Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
60 Cards in this Set
- Front
- Back
|
What is the usefulness of income statement? |
- evaluate the past performance of a company - provide a basis for predicting future performance - help assess the risk of uncertainty of achieving future cash flows. |
|
|
What are the limitations of income statement? |
- companies omit items from the income statement that they can't measure reliably - income numbers are affected by the accounting methods employed - income measurement involves judgement |
|
|
What is earnings management? |
- planned timing of revenues, expenses, gains, and losses to smooth out bump in earnings - used to increase income in the current year at the expense of income in future yeras |
|
|
What is quality of earnings? |
- information used to predict future earnings and cash flows, predictive value - ability of reported earnings to predict future earnings |
|
|
What is the transaction approach? |
- method of income measurement - focuses on income related activities that have occurred during the period |
|
|
What is the capital maintenance approach? |
- most common alternative to the transaction approach - company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions - main drawback is that the components of income aren't evident in its measurement
|
|
|
What is revenues? |
inflows or other enhancements 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 central operations. |
|
|
What are expenses? |
outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, carrying out other activities that constitute the entity's ongoing major or central operations |
|
|
What are gains? |
increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners |
|
|
What are losses? |
decreases in equity from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners |
|
|
What is a single-step income statement? |
- consists of 2 groupings; revenues and expenses - expenses are deducted from revenue to arrive at net income or loss |
|
|
What is the operating section? |
report of the revenues and the expenses of the company's principal operations |
|
|
What is non-operating section? |
- report of revenues and expenses resulting from secondary or auxillary activities of the company - special gains and losses that are infrequent or unusual, but not both, are reported here |
|
|
What is income tax? |
short section reporting federal and state level taxes levied on income from continuing operations |
|
|
What is discontinued operations? |
material gains or loss resulting from the disposition of a segment of the business |
|
|
What are extraordinary items? |
- unusual and infrequent gains or losses - material in amount |
|
|
What is the modified all-inclusive concept? |
- required application of this approach in practice - says that companies record most items, including irregular ones, as part of the net income - required to highlight irregular items in the financial statement so that users can better determine the long-run earning power of the company |
|
|
What are irregular items categories? |
- discontinued operations - extraordinary operations - unusual gains and losses - change in accounting principle - change in estimate - correction of errors |
|
|
What is discontinued operations? |
- most common type of irregular operiatons - when; = company eliminates the results of operations and cash flows of a component from its ongoing operations = there is no significant continuing involvement in that component after the disposal transaction |
|
|
What are extraordinary items? |
- nonrecurring material items that differ significantly from a company's typical business activities - must be both unusual in nature and infrequency of inccurence |
|
|
What is intraperiod tax collection? |
- companies report irregular items ( except for unusual gains and losses) on the income statement or statement of retained earnings net of tax - allocation within a period |
|
|
What is earnings per share? |
- (net income minus preferred dividends)/(weighted average of common shares outstanding) |
|
|
What is appropriated retained earnings? |
amount of retained earnings restricted to an account |
|
|
What is comprehensive income? |
- items that bypass the income statement are included - includes all changes in equity during a period except those resulting from investments by owners and distribution to owners = revenues and gains, expenses and losses, and all gains and losses that bypass net income but affect SH's equity |
|
|
- a 2nd income statement - combined statement of comprehensive income - part of the statement of SH's equity |
How does FASB display the components of comprehensive income? |
|
|
What is Statement of Stockholder's Equity? |
reports the change in each SH's equity account and total SH's equity during the year. |
|
|
What is capital maintenance approach? |
- income = net assets change adjusting for additional investments from owners and dividends |
|
|
what is accounting measurement of income? |
- aka transaction approach - income = revenues - expenses + gains - losses |
|
|
What is revenue? |
- inflows or increase of assets or decrease of liabilities from activities related to the major operation of business entity - will eventually increase SH's equity |
|
|
What is expense? |
- outflows or decrease of assets or increase of liabilities of a business entity from activities related to major operations of a business entity - will eventually decrease SH's equity |
|
|
What are irregular items? |
- result from discontinued operations - extraordinary items - unusual gains or losses - corrections of errors of prior year - accounting change |
|
|
What are the 4 parts of the income statement? |
- income from continuing operations - results from discontinued operations - extraordinary items - earnings per share |
|
|
Describe the income from continuing operations |
A. Net Sales B. Cost of Goods Sold C. Operating Expenses D. other revenues and expenses E. income taxes for the continuing operations |
|
|
Describe the results from discontinued operations |
A. Income (losses) from operations of discontinued components B. Gains (losses) from disposal of discontinued components |
|
|
What are restructuring costs? |
- costs associated with reorganization of operations EX: relocation costs, severance pays - PROS: greater operational efficiency in the future. and is recognized in the period in which the reorganization was made - CONS: premature restructuring expense or liability recognition violate the matching subject to income manipulation |
|
|
- managers can only recognize restructuring costs when a liability has actually happened - alleviates the income mainpulation problem associated with the recognition of restructuring costs - promoting the matching principle |
What did SFAS 146 do the current treatment of restructuring costs? |
|
|
What is the multiple-step income statement? |
- subdivides the continuing operations results into subgroups based on the characteristics of operating revenues and expenses |
|
|
What are transitory earnings? |
- lower earnings quality than permanent earnings - results from transactions that are not likely to occur again in the foreseeable future or likely to have a different impact on the earnings in the future EX: restructuring costs, extraordinary gains or losses |
|
|
What is a discontinued operations? |
- company eliminates the operations of a component of a business - company won't have significant involvement in the operations of the component after the disposal |
|
|
What is a component? |
comprises operations and cash flows that can be clearly distinguished, operationaly and for financial reporting purposes, from the rest of the entity EX: operating segment, reporting segment |
|
|
What is an operating segment? |
- engages in business activities when generating revenues and incurred expenses - discrete financial information available - managers regularly review its operating results to make decisions |
|
|
What is reporting unit? |
operating segment or a level below it as long as discrete financial info is available and managers regularly review the information |
|
|
What is an asset group? |
group of assets represents the lowest level for which the cash flows are largely independent of the cash flows or other groups |
|
|
What are extraordinary items? |
- unusual in nature - infrequent in occurrence - material in amount Ex: earthquake, prohibition under a new law |
|
|
What is non-controlling interest? |
portion of equity interest in a subsidiary not attributable to the parent company |
|
|
How to calculate earnings per share? |
(Net Income - Preferred Dividends)/(Weighted Average of common Share Outstanding) |
|
|
What is comprehensive income? |
- change in equity excluding owner related transactions such as investments from owners and dividend distributions |
|
|
What are the components of comprehensive income? |
- net income - other comprehensive income items |
|
|
What is earnings quality? |
- refers to the ability of reported earnings to predict future earnings -predictive value is a components of the relevance, primary quality of accusing info |
|
|
What earnings management? |
- practice be which earnings reported reflect the desires of the management rather than the underlying financial performance of the firm - planned timing of revenues, expenses, gains,and losses to smooth out bumps in earnings |
|
|
What is big bath? |
- earnings management device - excessive restructuring charges - overestimation of the impairment loss on the asset of the discontinued operations |
|
|
What are cookie jar reserves? |
for bad debts, loan loss reserves banks, litigation services, warranties, and other accruals |
|
|
What are intentional errors? |
- immaterial and intentional bias in estimates |
|
|
What is income shifting? |
premature or aggressive revenue recognition at the expense of future earnings |
|
|
What is the usefulness of the income statement? |
- evaluate of the past performance of the company - provides a basis for predicting future performance - help assess the risk or uncertainty of achieving future cash flows |
|
|
What are the limitations of the income statement? |
- assets are mostly reported at cost, thus the unrealized gains or losses on some assets aren't recognized - for investment, reported at market value, the unrealized gains or losses of some are reported only in the balance sheet statement - income is based on estimates - affected by choice of accounting methods - can be manipulated judgement needed for revenue and expense recognition |
|
|
What is Statement of Cash Flows? |
- provides uses and sources of cash and operating, financing, and investing information of a business entity - 3 sections = operating = investing = financing |
|
|
What is current cash debt coverage ratio? |
(net cash provided by operating activities)/(average current liabilities) |
|
|
What is cash debt coverage ratio? |
(net cash provided by operating activities)/(average total liabilities) |
|
|
What is free cash flow? |
(net cash provided by operating activities) - (capital expenditures) - dividends |
