ACCT (3110) - Chapter 4
Quality of Earnings
Earnings management might negatively affect this if it distorts information in a way that is less useful for predicting future earnings and cash flows.
Appropriated Retained Earnings
Earnings that may be restricted.
Unusual Gains & Losses
Effects of a strike are classified as what irregular item?
evaluate the past performance of the company
Examining revenues and expenses on the income statement helps users...
Transaction Approach
Focuses on the income-related activities that have occurred during the period.
In the year discovered, they report the error as an adjustment to the beginning balance of retained earnings.
How are prior period adjustments handled?
In the period of change if they affect only that period, or in the period of change and future period if the change affects both. WE DO NOT RETROSPECT CHANGE IN ESTIMATES AS THEY ARE NOT ERRORS**
How does a company account for change in estimates?
A retrospective adjustment; the company records the cumulative effect of the change for prior periods as an adjustment to beginning retained earnings of the earliest year presented.
How does a company recognize change in accounting principles?
Comprehensive Income
Includes all changes in equity during a period except those resulting from investment by owners and distributions to owners.
Gains
Increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.
Revenues
Inflows or other 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 major operations.
provide a basis for predicting future performance
Information about past performance helps users to determine trends that might...
the risk or uncertainty of achieving cash flows
Information on various components of income - revenues, expenses, gains and losses - might highlight...
[1] REVENUES: (a) Sales (b) Less Sales Discounts/Allowances (c) Less Sales Returns (d) Net Sales [2] Cost Of Goods Sold [3] GROSS PROFIT [4] OPERATING EXPENSES: (4a) Selling Expenses (4b) Admin Expenses [5] INCOME FROM OPS [6] NonOperating Income (6a) Other Revenues/Gains (6b) Other Losses/Expenses (6c) INCOME BEFORE INCOME TAX [7] Income Tax [8] NET INCOME [9] EARNINGS PER SHARE
List the general items found under the operating section of the multi-step income statement
[1] Operating Activities [2] Nonoperating Activities [3] Income Tax [4] Discontinued Operations [5] Noncontrolling Interest [6] Earnings Per Share **Extraordinary Items removed by FASB 12/31/15. These are now listed under other items (gains/losses)
List the major categories of a Multi-Step Income Statement
Unusual Gains & Losses
Loss on the write-down or write off of receivables is classified as what irregular item?
prior reporting adjustments
Making proper entries in the accounts to correct errors and reporting the corrections.
Change in estimates
Normal, recurring corrections and adjustments such as depreciable life
Discontinued Operations
Occurs when (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.
Expenses
Outflows or other using-up of assets of an entity or incurrences of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's major operations.
Restructuring Charge
Relates to a major reorganization of company affairs, such as costs associated with employee layoffs, plant closing costs, write-off of assets, and so on.
Non controlling Interest
Reported as a separate item below net income or loss as an allocation of the net income or loss.
Statement of Stockholder's Equity
Reports the changes in each stockholders' equity account and in total stockholders' equity during the year
Unusual Gains & Losses
Restructuring charges are classified as what irregular item?
Extraordinary Items (now other gains/losses)
Results from a major casualty, expropriation, or a prohibition under a newly enacted law or regulation.
Unusual gains or losses
Shown in separate section above income before income before income tax.
Discontinued Operations
Shown in separate section after continuing operations but before other net income; shown net of tax
Current Operating Performance approach
Some analysts argue that the most useful income measure reflects only regular and recurring revenue and expense elements; that some irregular items do not reflect a company's future earning power.
Intraperiod Tax Allocation
The allocation of tax to an item within a period.
Unusual Gains & Losses
The exchange of currency relating to major devaluation and revaluations is classified as what irregular item?
Earnings Per Share
The net income minus preferred dividends, divided by the weighted average of common shares outstanding
Earnings Management
The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings.
Non controlling Interest
The portion of equity interest in a subsidiary not attributable to the parent company.
Income Statement
The report that measures the success of company operations for a given period of time.
Capital Maintenance Approach
Under this approach, a company determines income for the period based on the change in equity after adjusting for capital contributions.
Modified All-Inclusive Concept
Under this approach, companies record most items, including unusual or irregular ones, as part of net income.
[1] Companies omit items that cannot be reliably measured. [2] Income numbers are affected by the accounting methods used. [3] Income measurement involves judgement.
What are limitations of the income statement?
[1] Unusual Gains & Losses [2] Discontinued Operations [3] Noncontrolling Interest
What are the 3 categories of irregular items on the income statement?
Information that helps them predict the amounts, timing, and uncertainty of future cash flows
What does the income statement provide investors and creditors with?
[1] Sales Revenue [2] Cost of Goods Sold [3] Gross Profit [4] Operating Expenses [5] Net Income [6] Other comprehensive income [7] Comprehensive income
What's listed on a single step comprehensive income statement?
Changes in accounting principle
A change in the method of inventory pricing from FIFO to average-cost, or a change in construction contracts from % of Completion to the completed-contract method.
Unusual Gains & Losses
Adjustments of accruals on long-term contracts are classified as what irregular item?
Change in accounting principle
Change from one generally accepted accounting principle to another.
Changes in accounting estimates
Companies changing the useful life of depreciable assets, uncollectible receivables, inventory obsolescence, is referred to as change in....
Losses
Decreases in equity from peripheral or incidental transactions of an entity except those that result from expenses or distribution to owners.
Component
the lowest level at which a company can clearly distinguish the operations and cash flows from the rest of the company's operations.