Acct 3366- Ch. 4

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income statement

Back 1

report that measures the success of company operations for a given period of time. used to determine profitability, investment value, and creditworthiness and helps predict that amounts, timing, and uncertainty of future cash flows

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earnings management

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the planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings

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cookie jar reserves

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companies use them as a method to decrease current earnings in order to increase income in the future. established by using unrealistic assumptions to estimate liabilities for items

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transaction approach

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a method of income measurement that focuses on the the income-reltated activities that have occurred during the period

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revenues

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inflows or other enhancement of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

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expenses

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outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

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capital maintenance approach

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-alternative to the transaction approach
-a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions
-drawback is that components of income aren't evident in its measurement
-used by the IRS "net worth check"

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gains

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increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners

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losses

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decrease in equity (net assets) from peripheral or inceidental transactions of an entity except those that result from expenses or distributions to owners

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sing-step income statement

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-consists of just two groupings: revenues and expenses
-income tax is frequently reported separately as the last item before net income to indicate its relationship to income before income tax

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multiple-step income statement

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separates operating transactions from nonoperating transactions, and matches costs and expenses with related revenues. also highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company

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operating section

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a report of the revenues and expenses of the compnay's principal operations

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sales or revenue section

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a subsection presenting sales, discounts, allowances, returns, and other related information. its purpose is to arrive at the net amount of sales revenue

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selling expenses

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a subsection that shows the cost of goods that were sold to produce the sales

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administrative or general expenses

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a subsection reporting expenses of general administration

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nonoperating section

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a report of revenues and expenses resulting from secondary or auxiliary activities of the company. special gains and losses that are infrequent or unusual, but not both, are normally reported in this section

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other revenues and gains

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a list of the revenues earned or gains incurred, generally net of any related expenses, from nonoperating transactions

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other expenses or losses

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a list of the expenses or losses incurred, generally net of any related incomes, from nonoperating transactions

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income tax

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a short section reporting federal and state taxes levied on income from continuing operations

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discontinued operations

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material gains or losses resulting from the disposition of a segment of the business

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extraordinary items

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unusual and infrequent material gains and losses

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natural expense classification

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used by manufacturing concerns and merchandising companies

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functional expense classification

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used by retail stores

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current operating performance approach

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only reflects regular and recurring revenue and expense elements

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modified all-inclusive concept

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-application of this approach is required in practice
-indicates that companies record most items, including irregular ones, as part of net income
-companies are required to highlight irregular items in the financial statements

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1. discontinued operations
2. extraordinary items
3. unusual gains and losses
4. changes in accounting principle
5. changes in estimates
6. corrections of errors

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irregular items

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occurs when
1. a company eliminates the results of operations and cash flows of a component from its ongoing operations
2. there is no significant continuing involvement in that component after the disposal transaction

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discontinued operation requirements

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component

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the lowest level at which a company can clearly distinguish the operations and cash flows form the rest of the company's operations

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discontinued operations

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the gain or loss from disposal of a component of a business

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restructuring charge

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relates to a major reorganization of company affiars

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retrospective adjustment

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-an adjustment that recasts the prior years' statements on a basis consistent with the newly adopted principle
-the company records the cumulative effect of the change for prior periods as an adjustment to beginning retained earnings of the earliest year presented

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prior period adjustment

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corrections of errors reported in the year in which it is discovered

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intraperiod tax allocation

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allocation within a period

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appropriated retained earnings

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account in which companies transfer the amount of retained earnings restricted

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comprehensive income

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includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

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statement of stockholders' equity

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reports the changes in each stockholder's equity account and in total stockholders' equity during the year