ACCT 3723: CHAPTER 4 INCOME STATEMENT
23 Cards in this Set
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Usefulness of Income Statement
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Usefulness:
Evaluate past performances
Assess risks and uncertainty of achieving future cash flows
Predicting future performance
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Income Statement Limitations
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Companies omit items that cannot be measured reliably (unrealized gains/losses. EX. PPE market price)
Income is affected by the accounting methods employed (EX. LIFO/FIFO affects COGS)
Income measurement involves judgment
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quality of earnings
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is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows
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elements of the income statement
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1)revenues
2)expenses
3)gains
4)losses
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Single-Step format
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revenues
-expenses
=net income
no distinction between operating and non-operating categories
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Multiple-step format income statement
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separates operating transactions from non-operating transactions
matches costs and expenses with related revenues
highlights certain intermediate components of income that analysts use
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Multiple-step income format
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sales
-operating expenses
-non-operating expenses
-income tax
=net income
THEN
-discontinued operations
-extraordinary items
-earnings per share
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Irregular Items
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Discontinued operations
Extraordinary items
Unusual gain/losses
Changes in Acct Principles
Changes in Estimates
Corrections of Errors
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Reporting - Discontinued Operations
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2 Parts:
1. Income/loss from operations of the discontinued component (net of tax)
2. Gain/loss on disposal of component (net of tax)
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Financial Reporting Basics - Revenue - Extraordinary Items
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Unusual and infrequent
Reported->Net of Tax after Discontinued Operations
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Unusual gains/losses
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1. Unusual OR infrequent. (NOT both)
- reported in separate section just above "income from continuing operations before income tax"
- FASB prohibits net of tax treatment
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Changes in Accounting Principles
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-Retrospective Adjustment
-Cumulative effect adjustment to beginning retained earnings
-Preserves comparability
-Ex: change form FIFO to average cost
:change from the percentage-of-completion to the completed-contract method
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changes in estimate
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-accounted for in the period of change and future periods
-not handled retrospectively
-not considered errors or extraordinary items
1.) Useful lives and salvage values of depreciation
2.) Allowance for uncollectible receivables
3.) Inventory Obsolescence
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correction of errors
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Result from:
-mathematical mistakes
-mistakes in application of accounting principles
-oversight or misuse of facts;
-Correct prior years' income statements to correct for the error
-adjustment to the beginning balance of retained earnings
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Intraperiod Tax Allocation
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Relates the income tax expense to the specific items that give rise to the amount of the tax expense
Income tax is allocated to the following items:
(1) Incomefrom continuing operations before tax
(2) Discontinued operations
(3) Extraordinary items
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Earnings per share
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Net income - Preferred dividends/Weighted-average common shares outstanding
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Retained Earnings Statement
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Increase:
-Net income
-Changes in accounting principle
-Error corrections
Decrease:
-Net loss
-Dividends
-Change in accounting principle
-Error corrections
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What to do with restricted Retained Earnings?
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Disclose in notes to the financial statements under Appropriated Retained Earnings.
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comprehensive income
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all changes in equity during a period except those resulting from investments by owners and distributions to owners.
includes:
-all revenues and gains, expenses and losses reported in net income
-all gains and losses that bypass net income but affect stockholders equity
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Other comprehensiveincome
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Unrealized G/L in AFSS
G/L from foreign currency translation adjustments
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Comprehensive income equation
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C.I= N.I.+ O.C.I.
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Stockholders Equity
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S.E.=R.E.+C.S.+Acc O.C.I.
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3 approaches of reporting comprehensive income
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Second separate Income Statement, combines/comprehensive income statement, claim it as part of equity.
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ACCT 3723: CHAPTER 10