Chapter 5 Flashcards
3 Main Limitations of Income Statement:
Excludes certain items/Depends on type of accounting methods/Requires extensive judgement
Earnings Quality:
How useful financial info is for predicting future firm performance
Permanent Components:
Components of earnings that are likely to continue into the future
Transitory Components:
Components of earnings that are unlikely to continue into the future
Higher Earnings Quality comes from:
More Permanent Components
Nature vs Functional Approach to summarizing expenses:
Nature is by source/Function is by use
Net Sales Revenue:
Sales net of sales discounts and estimated returns and allowances
Gross Profit:
Net sales revenue less cost of goods sold
Why Operating Income is a key financial performance measure:
Reflects results of core operations of business/Assists in comparing different firms operations/Provides measure of income available to all outside stakeholders
Income Tax Provision includes what:
Tax expense from all jurisdictions (federal, state, local, foreign) income taxes
Income Tax Provision does not include:
Payroll or property tax
Discontinued Operations:
Portions of business that company has disposed of or is in the process of disposing of
Components of an Entity have 3 characteristics:
Portion of entity/Comprised of operations and cash flows/Clearly distinguishable from rest of entity
What must a company demonstrate with potential Discontinued Operations segments:
that the disposal represents a strategic shift that will have a major effect on the entity’s operations and financial results
Elements that should be included in Other Comprehensive Income (OCI):
Unrealized gains and losses from available for sale portfolio/Foreign currency translation gains and losses/Unrecognized pension costs
