Acc 3010 Exam 2

UVU, Prof Van Wagoner

Single step v. multi-step income statement

Single step:

• Rev/gain first and then all expenses listed after

Multi-step

• Seperates by operating and non-operating

• Rev - COGS = GP - OP exp (SGA) = OP inc - int = EBT - tax = NI

• need to know the proper multi-step order

Temporary earnings

Results from transactions that are:

• Not likely to occur again in the future

• likely to have different impact on earnings and cash flows in future

Ex: discontinued operations, gain/loss on sale of asset/investment, casualty losses, restructing costs

Permanent Earnings

Results from transactions likely to generate similar profits in the future

• included in income from continuing operations

Income Smoothing

changing estimates to create smooth earning over time

Classification Shifting

Shifting operating expenses to a nonoperating expense classification to report fewer op exp and higher NI

Ebit/Ebitda in financial statement

CAN NOT PUT IN GAAP FINANCIAL STATEMENTS

Discontinued operations affect on NI

Pulls out of temporary and then placed below continuing operations, net of tax

• makes NI look better

What qualifies for a discontinued operations

Component of entity is sold/disposed

• component of entity (economic entity assumption) is sold/held for sale

• a strategic shift

  • Drop athletic clothing from store = strategic

  • Dropping 1 brand doesn’t count (needs to be all orange juice, not just one brand of oj)

  • There needs to be judgement, mcdonalds closing their orem store doesn’t count

sold discont operation

2 line items

• operating related to the discontinued op

• gain/loss of disposal

Net of tax

• show with tax

held for sale discontinued oper

Not been sold yet = impairment

• recognize loss when aware it will occur

• dont recognize gain until it happens

  • conservatism

discontinued operations visual

Basic EPS

(Net income - preferred dividends) / weighted avg # of common shares outstanding

Outstanding shares

shares that are in circulation (includes bought and still availble for sale)

Weighted avg of share

common shares outstanding * % weight

% weight is the months held (shares issued march count for 9/12)

Diluted EPS

stock options

• certificate to buy the shares at a set price whenever

Potential common stock

• other owners want to know if there will be other shares out there (if so their % is diluted)

Treat debt as is common stock (convertible) need to + interest back

Convertible stock

debt turned into stock

• lend money, lender turns it into stock

basic EPS is adjusted as if potential has been converted

3 types of comprehensive income

Investments

• derivatives

Pensions

Foreighn currency translation

• not actually changing money, used to compare with other countries, not realized until the company is sold

Comphrensive income formula

NI + Other comprehensive income

2 ways to present OCI

net income on IS

Statement of OCI

AOCI (accumulated other comprehensive income)

OCI Part of the BS through equity

Change in accounting principle

Restrospective (in past)

FASB new major update

whenever new update, have to change last year statements to reflect the new principle

treat new principle as what has always been used

• cummulative catch up ending

End RE = Beg RE + catch up, adj beg re

Go back how far it impacts the current year (invent 1 yrs, etc)

Change in acct estimate

Prospective (in future)

do not change what was recognized

from this point forward adj

depreciation, equipment lasting long that thought → lower depre going forward