Accounting Exam 2 Study Guide Chapter 4 Income Statement and Related Information o Income Statement the report that measures the success of company operations for a given period of time o Usefulness Evaluate the past performance the company Provide a basis for predicting future performance Help assess the risk or uncertainty of achieving future cash flows o Limitations Companies omit items from the income statement that they cannot measure reliably Income numbers are affected by the accounting methods employed Income measurement involves judgment o Earnings management negatively affect quality of earnings o Elements of Income Statement 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 ongoing major or central operations Expenses outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods rendering services or carrying out other activities that constitute an entity s ongoing major or central operations Gains increases in equity net assets from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners Losses Decreases in equity net assets from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners o Single Step Income Statement Two groupings revenues and expenses Advantages Simple presentation No implication that one item is more important o Multi Step Income Statement More than two groupings Separation of operating and non operating activities Classification of expenses by function Components Operating Section o Sales Revenue o Cost of Goods Sold o Selling Expenses o Administrative General Expenses Non operating Section o Other Revenues and Gains o Other Expenses and Losses Income Tax Discontinued Operations Extraordinary Items Earnings Per Share Natural Expense Classification manufacturing merchandising companies Functional Expense Classification retail stores Three Subtotals Net Sales Revenue Gross Profit Income from Operations o Reporting Irregular Items Current operating performance approach most useful income measure reflects only regular and recurring revenue and expense elements Modified all inclusive concept companies must record most items including irregular ones as part of net income o Irregular Items Discontinued Operations occurs when A company eliminates the results of operations and cash flows of a component from its ongoing operations No significant continuing involvement in the component after the disposal transaction Reported net of tax o Gain loss on disposal o Results of operations of component Extraordinary Items nonrecurring material items that are Unusual in Nature Infrequent Reported net of tax Unusual Gains and Losses unusual OR infrequent Reported above Income loss before extraordinary items Prohibited net of tax treatment Changes in Accounting Principle Retrospective adjustment to retained earnings Changes in Estimates Adjust in present and future not retrospective Corrections of Errors treated like prior period adjustments o Special Reporting Issues Intra period Allocation relates income tax expense to the specific items that give rise to the amount of the tax provision Used for Income from continuing operations Discontinued operations Extraordinary items Earnings per Share Net Income Preferred Dividends Weighted Average Common Shares Outstanding Retained Earnings Statement often restricted May report two separate amounts o Retained earnings free unrestricted o Retained earnings appropriated restricted TOTAL retained earnings Comprehensive Income includes Revenues Expenses Losses Gains Other Comprehensive Income non owner changes in equity that bypass the income statement reported in 3 ways o Second Income Statement o Combined Statement of Comprehensive Income o Part of Statement of Stockholders Equity Chapter 5 Balance Sheet and Statement of Cash Flows BALANCE SHEET Balance Sheet Statement of Financial Position reports assets liabilities and stockholders equity of a business enterprise at a specific date o Usefulness Liquidity describes the amount of time expected to elapse until an asset is converted to cash or a liability has to be paid Solvency ability of a company to pay its debts as they mature Financial Flexibility ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so that is can respond to unexpected needs and opportunities o Limitations Historical Cost Irrelevant Judgments and estimates Unreliable Omission of items of financial value o Classifications ASSETS Current Assets cash and other assets a company expects to convert into cash sell or consume in one year or operating cycle whichever is longer listed by order of liquidity o Cash and cash equivalents currency demand deposits and short term highly liquid investments that will mature in 3 months or less o Short Term Investments Held to maturity Current or Noncurrent Amortized Cost Trading Current ONLY Fair Value Available for Sale Current or Noncurrent Fair Value o Receivables o Inventories Basis of valuation lower of cost or market Cost flow assumption LIFO FIFO o Prepaid Expenses Non Current Assets o Long term Investments 4 types Investments in securities Investments in tangible fixed assets not used in operations Special funds sinking pension etc Investments in nonconsolidated subsidiaries or affiliated companies o Property Plant and Equipment Land None Building Depreciation Equipment Depreciation Natural Resources Depletion o Intangible Assets Limited Life Amortized Indefinite Life Tested for Impairment LIABILITIES Current Liabilities o Payables o Unearned Revenues o Current Maturities of Long Term Debt Long Term Liabilities o Financing Obligations bonds o Ordinary operating obligations pension deferred tax o Occurrence depending obligations warrantees OWNERS EQUITY Capital Stock par value authorized issued and outstanding share amounts Paid in Capital excess amounts paid above par Retained Earnings o Un appropriated amount available for dividend distribution o Restricted bond loan requirements o Treasury Stock re acquired shares as reduction of Retained Earnings o Format Account Form Assets Liabilities Stockholders Equity Report Form Assets Liabilities Stockholders Equity STATEMENT OF CASH FLOWS Statement