FR1 Chapter 3

net financing costs

(interest expense-less interest income) companies can buy or sell bonds, its not included in day to day operations but it does help the company operate

diluted eps

(net income- preferred dividends + adj for diluted securities)/ weighted avg # of common shares for assuming max diluation

basic eps

(net income- preferred dividends)/ weighted avg # of common shares

comprehensive income

Change in equity from transactions and events other than transactions with owners Think about it like a second type of net income that results from special gains/losses that are not included in the income statement

single step income statement

Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.

pensions, unrealized holding gain/losses on certain types of debt investments, unrealized gains/losses on certain derivatives, foreign currency translation adjustments

OCI represents net income from valuation adjustments in four specific sources:

a component of an entity or group of components has been sold, disposed of, or is considered held for sale and disposal represents a strategic shift that has or will have a major effect on the company's operations and financial results

a discontinued operation has to meet these two requirements:

earnings quality

ability of reported earnings to predict a company's future cash flows (includes temporary and permanent earnings)

change in accounting estimates

account for change in estimates on a prospective basis (forward looking only)

low probability of cash realization in the short run, transitory with high volatility, not part of normal operations

common characteristics of OCI items:

comprehensive income= net income + OCI

comprehensive income formula

geographical, line of business, method investment

examples of discontinued operations that could have a major effect on the company's operations and financial results: a major ____________ area, a major ______________, a major equity ______________, other major parts of an entity

3

how many years or quarters of financial performance does the income statement have to report

allocated over several periods

if it is not possible to establish a casual relationship between revenues and expenses, then expenses are:

in the same period that the related revenue is recognized

if it is possible to establish a casual relationship between revenues and expenses, then expenses are reported:

common tools to manage earnings

income smoothing (create smoother pattern in earnings over time), classification shifting (shift operating expense to a non-operating expense), "borrow" from tomorrow to meet today's earnings target

gains

increase in equity from an entity's peripheral or incidental transactions. also arise from all other transactions and other events and circumstances affecting the entity, except those that result from revenues or investments by owners. we often think of these as events that didn't happen on a day to day basis, these are typically in the non-operating section

revenue

inflows of resources resulting from providing goods or services to customers. generated from activities that constitute the entity's ongoing major or central operations. EX: a clothing retailer records revenue when it sells clothing to customers because this translation is an inflow that occurs from its major operations

sale of investments, litigation settlements, selling equipment or buildings

list 3 examples of unusual or infrequent items: gain or losses on:

net financing costs, infrequent

major accounts listed in the non operating section are ____________, dividend/royalty revenue, unusual or __________ items

cost of goods sold, general and administrative expenses

major accounts listed in the operating section are sales, _________________, selling expenses, ____________________, other operating expenses

error correction

material error corrected through a prior period adjustment, record in the period error is discovered.

multi step income statement

more commonly used, reports several critical subtotals before getting to net income (not all one big lump), separates into revenues/gains and expenses/losses into operating and non operating sections

casualty loss, impairment of assets, unusual sale

other unusual or infrequent items include:

expenses

outflows of resources incurred while generating revenue. used for activities that constitute the entity's ongoing major or central operations. ex: a clothing retailer records the cost of the clothing that it sold as an expense because this transaction is an outflow related to its major operations

statement of stockholders' equity

presents sources and changes in stockholders' equity components from beginning to end of reporting period. these include paid in capital (common stock, preferred stock, and APIC), retained earnings, and accumulated OCI

EPS (earnings per share)

ratio that indicates the amount of income earned by a company expressed on a per share basis

balance sheet, shareholders' equity

report OCI on a cumulative basis in the _________________. report as an additional component of _______________. consistent with how accumulated net income is reported in the balance sheet as retained earnings

a major change that the company took in their operations

restructuring costs show:

net income and eps

section of the income statement that reports net income and several computations of the amount of earnings available to each shareholder in a company

income tax provision

section of the income statement that reports the income taxes related to continuing operations from all jurisdictions in which the entity operates (US federal taxes, US state taxes, income taxes levied by foreign countries)

discontinued operations

section of the income statement that reports the results of operations for a component of an entity that are or will be discontinued

non operating section

section of the income statement that reports the revenues and expenses related to any secondary operations of the entity. arise from peripheral or incidental transaction

operating section

section of the income statement that reports the revenues and expenses related to the entity's principle operations. also called major or central operations

income statement (also known as consolidated statement of earnings, consolidated statement of income)

summarizes a company's financial performance over a period of time

the use of the expense

the functional approach to classify expenses refers to classification by: - ex: cost of goods sold, sales expense, administration expenses

the source of the expense

the nature approach to classify expenses refers to classification by: -ex: payroll costs, costs of raw materials used, depreciation expense

single, continuous statement of comprehensive income or two separate but consecutive statements

there is some flexibility with reporting comprehensive income. you can report it in two ways:

restructuring costs and other unusual or infrequent items

unusual or infrequent items include:

change in accounting principle

voluntary change in accounting principle (retrospective adjustment (rewrite the history))

operating section, non operating section, income tax provision, discontinued operations, net income and EPS

what are the five common sections of a multi step income statement?

revenue, expenses, gains, losses

what are the four primary elements of the I/S operating section

single step and multi step

what are the two allowable income statement formats under GAAP?

basic and diluted

what are the two types of eps

other comprehensive income

what does OCI stand for

harder to understand performance

what is a disadvantage of using the single step income statement?

more useful to evaluate performance

what is an advantage of using a multi step income statement?

straightforward and easy to understand

what is an advantage of using the single step income statement?

income or loss from operations of the component from the beginning of the reporting period to the end of the reporting period and an impairment loss if the book value of the assets of the component is more than the fair value minus cost to sell

when the discontinued component has not been sold when the reporting period ends, the income effects are reported but modified to include:

income or loss from operations of the component from the beginning of the reporting period to the disposal date and a gain or loss on disposal of the component's assets

when the discontinued component is sold before the end of the reporting period, the income effects will include:

losses

decrease in equity from an entity's peripheral or incidental transactions. also arise from all other transactions and other events and circumstances affecting the entity, except those that result from expenses or distribution to owners

disposed of, held for sale

discontinued operations are either ______________ by the end of the reporting period or ____________ at the end of the reporting period. includes any gain or loss from the actual disposal of the component of the entity

when the discontinued component is sold before the end of the reporting period or when the discontinued component has not been sold when the reporting period ends

discontinued operations are presented on the income statement in two ways: