Intermediate Accounting - Chapter 4 Income Statement and Related Information

Flashcards to review key concepts from the Intermediate Accounting lecture on the income statement and related information.

What are three uses of the income statement?

Evaluate past performance, provide basis for predicting future performance, help assess risk or uncertainty of future cash flows.

What are the three main limitations of an income statement?

Companies omit items they cannot reliably measure, income is affected by accounting methods, and income measurement involves judgment.

What is meant by 'Quality of Earnings'?

Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.

Define 'Revenues' in the context of an income statement.

Inflows or other enhancements of assets or settlements of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Define 'Expenses' in the context of an income statement.

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 the entity’s ongoing major or central operations.

Define 'Gains' in the context of an income statement.

Increases in equity from peripheral or incidental transactions except those that result from revenues or investments by owners.

Define 'Losses' in the context of an income statement.

Decreases in equity from peripheral or incidental transactions except those that result from expenses or distributions to owners.

What are the benefits of a multiple-step income statement?

Separates operating transactions from nonoperating transactions, matches costs and expenses with related revenues, and highlights certain components of income that analysts use assessing financial performance.

What are the six sections and totals within the income statement?

1. Operating section 2. Nonoperating section 3. Income tax 4. Discontinued operations 5. Noncontrolling interest 6. Earnings per share

What is a key characteristic of a single-step income statement?

It has no implication that one type of revenue or expense item has priority over another.

In what type of income statement is there a separation of operating and non-operating activities?

Multiple-Step Income Statement

List the 4 general categories of additional items companies are required to report as part of net income.

1. Unusual and infrequent gains and losses 2. Discontinued operations 3. Noncontrolling interest 4. Earnings per share

What are the criteria to classify a gain or loss as 'unusual'?

High degree of abnormality and of a type clearly unrelated to ordinary activities, taking into account the environment in which it operates.

What are the criteria to classify a gain or loss as 'infrequent'?

Type of transaction that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates.

Describe 'Discontinued Operations'.

Occurs when: 1) A company eliminates the results of operations of a component of the business and 2) The elimination of a component represents a strategic shift, having a major effect on the company’s operations and financial results. Amounts are reported “net of tax.”

Where are discontinued operations reported on the Income Statement?

After 'Income from continuing operations'

What is intraperiod tax allocation used for?

Income from continuing operations and discontinued operations

Define 'Noncontrolling interest'.

The portion of equity interest in a subsidiary not attributable to the parent company.

How is Earnings Per Share calculated?

Net Income - Preferred Dividends / Weighted Average of Common Shares Outstanding

How is a change in accounting principle reported?

Retrospective adjustment and cumulative effect adjustment to beginning retained earnings.

How are changes in accounting estimates accounted for?

In the period of change or the period of change and future periods if the change affects both.

List three examples of changes in accounting estimates.

Useful lives and salvage values of depreciable assets, allowance for uncollectible receivables, and inventory obsolescence.

How are corrections of accounting errors treated?

As prior period adjustments--an adjustment to the beginning balance of retained earnings

What increases retained earnings?

Net income, change in accounting principle, and prior period adjustments.

What decreases retained earnings?

Net loss, dividends, change in accounting principles, and prior period adjustments.

Define 'Comprehensive Income'.

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, and all gains and losses that bypass net income but affect stockholders’ equity.

What are gains and losses that bypass net income but affect stockholders' equity referred to as?

Other comprehensive income

List two ways companies can display the components of other comprehensive income.

1. A single continuous statement (one statement approach) or 2. Two separate, but consecutive statements of net income and other comprehensive income (two statement approach).

What items are disclosed in the statement of stockholders' equity?

Contributions (issuances of shares) and distributions (dividends) to owners and reconciliation of carrying amount of each component of stockholders’ equity from beginning to end of period.