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Flashcards in Ch 4 Deck (42):

3 ways Business and investment community uses from income statement?

Helps predict amounts, timing and uncertainty of future cash flows


3 Limitations of income statement?

1 companies omit items from income statement they can't measure reliably (ex. Company may not record unrealized gains/losses from investments b/c uncertainty of realization)

2 income #s are affected by accounting methods employed
(ex. Straight line vs accelerated depreciation)

3 income measurement involves judgement (ex. companies estimate useful life and write off values differently)


Earnings management

Planned timing of revenues, expenses, gains and losses
To smooth out bumps in earnings


Quality of earnings

Usefulness for predicting future earnings and cash flows


What is earnings management's effect on quality of earnings?

Distorts information of earnings in a way that's less useful
In predicting future earnings


Transaction approach

Focuses on income-related activities that occurred
During the period


4 Elements of income related items?

Revenues, expenses, gains, losses



Inflows or other enhancements of assets of entity or
Settlements of liabilities during a period from delivering
Or producing goods, rendering services or other
Activities that constitute the entities central operations



Outflows or other using up of assets or incurrences of
Liabilities during period from delivering or producing goods,
Rendering services, or carrying out other activities that
Constitute entities ongoing major or central operations



Increases in equity (net assets) from peripheral or incidental
Transactions of an entity except those that result from
Revenues or investments by owners



Decreases in equity from peripheral or incidental transactions
Of an entity except those that result from expenses or
Distributions to owners


Capital maintenance approach

Company determines income for period based on change
In equity after adjustment for capital contributions
(investments by owners) or distributions (dividends)


7 main steps in multi-step income statement?

1 operating section
2 non operating section
3 income tax
4 discontinued operations
5 extraordinary items
6 noncontrolling interest
7 earnings per share


4 parts of Operating section, define?

Report revenues and expenses of company's principal

1 Sales and revenues
2 cost of goods sold
3 selling expenses
4 administrative or general expenses


Non operating section, define, 2 parts?

Report revenues and expenses from secondary activities

1 other revenues and gains

2 other expenses and losses


Income tax

Section reporting federal and state income taxes levied
On income from continued operations


Discontinued operations section

Material gains or losses resulting from disposition
Of component of business


Extraordinary items

Unusual and infrequent material gains and losses


Noncontrolling Interest

Allocation of income to non controlling shareholders


Single step income statement, advantage?

Consists of two groupings: revenues and expenses

Advantage is simplicity


Current operating performance approach

Most useful income measure reflects only regular
And recurring revenue and expense elements

Irregular items don't reflect company's future earning power


Modified all inclusive concept of income reporting

Approach where companies record most items
Including unusual and irregular ones as part of net income

However companies must highlight extraordinary items
To help users better determine long run earning power


4 general categories for unusual items on income statements?

1 unusual gains and losses
2 discontinued operations
3 extraordinary items
4 noncontrolling interest


Unusual gains and losses 6 components?

1 losses on write off of receivables, inventories, property,
plant and equipment, deferred R&D or other intangibles

2 gains or losses from currency exchange

3 restructuring charges

4 gains or losses from sale or abandonment of property,
Plant or equipment used in business

5 effects of strike including against competitors and major

6 adjustment of accruals on Longterm contracts


Restructuring charge , 3 examples?

Major reorganization of company affairs

Ex. Employee layoff costs, plant closing costs,
write off of asset's


Discontinued operations 2 things?

1) company eliminates results of operations of
component of business

2) there is no significant involvement in component after
Disposal transaction



Manufactures and sells consumer products

It has several product groups, each with different product
Lines and brands


Intraperiod tax allocation

Allocation of tax to item within a period


Extraordinary items 2 qualities?

Unusual nature- possess a high degree of abnormality
And unrelated to typical activities of business

Infrequency of occurrence- activity that company does not
Expect to repeat itself in the near future


Noncontrolling interest, example? Define?

The portion of equity interest in a subsidiary not attributable
to parent company

If Coca Cola acquires 70% of Koch Company
Coca Cola has the controlling interest (over 50%)
And remaining shareholders of Koch have noncontrolling


Earnings per share

Earnings per share =
(net income - preferred dividends)/
weighted avg. common shares outstanding


2 examples of changes in accounting principle?

Change in method of inventory (FIFO to avg. cost)

Change in accounting construction contracts from
Percentage of completion to completed contract method


Retrospective adjustment

Company recognizes a change in accounting principle
On financial statements

Adjustment recasts the prior years statements on newly
Adopted principle preserving comparability


Changes in accounting estimates?

Do not get carried back to financial statements
Of prior years


Corrections of errors are treated as...

Prior period adjustments, similar to changes in accounting principles


Appropriated retained earnings

Restricted retained earnings


Comprehensive income

Includes all changes in equity during period except
Those resulting from investments to owners and
Distributions to owners


Other comprehensive income

Non owner changes in equity that bypass the
income statement


One statement approach

Reports comprehensive income in single statement


Two statement approach

Two separate but consecutive statements of net income
And other comprehensive income


Statement of stockholders equity

Presents account of total stockholders equity in columnar
Form (columns)

Consists of contributed capital, retained earnings and accumulated balances in other comprehensive income


2 items disclosed in statement of stockholders equity?

1 contributions (issuances of shares) and distributions
(dividends to owners)

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