ch 3- income statement and revenue recognition

what is the purpose of the income statement

evaluate past performances

provide basis for predicting future performance

help asses the risk or uncertainty of achieving future cash flows

what are the limitations of the income statement

companies omit items that cannot be measured reliably

affected by the accounting method(s) employed

income measurement involves judgement

heading of the income statement

For the Mth/Q/Yr Ended...

What are revenues?

Inflows or other enhancements of assets or settlements of liabilities.

What do revenues constitute in an entity?

The entity's ongoing major or central operations.

examples of revenues

sales

fees

interest

dividends

rent

What are expenses?

Outflows or other using-up assets or incurrences of liabilities.

What do expenses constitute in an entity?

The entity's ongoing major or central operations.

examples of expenses

cost of goods sold

depreciation expense

interest expense

rent expense

salaries and wages expense

taxes expense

gains

increase in equity (net assets) from peripheral or incidental transactions

losses

decreases equity (net assets) from peripheral or incidental transactions

gains and losses can result from

sale of investments or plant assets

settlement of liabilities

write-offs of assets

What is a characteristic of a single-step income statement regarding operating and nonoperating categories?

There is no distinction between operating and nonoperating categories.

What does a single-step income statement imply about revenue and expense items?

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

basic format of single-step income statement

revenues

(expenses)

Income before income taxes

(income taxes)

net income

What does a multi-step income statement separate?

Operating transactions from nonoperating transactions

What does a multi-step income statement do with costs and expenses?

Matches costs and expenses with related revenues

What does a multi-step income statement highlight for analysts?

Certain components of income used to assess financial performance

basic format of multi-step income statement

Net Sales

(cost of goods sold)

gross profit

(operating expenses)

income from operations

other revenues and gains

(other expenses and losses)

income before income tax

(income tax)

net income

characteristics of condensed income statement

no details presented; only category totals supplemental schedules support totals

highly summarized

What is intraperiod tax allocation?

Allocation of tax within a period

What does intraperiod tax allocation help users understand?

The impact of income taxes on the various components of net income

what is intraperiod tax allocation used for

income from continuing operating before income tax

discontinued operations

basic formula for calculating earnings per share

(income - preferred dividends if appropriate) / weighed average number of commons shares outstanding

why is earnings per share important

significant business indicator

measures the dollars theoretically earned by each share of common stock

must be disclosed on income statement

when calculating earnings per share, if the preferred dividends are cumulative, which dividends are subtracted from income

both declared and paid

when calculating earnings per share, if the preferred dividends are noncumulative, which dividends are subtracted from income

just preferred dividends declared during period

what items on the income statement are net of tax

income from continuing operations

discontinued operations

net income

current operating performance reporting

focus is on normal, recurring activities under the control of management

all inclusive reporting

include all items that cause owners' equity to change that are not transactions with owners

what reporting methods is used by US GAAP

modified all inclusive reporting

unusual gains and losses

transactions with high degree of abnormality and of a type clearly unrelated to the ordinary and typical activities of the company

infrequent gains and losses

transaction that is not reasonable expected to recur in the foreseeable future

where are unusual and infrequent gains and losses reported

other revenues/gains or other expenses/losses

when do discontinued operations occur

a company eliminated the results of operations of a component of the business

AND

the elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results

what are the two items reported for discontinued operations

gain/loss from operating the component during the current period

gain/loss from the disposal of the component

comprehensive income

all changes in equity during the period except those resulting from investment by owners and distributions to owners

what is included in comprehensive income

all revenues/gain and expenses/losses reported in net income

AND

all gains and losses that bypass net income but affect stockholders' equity (other comprehensive income)

items that fall under other comprehensive income

unrealized holding gains and losses on available-for-sale securities

translation gains and losses on foreign currency

unrealized holding gains and losses on certain hedging transactions

adjustments related to pensions

NET OF TAX

one statement approach for comprehensive income

combined statement of income and comprehensive income

two statement approach for comprehensive income

separate income statement and comprehensive income statement

what does the statement of stockholders' equity report

changes in each stockholders' equity account

total stockholders' equity for the period

what items are disclosed on statement of stockholders' equity

1. contributions , earnings, and accumulated other comprehensive income

2. reconciliation of carrying amount of each component of stockholders' equity from beginning to end of period

what is retained earnings

earnings to date that have not been the subject of dividends declared

basic formula for calculating retained earnings

cumulative net income

(distributions to owners)

what type of transactions increase retained earnings

net income

change in accounting principle

period period adjustments

what type of transactions decrease retained earnings

net loss

dividends

change in accounting principles

prior period adjustments

why would an error correction need to occur in statement of retained earnings

1. mathematical mistakes

2. mistakes in application of accounting principles

3. oversight or misuse of fact

how are corrections of errors made

retroactively

if the error was made in the current year, how is it treated

just make correction

if the error was made in the previous year

treat as prior period adjustments

net of tax

restate all prior financial statements

appropriated retained earnings

makes retained earnings unavailable for dividend declaration

no cash set aside, just disclosed

revenue recognition principle

recognize revenue to depict the transfer of goods or services to customers in an amount that reflects consideration that the company receives or expects to receive, in exchange for those goods or services

indicators that control has passed

1. company has a right to payment for the asset

2. company has transferred legal tile to the asset

3. company has transferred physical possession of the asset

4. customer has significant risk and rewards of ownership

5. customer accepted the asset

five-step model for recognizing and measuring the amount of revenue to be recognized

1. identify the contract

2. identify the performance obligation

3. determine the transaction price

4. allocate the transaction price

5. recognize revenue

validity of a contract

revenue is recognized only when a valid contract exists

variable considerations when determining the transaction price

1. a situation in which the price of a good or service is dependent on future events

2. future events might include price increases, volume discounts, rebates, credits, performance bonuses, or royalties

3. companies estimate the amount of variable consideration they will receive from the contract to determine the amount of revenue to recognize

4. companies commonly use the expected value, which is a probability-weighted amount

quality of earnings

companies have incentives to manage income to meet or beat Wall Street expectations, so that the:

1. market price of stock increases

2. value of management's stock compensation packages increases

earnings management

the planned timing of revenues, expense, gains, and losses to smooth out the bumps in earnings

usually used to increase income in the current year at the expense of income in future years

what reduces quality of earnings

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

does IFRS discuss reporting formats

no

1 multiple choice option

what is the IFRS rule for classifying expenses

they are classified by nature or function

does US GAAP have the same requirement for classifying expenses

no, but the SEC requires a functional presentation

does IFRS have minimum information requirements

yes

1 multiple choice option

does US GAAP have minimum information requirements

no, but the SEC has rigorous presentation requirements

does IFRS have the same definition for discontinued operations as US GAPP

no, IFRS is more narrow

but, they are working towards creating more similar definitions

do both US GAAP and IFRS allow for a one or two-statement approach to preparing the statement of comprehensive income

yes

1 multiple choice option

does IFRS define income form operations

no

1 multiple choice option

does IFRS allow for reevaluation of PP&E and intangible assets, with the gains/losses being reported in other comprehensive income

yes

1 multiple choice option