Chapter Four: Income Statement and Related Infomation

Question 1

Income Statement

Answer 1

Picture of operations over a specific period of time, links together balance sheets to show how went from one to another

Question 2

What does the income statement help investor with?

Answer 2

Time and amount of future cash flows

Question 3

What allows comparability between firms?

Answer 3

Evaluation of past performance

Question 4

How do company’s assess risk?

Answer 4

Look at trends

Question 5

Three uses for Income Statement

Answer 5

1) Evaluation of Past Performance, 2) Assessment of Risk Involved, 3) Prediction of future cash flows

Question 6

What happens when manager’s want to meet or exceed street expectations?

Answer 6

Tendency to manage earnings

Question 7

Cookie jar effect

Answer 7

Cause earnings to look nice and smooth and on upward trend

Question 8

Big Bath Effect

Answer 8

Take known loss along with additional loss

Question 9

What accounts are shown on the Income Statement?

Answer 9

Revenues and Expenses, temporary and nominal accounts

Question 10

What are the two subsets of revenues and expenses?

Answer 10

Gains and Losses

Question 11

How are gains and losses shown on the income statement?

Answer 11

Expenses and revenues reported as net, so they are shown as reductions and increases in net income

Question 12

Two formats of Income Statement

Answer 12

Multi-step Income Statement and Single Step Income Statement

Question 13

Sections of Multi-step Income Statement

Answer 13

Operating Section and Selling Expense Section

Question 14

Operating Section

Answer 14

Contains revenue and expenses earned or incurred over normal course of business

Question 15

Sections within Operating Section

Answer 15

Sales/Revenue Section, Cost of Goods Sold Section, Selling Expense Section, and Administrative/General Expenses

Question 16

Sales/Revenue Section

Answer 16

inflows of resources from selling/providing resources, also has contra-accounts

Question 17

Cost of Goods Sold Section

Answer 17

Beginning Inventory + Purchases = Goods Available for Sale - Ending Inventory = Cost of Goods Sold

Question 18

Gross Profit/Margin Equation

Answer 18

Sales/Revenue Section - Cost of Goods Sold = Gross Profit/Margin

Question 19

Administration Selling Expenses

Answer 19

Overhead expense not related to revenue generation

Question 20

Operating Income Equation

Answer 20

Operating Revenues - Operating Expenses = Operating Income

Question 21

Non-operating Section of Income Statement

Answer 21

Other Revenues and Gains Section and Other Expenses and Losses Section

Question 22

Tax Section

Answer 22

Takes away from income before income tax (income before tax - provision)

Question 23

Net Income Equation

Answer 23

Operating Section + Non-Operating Section

Question 24

Earnings Per Share Equation

Answer 24

Income Available to Common Shareholders/Weighted Average Shares Outstanding

Question 25

Income Available to Common Shareholders Equation

Answer 25

Net Income - Preferred Dividends

Question 26

Single-Step Income Statement

Answer 26

use all revenues and all expenses in sections, separate tax section and earnings per share

Question 27

Irregular Items on Income Statement

Answer 27

Discontinued Operations, Extraordinary Items, Unusual Gains and Losses, and Changes in Accounting Principle, Changes in Accounting Estimates, and Accounting Error

Question 28

Discontinued Operations

Answer 28

Company might dispose portion/sector of business, sell a subsidiary

Question 29

Where are discontinued operations reported?

Answer 29

Beneath the line (Income from Continuing Operations), after Provision for Income Tax

Question 30

Extraordinary Item

Answer 30

Unusual in nature, infrequent in occurrence (must be both)

Question 31

Where are extraordinary items reported?

Answer 31

Below the line, net of tax (intraperiod tax allocation: split into different sections), separate earnings per share

Question 32

Unusual Gains and Losses

Answer 32

unusual or infrequent (not both)

Question 33

Where are unusual gains and losses reported?

Answer 33

Reported above the line

Question 34

Changes in Accounting Principle

Answer 34

Company decides better reporting for how recording something or FASB mandates change in accounting principles

Question 35

How are changes in accounting principle reported?

Answer 35

Reported using a retrospective approach

Question 36

Retrospective approach

Answer 36

All prior year statements reported (1 or 2) will be adjusted to reflect new accounting principle, except retained earnings

Question 37

Changes in Accounting Estimates

Answer 37

Correct an estimate made previously

Question 38

How do you account for accounting estimates?

Answer 38

Adjust books to reflect new estimate

Question 39

Accounting Error

Answer 39

Made a mistake

Question 40

How do you account for an accounting error?

Answer 40

Make prior year adjustment: Adjust beginning retained earnings