ACCT CH.4 Part. A Income Statement

Income Statement

Reports a company’s profit during a particular reporting period

Other Comprehensive Income (OCI)

includes some gains and losses that are excluded from net income

income from continuing operations

reports the revenues, expenses, gains, and losses that happened during the reporting period from the part of the business that is still ongoing

Revenues

inflows of resources from providing goods or services to customers.

Expenses

outflows of resources incurred while earning revenue

Gains and Losses

changes in equity from peripheral or incidental transactions (non-core, irregular business activities that fall outside a company's main operations)

Operating income

relates to the company’s primary revenue-generating activities.

Nonoperating income

relates to peripheral or incidental activities (income from side activities)

revenues; losses; Subtract; tax

A single-step income statement is very simple:

1. List all ____ and gains

2. List all expenses and _____ except income taxes

3. ______ total expenses/losses from total revenues/gains

4. Then subtract income ___ expense to get net income

separates; subtotals; analyzing; format

A multi-step income statement:

• ____ operating and nonoperating items

• shows several intermediate ______

• is more useful for ______ performance

• is the _____ most real companies use

Earnings quality

how useful reported income is for predicting a company’s future earnings.

Temporary earnings

are not likely to happen again soon or may affect future earnings differently

Permanent earnings

come from transactions that are likely to generate similar profits in the future

predict

So analysts try to separate:

• temporary parts of earnings
  from

• permanent parts of earnings

so they can better _____ the future

Income smoothing

trying to make earnings look less up-and-down from year to year.

lowers; weaker; saving

Cookie jar reserves

This is a specific type of income smoothing.

How it works

When income is high, a company may:

• overestimate expenses like

  • bad debts

  • warranties

That ___ income now and creates a kind of reserve.

Later, when income is ___, the company can:

• estimate lower expenses

• use those earlier reserves

• make net income look better

So it is like “____” earnings from a good year and using them in a weaker year.

adjusts; reduce

Income smoothing happens when management ___ estimates, like bad debt expense, to ___ the natural ups and downs in reported income.

Classification shifting

_____ ______ means moving an operating expense into a nonoperating expense category. So total income may not change much, but the way it looks inside the income statement changes.

permanent; adjust

Operating income is not automatically the same thing as ____ earnings.

Some operating items are:

• unusual

• infrequent

• temporary

and analysts should ____ for that when judging earnings quality.

Restructuring costs

are costs tied to management’s plan to materially change the scope of business operations.

In simple terms:
the company is making a major change in how it operates.

actually; arises

Restructuring costs are recognized in the period when the exit or disposal cost obligation is ___ incurred.

That means the company records the cost when the obligation really ___, not just when management first thinks about making the change.

impairment

happens when an asset loses a significant amount of value. When that happens, the company reduces the asset’s recorded balance.

non-GAAP earnings

These are earnings numbers that management chooses to present in addition to regular GAAP earnings.

reconciliation; official

Sarbanes-Oxley / reconciliation requirement

There must be a _____ between:

• non-GAAP earnings
  and

• GAAP earnings

That means if a company presents non-GAAP earnings in an SEC filing, public report, or press release, it must also show how it got from the ____ GAAP number to the adjusted non-GAAP number.

So users can see exactly what was removed or changed

Earnings Quality

the ability of reported earnings to predict future earnings

discontinued operations

If a company sells, shuts down, or plans to get rid of a part of its business, the profits or losses from that part will not continue in the future.

Because of that, those results are shown separately on the income statement.

distinguished; identify

A component is a part of the company whose:

• activities

• and cash flows

can be clearly ____ from the rest of the business.

So it has to be separate enough to ___ on its own.

second condition for reporting discontinued operations

It is not enough that a component is sold or held for sale.

The disposal also has to represent a strategic shift that has, or will have, a major effect on the company’s operations and financial results.

major; parts; small

examples include disposal of:

• operations in a major geographic area

• a ____ line of business

• a major equity method investment

• other major ___ of the company

So these are big pieces of the business, not ___ side assets

earnings per share (EPS)

how much income was earned for each common share

Comprehensive Income

 Provides a broader perspective of income and includes all revenues, expenses, gains, and losses for the period

Other Comprehensive Income

These are certain gains and losses that are reported outside net income, but still matter in measuring the company’s total performance for the period

AOCI

the running total of those OCI items on the balance sheet