Chapter 4: Income Statement

Front 1

Define: income statement

Back 1

A summary of revenues and expenses and gains and losses for the period

Front 2

Define: net revenue. What is it shown in net of?

Back 2

Revenue earned from the sale of its principal goods or services.

It is shown in net of discounts, returns, and allowances.

Front 3

Define: Cost of Goods Sold (Manufacturing)

Back 3

The manufacturing costs required to create goods

Front 4

What are examples of other operating revenue?

Back 4

Lease and Royalties

Front 5

What do operating expenses consist of? Define.

Back 5

Selling: expenses incurred to generate sales (.e.g advertising, sales commissions, supplies)

Administrative: expenses related to general administration of the company's operations (e.g. salaries, insurance, telephone, bad debt)

Front 6

Define: other income or expense. Examples?

Back 6

Non-operating revenues and expenses.

Lease, dividend, sale of assets (gains or losses)

Front 7

How are unusual or infrequent items shown? If material, how will they be disclosed?

Back 7

With normal, recurring revenues and expenses; Disclosed separately before taxes.

Front 8

Define: equity earnings of non-consolidated subsidiaries

Back 8

The investor's proportional share of the investee's net income

Front 9

What are the inherent problems related to equity earnings?

Back 9

Net income reported could be much higher than dividends received from investment (i.e. cash flow); and therefor be higher than its ability to pay dividends or cover maturing liabilities.

Also, it represents earnings in exclusion to the operations of the business (i.e. distort profitability ratios)

Front 10

What are different special income statement items?

Back 10

1. Unusual or infrequent items

2. Equity Income

3. Discontinued Operations

4. Extraordinary Items

5. Changes in accounting principle

6. Minority Share of Earnings

Front 11

Define: non-consolidated business

Back 11

Businesses which are owned by a parent company, but whose financial statements are separated form the consolidated one of the parent.

Front 12

What is a common type of unusual item for discontinued operations? How is it treated? In terms of taxes, how are they shown?

Back 12

Disposal of business or product lines. Ideally, it should be removed from continuing operations. In net of taxes.

Front 13

What are the two methods in which a change of accounting principle is applied? Define.

Back 13

1. Retrospective: changes of previous periods applied.

2. Prospective: previous periods are not adjusted; the cumulative effect of past accounts are disclosed in the current period, net of taxes

Front 14

Define: minority interest. What should be done to minority share of earnings? How can companies own another firm that is not wholly purchased?

Back 14

The portion of a subsidiary corporation stock that is not owned by the parent. Deduct the portions of the minority shares of the earnings.

If they own more than 50% of ownership percentage.

Front 15

Formula: earnings per share

Back 15

Net Income / Common Shares Oustanding

Front 16

Define: retained earnings and appropriated retained earnings.

If a company has retained earnings, can it declare dividends?

Back 16

Undistributed income of the company; the yearly level of retained earnings portion restricted from dividends

Not necessarily because it must have sufficient cash to do so.

Front 17

How are stock dividends (less than 25%) accounted for? If material? What happens to the total stockholder's equity in both cases?

Back 17

Amounts equal to the fair market value of the shares from retained earnings to paid in capital.

If material, the amount transferred is the product of the par value and the number of additional shares

It does not change as amounts are only transferred.

Front 18

What are the four categories of comprehensive income?

Back 18

1. Foreign currency translations

2. Unrealized gains/losses of marketable securities

3. Equity changes from additional minimum pension liability adjustments

4. Unrealized gains and losses from derivatives

Front 19

Define: comprehensive income. What are the categories of such?

Back 19

Net income plus the period's change in accumulated other comprehensive income

1. Foreign currency translation adjustments

2. Unrealized returns of marketable securities

3. Unrealized returns from derivative instruments

Front 20

How are equity earnings presented regarding tax?

Back 20

Before tax.

Front 21

Extraordinary items: how are they presented regarding tax? How should they be dealt with for trend analysis?

Back 21

After tax. Removed as not expected to recur.

Front 22

Which accounts will dividends decrease?

Back 22

Cash and retained earnings