to be sold within a year), what value is reported for the assets of the component on the balance sheet? (pg 185)

Lower of book value or fair value minus costs to sell. Assets are not reported as PP&E and not depreciated or amortized. The assets and liabilities are reported as current assets and liabilities.

6. Which format do companies use more often, the single-step or multiple-step income statement? 176)

Multiple-step is used most often by large companies.

11. Should all items of nonoperating revenues/expenses and gains/losses be regarded as transitory? (pg 181)

No, some revenues and expenses such as interest and dividend revenue or expense will occur each period. Gains and losses on the sale of investments also cannot be assumed to occur on a regular basis.

9. Should all items of revenue and expense included in operating income be considered part of a company's permanent earnings? Why or why not? (pg 178)

Not necessarily. Operating expenses may include some unusual items that may or may not continue into the future. For example, restructuring costs, goodwill impairment and long-lived asset impairment may or may not recur. Revenues may also include transitory items (such as revenues in the current year from a major customer who will not continue to buy from company).

3. Within income from continuing operations, companies may choose to separate operating income from nonoperating income. How does a company decide whether an item (revenue/expense/gain/loss) is operating or nonoperating? Give examples of operating versus nonoperating items. (pg 174)

Operating income includes revenues and expenses directly related to the primary revenue-generating activities of the company. Nonoperating income relates to peripheral or incidental activities of the company. Operating income: for a manufacturing company includes sales revenues from selling the products it manufactures as well as all expenses related to this activity. It might also include gains and losses from the selling equipment and other assets used in manufacturing process.

19. How are error corrections reported in the financial statements? (Assume the error occurred in an earlier period and the company discovered it in the current period.) (pg 188)

Prior period adjustment - must correct prior years' financial statements.

18. How are changes in accounting estimate reported in the income statement? Give several examples of changes in estimates. (pg 187)

Prospectively - change current and future financial statements using new information. Examples: bad debt expense, salvage value, estimated useful life, and depreciation method.

7. What does the term "earnings quality" mean? (pg 177)

Refers to the ability of reported earnings (income) to predict a company's future earnings. The relevance of any historical-based financial statement hinges on its predictive value.

10. What are restructuring costs? When are they reported as an expense? Should restructuring costs be considered permanent or transitory earnings? Why? (pgs 179-180)

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. Restructuring costs are recognized in the period the exit or disposal cost obligation actually is incurred. The frequency with which a company incurs restructuring costs should be taken into consideration to determine whether these are permanent or transitory earnings.

17. How are the effects of voluntary changes in accounting principles generally reported in the income statement? (Note: there are exceptions to the general rule.) (pg 186)

Retrospectively - recast financial statements of earlier periods being presented using the new principle. A change in accounting principle occurs when a company changes from one GAAP to another.

4. What is the format for the single-step income statement? What is the primary advantage of this format? (pp 175-176)

This format lists all the revenues and gains included in income from continuing operations. Then expenses and losses are grouped, subtotaled, and subtracted - in a single step - from revenues and gains to derive income from continuing operations. Does not separate operating and nonoperating items. Primary advantage is simplicity (does not require that revenues and expenses be classified or prioritized.)

5. What is the format for the multiple-step income statement? What are the advantages of this format? (pp 175-176)

This format reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes. Primary advantage is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. It also highlights relationships such as gross profit (relationship between sales and COGS).

1. What is the purpose of the income statement?

To summarize the profit-generating activities that occurred during a particular reporting period.

8. What is the difference between permanent earnings and transitory earnings? (pg 177)

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. Permanent earnings result from transactions that are likely to occur on a regular basis and have a similar effect on earnings.