M1 Balance Sheet, Income Statement, and Comprehensive Income

What should a full set of financial statements include?

• Statement of Financial Position (the balance sheet)

• Statement of Earnings (the income statement)

• Statement of Comprehensive Income

• Statement of Cash Flows

• Statement of Changes in Owner’s Equity

What is meant by a “classified” balance sheet?

A classified balance sheet distinguishes current and non current assets and liabilities.

Name the expense that each of the following unexpired costs turn into as they expire:

1. Inventory

2. Unexpired (prepaid) cost of insurance

3. Net book value of fixed assets

4. Unexpired costs of patents

1. Costs of goods sold

2. Insurance expense

3. Depreciation expense

4. Amortization expense

Are gains and losses on the disposal of assets shown on a “gross basis” (ex. where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (ex. where only the difference between the sale price and the net book value of the disposed asset is reported)?

Gains and losses are reported at their net amounts (ex. proceeds less net book value).

How does a “multiple-step” income statement differ from a “single-step” income statement?

• A multiple-step income statement reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses.

• On a single-step income statement’s presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and non-operating revenues and expenses.

The gain (loss) from discontinued operations can consist of…

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

How do we account for subsequent increases in the fair value of a discontinued component?

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

What conditions must be present for a disposal to be reported in discontinued operations?

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

State two types of foreign currency transaction.

• Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions.

• Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate.

Where are foreign currency transaction gains or losses reported in the financial statements?

Foreign currency transaction gains or losses are included in determining net income for the period.

For operating transaction in foreign currency, detail the recording process.

• Record original transaction at exchange or spot rate on date of transaction.

• At balance sheet date, compute gain/loss on transaction by recalculating using the current or spot rate.

• On payment date, compute gain/loss on the transaction by using the exchange rate on payment date.

Define comprehensive income

Change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources.

List some disclosure requirements for comprehensive income

• Tax effects of each component included in current “other comprehensive income”

• Changes in the accumulated balances of components of “other comprehensive income”

• Total accumulated other comprehensive income

• Reclassification adjustments between other comprehensive income and net income

List the two formats acceptable for reporting comprehensive income.

• Statement of comprehensive income (single-statement approach)

• Statement of income followed by separate statement of comprehensive income (two-statement approach)

Identify four items included in other comprehensive income

Remember the PUFI mnemonic:

Pension adjustments

Unrealized gains and losses on available-for-sale debt securities and hedges

Foreign currency transaction adjustments and gains/losses on certain foreign currency transactions

Instrument-specific credit risk for liabilities (using FV) and their changes in FV