Acct 351 Chapter 04

Question 1

accrual basis

Answer 1

The most common used basis of accounting whereby revenue is recognized when it is earned and expenses recognized in the period incurred, without regard to the time of receipt or payment of cash

Question 2

all-inclusive approach

Answer 2

An income measurement approach that indicates that most items, including irregular ones, are recorded in income

Question 3

business component

Answer 3

In order to qualify for separate presentation as a discontinued operation on the income statement, the business being disposed of must be a component of an entity where the operations, cash flows, and financial elements are clearly distinguishable from the rest of the enterprise

Question 4

capital maintenance approach

Answer 4

An approach to income measurement whereby income for the period is determined based on the change in equity after adjusting for capital contributions

Question 5

changes in accounting principle

Answer 5

When an accounting principle is adopted that is different from the one previously used

Question 6

changes in estimates

Answer 6

A change that occurs in the circumstances on which a previous estimate was based, or as a result of new information, more experience, or subsequent developments. An example is a change in the estimate of the service lives of assets subject to amortization

Question 7

comprehensive income

Answer 7

An income measure that includes net income and all other changes in equity exclusive of owners’ investments and distributions

Question 8

current operating performance approach

Answer 8

income measurement approach that argues that the most useful income measure will reflect only regular and recurring revenue and expense elements

Question 9

discontinued operations

Answer 9

The operations of an identifiable business segment that have been sold, abandoned, shut down, or otherwise disposed of, or that is the subject of a formal plan of disposal

Question 10

earnings management

Answer 10

The process of targeting certain earnings levels (whether current or future) or desired earnings trends and working backwards to determine what has to be done to ensure that these targets are met

Question 11

earnings per share

Answer 11

Net income divided by the number of shares outstanding

Question 12

extraordinary items

Answer 12

These are income statement items that are unusual in nature and infrequent in occurrence. Examples include a loss from an earthquake

Question 13

formal plan

Answer 13

When top management has approved the plan for disposal and has articulated in reasonable detail. which assets are to be disposed of and how

Question 14

income statement

Answer 14

A method to account for contributions of assets that requires the amount received to be deferred and recognized over the period that the related assets are employed

Question 15

intraperiod tax allocation

Answer 15

The approach to allocating taxes within the financial statements of the current period

Question 16

modified cash basis

Answer 16

A mixture of cash basis and accrual basis accounting often followed by professional service firms

Question 17

multiple-step income statement

Answer 17

An income statement format that recognizes a separation between operating transactions and non-operating transactions and matches the relevant costs and expenses with their related revenues

Question 18

non-GAAP earnings

Answer 18

An earnings measure that is not in in accordance with GAAP

Question 19

other comprehensive income

Answer 19

Comprises revenues, expenses, gains and losses that are required by primary sources of GAAP (see Generally Accepted Accounting Principles, Section 1100) to be included in comprehensive income, but excluded from net income

Question 20

quality of earnings

Answer 20

The nature of the content of earnings and the way they are presented

Question 21

single-step income statement

Answer 21

An income statement format where two groupings exist: revenues and expenses. Expenses and losses are deducted from revenues and gains to arrive at a net income or loss

Question 22

strict cash basis

Answer 22

A method of accounting where revenue is recognized only when the cash is received, and expenses are recognized only when the cash is paid. Cash based financial statements are not in conformity with GAAP

Question 23

typical business activities

Answer 23

A frequent activity of a company

Question 24

Identify the uses and limitations of an income statement

Answer 24

The income statement provides investors and creditors with information that helps them predict the amounts, timing, and uncertainty of future cash flows. It also helps users determine the risk (level of uncertainty) of not achieving particular cash flows. The limitations of an income statement are that (1) the statement does not include many items that contribute to the general growth and well-being of an enterprise; (2) income numbers are often affected by the accounting methods that are used; (3) income measures are often estimates; and (4) there are differing views on how to measure net income

Question 25

Prepare a single-step income statement

Answer 25

In a single-step income statement, there are only two groupings: revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss; i.e., only a single subtraction is made. Frequently, income tax is reported separately as the last item before net income to indicate its relationship to income before income tax

Question 26

Prepare a multiple-step income statement

Answer 26

A multiple-step income statement shows two additional classifications: (1) a separation of operating results from the results obtained through the subordinate or non-operating activities of the company; and (2) a classification of expenses by functions, such as merchandising or manufacturing, selling, and administration, or by nature (such as salary expense, depreciation and other).

Question 27

Understand the difference between classifying expenses according to their nature versus their function

Answer 27

IFRS requires entities to provide information about either the nature or function of expenses. When information is presented using function, additional disclosures should be made regarding the breakdown of the nature of expenses as the latter has good cash flow predictive value. The entity should choose the method that best reflects the nature of the business and industry

Question 28

Explain how irregular items are reported

Answer 28

Irregular gains or losses or nonrecurring items are generally closed to Income Summary and are included in the income statement. They are treated in the income statement as follows: (1) Discontinued operation of a business component is classified as a separate item, after continuing operations. (2) Other items that are material in amount, are unusual or nonrecurring, and are not considered extraordinary are separately disclosed and are included as part of continuing operations. Extraordinary items are not allowed under IFRS and not referred to under private entity GAAP

Question 29

Measure and report results of discontinued operations

Answer 29

The gain or loss on disposal of a business component involves the sum of: (1) the income or loss from operations to the financial statement date, and (2) the gain or loss on the disposal of the business component. These items are reported net of tax among the irregular items in the income statement

Question 30

Explain intraperiod tax allocation

Answer 30

The tax expense for the year should be related, where possible, to specific items on the income statement in order to give a more informative disclosure to statement users. This procedure is called intraperiod tax allocation; i.e., allocation within a period. Its main purpose is to relate the income tax expense for the fiscal period to the following items that affect the amount of the tax provisions: (1) income from continuing operations, (2) discontinued operations, and (3) other comprehensive income

Question 31

Explain where earnings per share information is reported

Answer 31

Because of the dangers of focusing attention solely on earnings per share, the profession concluded that earnings per share must be disclosed on the face of the income statement. A company that reports a discontinued operation must report per share amounts for these line items either on the face of the income statement or in the notes to the financial statements. EPS information is not required to be presented under private entity GAAP

Question 32

Prepare a retained earnings statement

Answer 32

The retained earnings statement should disclose net income (loss), dividends, prior period adjustments, and transfers to and from retained earnings (appropriations). This statement is required under private entity GAAP

Question 33

Prepare a statement of comprehensive income

Answer 33

Comprehensive income may be presented by expanding the income statement or by adding another separate statement. The concept of other comprehensive income is not relevant under private entity GAAP

Question 34

Prepare a statement of changes in shareholders’ equity

Answer 34

The statement of shareholders’ equity is a required statement under IFRS and takes the place of the statement of changes in retained earnings. It shows all changes in all equity accounts including accumulated other comprehensive income

Question 35

Identify differences in accounting between accounting standards for private enterprises (private entity GAAP) and IFRS

Answer 35

The chart on page 181 outlines the major differences

Question 36

Identify the significant changes planned by the IASB regarding financial statement presentation

Answer 36

The IASB is planning to change the way financial statements are presented, with a new standard being issued by 2011. The major statements, including balance sheet, income statement, and statement of cash flows, will be classified according to business and financing activities

Question 37

Explain the differences between the cash basis of accounting and the accrual basis of accounting

Answer 37

Accrual basis accounting provides information about cash inflows and outflows associated with earnings activities as soon as these cash flows can be estimated with an acceptable degree of certainty. That is, accrual basis accounting aids in predicting future cash flows by reporting transactions and events with cash consequences at the time the transactions and events occur, rather than when the cash is received and paid. The cash basis focuses on when the cash is received or dispersed, and therefore it is not the best predictor of future cash flows if the company has irregular cash flow patterns