Income Statement

Front 1

What is the purpose of the I/S?

Back 1

The purpose of the I/S is to provide information about the uses of funds in the income process (i.e. , expenses), the uses of funds that will never be used to earn income (i.e. , losses), the sources of funds created by those expenses (i.e. , revenues), and the sources of funds not associated with the earnings process (i.e., gains).

Front 2

What are the uses of the I/S?

Back 2

The I/S is useful in:
1- Determining:
a. Profitability
b. Value for investment purposes,
c. Credit worthiness.
2- Predicting information about future cash flows (e.g., the amounts, timing, and uncertainty of cash flows) based on past performance.

Front 3

Note

Back 3

Cost is an amount (measured in money) expended for items such as capital assets, services (e.g. , payroll), and merchandise received. Cost is the amount actually paid for something.

Front 4

Note

Back 4

Unexpired costs are costs that will expire in future periods and be charged (allocated in a systematic and rational manner or matched) against revenues from future periods.

Front 5

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Back 5

Revenues & Expenses are recorded at their GROSS amount

Front 6

Note

Back 6

Gains & Losses are reported at their NET amounts (i.e., proceeds less net book value).

Front 7

What is meant by a "Gain"?

Back 7

A gain is the recognition of an asset either:
1- Not in the ordinary course of business
OR
2- Without the incurrence of an expense

Front 8

Note

Back 8

Not in the ordinary course of business example is gains on the sale of a fixed asset

Front 9

Note

Back 9

Without the incurrence of an expense example is finding gold on the company's property

Front 10

What is meant by a "Loss"?

Back 10

A loss is cost expiration either:
1- Not in the ordinary course of business
OR
2- Without the generation of revenue

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Back 11

Not in the ordinary course of business example is loss on the sale of investment assets

Front 12

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Back 12

Without the generation of revenue example is abandonment

Front 13

What are the major components of an I/S & RE statement?

Back 13

1- Income (or Loss) from continuing operations (individual line items show "gross of tax", then total reported "net of tax'')
2- Income (or Loss) from DCOs (reported "net of tax'')
3- Extraordinary items (reported "net o f tax'')
4- Cumulative effect of change in Accounting principle (reported "net of tax'')
IDEA

Front 14

Note

Back 14

Income from continuing operations includes:
1- Operating activities
2- Non-operating activities
3- Income taxes

Front 15

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Back 15

Income from DCOs is presented net of tax.

Front 16

Note

Back 16

Extraordinary items are presented net of tax and include items that are unusual in nature and infrequent in occurrence.

Front 17

What is meant by the Cumulative effect of change in Accounting principle?

Back 17

It is the cumulative effect of a change from one acceptable method of accounting to another ("GAAP to GAAP") because the new method presents the financial information more fairly than the old method.

Front 18

Note

Back 18

The cumulative effect of a change in accounting principle is presented net of tax.

Front 19

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Back 19

The multiple step I/S reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses.

Front 20

Note

Back 20

The benefit of the multiple step I/S is enhanced user information (because the line items presented often provide the user with readily available data with which to calculate various analytical ratios).

Front 21

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Back 21

In the single step I/S presentation of income from continuing operations, total expenses (including income tax expense) are subtracted from total revenues; thus, the I/S has a single step.

Front 22

Note

Back 22

The benefits of a single step I/S are its simple design and the fact that the presentation of types of revenues or expenses do not appear to the user to be classified as more important than others.

Front 23

What does the normal loss from DCO consist of?

Back 23

1- Impairment loss (and subsequent increases in fair value) of the component.
2- Gain/loss from actual operations
3- Gain/loss on disposal

Front 24

Note

Back 24

The 3 items consisting the gain/loss from DCOs shouldn't be included into "gain/loss from DCOs" item except in the period in which they occur and not before.

Front 25

Note

Back 25

A component of an entity is a part of an entity for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity.

Front 26

What are the components of an entity according to US GAAP?

Back 26

1- An operating segment,
2- A reportable segment
3- A reporting unit
4- A subsidiary
5- An asset group

Front 27

Note

Back 27

An asset group is a collection of assets to be disposed of together as a group in a single transaction and the liabilities directly associated with those assets that will be transferred in that same transaction.

Front 28

What are the components of an entity according to IFRS?

Back 28

1- A separate major line of business or geographical area of operations,
2- A subsidiary acquired exclusively with a view to resale.

Front 29

What are the criteria that should be ALL met in order for a component of a business (US GAAP) or a disposal group (IFRS) is classified as "Held for sale"?

Back 29

1- Management commits to a plan to sell the component
2- The component is available for immediate sale in its present condition.
3- An active program to locate a buyer has been initiated.
4- The sale of the component is probable and the sale is expected to be complete within one year.
5- The sale of the component is being actively marketed
6- Actions required to complete the sale make it unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Front 30

Note

Back 30

Under IFRS, before a component can be classified as held for sale, the individual assets and liabilities of the component must be measured in accordance with applicable standards and any resulting gains and losses must be recognized. After classification as held for sale, the component is reported at the lower of carrying value and fair value less costs to sell. U.S. GAAP does not require remeasurement of individual assets and liabilities before classification as held for sale, but the classification of a component as held for sale does trigger an impairment analysis of the component.

Front 31

What are the cases that the "results of operations of a component of an entity" will be reported in DCO?

Back 31

If either the component:
1- Has been disposed of, or
2- Is classified as held for sale.

Front 32

What are the criteria that should be ALL met in order to report in DCO "the results of operations of a component" that has been disposed of or is held for sale?

Back 32

1- The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal.
2- The entity will not have any significant continuing involvement in the operations of the component after the disposal.

Front 33

Note

Back 33

Impairment losses "Restoration" is allowed, but not in excess of the previously recognized cumulative loss.

Front 34

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Back 34

The results of DCOs of a component are reported in DCOs (for the current period and for all prior periods presented) in the period the component is either disposed of or is held for sale.

Front 35

Note

Back 35

The results of subsequent operations of a component classified as held for sale are reported in DCOs in the period in which they occur, like "Impairment loss reversal".

Front 36

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Back 36

Assets within the component that his operations has been discontinued are no longer depreciated or amortized.

Front 37

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Back 37

The DCOs loss from actual operations is not reported only from the period in which the "Plan to sell" has been established to the end of the year, but for the whole year in which the "Plan to sell" has been established.

Front 38

Note

Back 38

A gain or loss not previously recognized that results from the sale of the component is recognized at the date of sale and not before.

Front 39

Note

Back 39

Gains or losses related to DCOs anticipated to occur in future periods are not recognized until they occur.

Front 40

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Back 40

Adjustments to amounts previously reported in DCOs that are directly related to the disposal of a component of an entity in a prior period are classified in the current period in DCOs.

Front 41

What are the criteria that should be met ALL in order for a settlement to be considered "directly related" to a component of an entity?

Back 41

It must:
1- Have a demonstrated cause-and-effect relationship, and
2- Occur no later than one year after the date of the disposal transaction (unless circumstances beyond the control of the entity exist).

Front 42

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Back 42

A component classified as held for sale is measured at the lower of its carrying amount or fair value less costs to sell.

Front 43

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Back 43

Costs to sell are the incremental direct costs to transact the sale.

Front 44

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Back 44

A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to the financial statements.

Front 45

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Back 45

As part of its convergence with IFRS, US GAAP requires the recognition of a liability for the costs associated with an exit or disposal activity.

Front 46

What are the costs that might be associated with exit and disposal activities?

Back 46

1- Involuntary employee termination benefits.
2- Costs to terminate a contract that is not a capital lease.
3- Other costs associated with exit or disposal activities, including costs to consolidate facilities or relocate employees.

Front 47

Note

Back 47

An entity's commitment to an exit or disposal plan, by itself, is not enough to result in liability recognition. A liability associated with an exit or disposal activity should be recognized only when some criteria are met.

Front 48

What are the criteria that should be ALL met in order for an entity to recognize a liability associated with an exit or disposal activity?

Back 48

1- An obligating event has occurred
2- The event results in a present obligation to transfer assets or to provide services in the future, and
3- The entity has little or no discretion to avoid the future transfer of assets or providing of services.

Front 49

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Back 49

Future operating losses expected to be incurred as part of an exit or disposal activity are recognized in the period(s) incurred.

Front 50

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Back 50

The liability associated with an exit or disposal activity should be measured at fair value.

Front 51

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Back 51

The liability associated with an exit or disposal activity may be adjusted in future periods as a result of revisions to the timing of or estimated cash flows from the exit or disposal activity.

Front 52

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Back 52

The Liability revisions are accounted for prospectively (change in estimate).

Front 53

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Back 53

Costs associated with an exit or disposal activity related to a discontinued operation will be reported in d iscontinued operations.

Front 54

Note

Back 54

Costs associated with an exit or disposal activity NOT related to a discontinued operation will be reported in income from continuing operations.

Front 55

What are the issues that should be disclosed in the footnotes regarding the "Exit or Disposal activity"?

Back 55

1- A description of the exit or disposal activity,
2- The line item(s) in the income statement in which the costs are aggregated.
3- For each reportable segment, the total amount of costs expected to be incurred
4- If a liability for a cost associated with the activity is not recognized because fair value cannot be reasonably estimated, that fact and the reasons for that should be disclosed.

Front 56

What is meant by Extraordinary items?

Back 56

Under U.S. GAAP, extraordinary items are transactions and other events that are:
1- Material in nature,
2- Of a character significantly different from the typical or customary business activities,
3- Not expected to recur in the foreseeable future, and
4- Not normally considered in evaluating the ordinary operating results of an enterprise.

Front 57

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Back 57

Extraordinary items are usually determined by informed professional judgment, taking into consideration all the facts involved in a particular situation.

Front 58

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Back 58

Extraordinary items must be separately disclosed in the income statement, net of any related tax effects, after discontinued operations.

Front 59

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Back 59

Losses from major strike by employees is NOT considered to be Extraordinary item

Front 60

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Back 60

Gains or losses are not considered Extraordinary except if they are "Ununsual in nature" AND "Infrequent in occurrence"

Front 61

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Back 61

Items of income or loss that are either unusual OR infrequent are not extraordinary, If material, these items should be reported as a separate line item as part of Non-operating income from continuing operations (and not net of tax).

Front 62

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Back 62

The nature of the Non-extraordinary item and the financial effects should be disclosed on the face of the income statement or in the footnotes.

Front 63

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Back 63

Extraordinary Items Gains/Losses concept is prohibited under IFRS

Front 64

What are the classification of "Accounting changes" according to GAAP?

Back 64

1- Changes in accounting estimate
2- Changes in accounting principle
3- Changes in accounting entity.

Front 65

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Back 65

Error corrections are not considered accounting changes.

Front 66

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Back 66

A change in accounting estimate occurs when it is determined that the estimate previously used by the company is incorrect.

Front 67

What are the events resulting in estimate changes?

Back 67

1- Changes in the lives of fixed assets.
2- Adjustments of year-end accrual of officers' salaries and/or bonuses.
3- Write-downs of obsolete inventory.
4- Material nonrecurring IRS adjustments.
5- Settlement of litigation.
6- Changes in accounting principle that are inseparable from a change in estimate

Front 68

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Back 68

Changes in accounting estimate are accounted for PROSPECTIVELY (i.e. , implement in the current period and continue in future periods). They do not affect previous periods (i.e., no effect on previously reported RE).

Front 69

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Back 69

If a change in accounting estimate affects several future periods, the effect on:
1- Income before extraordinary items
2- NI
3- Related per share information
for the current year should be disclosed in the notes to the FSs.

Front 70

Note

Back 70

Changes in ordinary accounting estimates usually made each period do not have to be disclosed unless they are material.

Front 71

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A change in accounting principle is a change in accounting from one accounting principle to another acceptable accounting principle (i.e., GAAP to GAAP or IFRS to IFRS).

Front 72

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Back 72

An accounting principle may be changed only if required by GAAP/IFRS or if the alternative principle is preferable and more fairly presents the information.

Front 73

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Back 73

An accounting change should not be made for a transaction or event in the past that has been terminated or is nonrecurring.

Front 74

What are the types of effects that happen in case of changes in accounting principles?

Back 74

1- Direct effect
2- Indirect effect
3- Cumulative effect

Front 75

What are the direct effects of a change in accounting principle?

Back 75

Adjustments that would be necessary to restate the FSs of prior periods.

Front 76

What are the indirect effects of a change in accounting principle?

Back 76

Differences in nondiscretionary items based on earnings (e.g., bonuses) that would have occurred if the new principle had been used in prior periods.

Front 77

What is the cumulative effect of a change in accounting principle in case of non-comparative FSs?

Back 77

The effect is equal to the difference between the amount of beginning RE in the period of change and what the RE would have been if the accounting change had been retroactively applied to all prior affected periods.

Front 78

Note

Back 78

Cumulative effect of a change in accounting principle in case of non-comparative FSs includes direct effects and only those indirect effects that are entered in the accounting records.

Front 79

What is the cumulative effect of a change in accounting principle in case of comparative FSs?

Back 79

The cumulative effect is equal to the difference between beginning RE in the first period presented and what RE would have been if the new principle had been applied to all prior periods.

Front 80

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Back 80

The general rule is that changes in accounting principle should be recognized by adjusting beginning RE in the earliest period presented for the cumulative effect of the change, and, if prior period FSs are presented, they should be restated (retrospective application).

Front 81

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Back 81

Under IFRS, when an entity disclosing comparative information applies an accounting principle retroactively or makes a retrospective restatement of items in the FSs, the entity must (at a minimum) present three B/Ss (end of current period, end of prior period, and beginning of prior period) and two of each other FS (current period and prior period). The cumulative effect adjustment would be shown as an adjustment of the beginning REs on the B/S for the beginning of the prior period. US GAAP does not have a three B/S requirement.

Front 82

What are the exceptions to the GR of "Reporting changes in an accounting principle"?

Back 82

1- Impracticable to estimate (i.e. Any change in inventory cost flow assumption to LIFO)
2- Change in Depreciation method

Front 83

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Back 83

All exceptions to the GR of "Reporting changes in an accounting principle" are accounted for prospectively

Front 84

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Back 84

If an accounting change is not considered material in the year of change but is reasonably expected to become material in later periods, it should be fully disclosed in the year of change.

Front 85

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Back 85

Under US GAAP, a change in accounting entity occurs when the entity being reported on has changed composition.

Front 86

What are the examples on changes in entity composition that leads to accounting for the change as "Change in accounting entity"?

Back 86

1- Consolidated or combined FSs that are presented in place of statements of the individual companies.
2- Changes in the companies included in the consolidated or combined FSs from year to year.

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Back 87

If a change in accounting entity occurs in the current year, all previous FSs that are presented in comparative FSs along with the current year should be restated to reflect the information for the new reporting entity.

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Back 88

Full disclosure of the cause and nature of the change should be made, including changes in income before extraordinary items, NI, and REs.

Front 89

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Back 89

IFRS does not include the concept of a change in accounting entity.

Front 90

What are the types of errors that leads to "Prior period adjustment"?

Back 90

1- Mathematical mistakes
2- Mistakes in the application of US GAAP/IFRS
3- Oversight or misuse of facts that existed at the time the FSs were prepared.
4- Changes from a non-GAAP/IFRS method of accounting to a GAAP/IFRS method of accounting (e.g. , cash basis to accrual basis),

Front 91

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Back 91

Changes from a non-GAAP/IFRS method of accounting to a GAAP/IFRS method of accounting is a specific correction of an error.

Front 92

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Back 92

If comparative FSs are presented and FSs for the year with the error are presented , merely correct the error in those prior FSs.

Front 93

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Back 93

If comparative FSs are presented and FSs for the year with the error are not presented (e.g. , because it is too far back in years), adjust (net of tax) the opening REs of the earliest year presented.

Front 94

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Back 94

If comparative financial statements are NOT presented the error correction should be reported as an adjustment to the opening balance of retained earnings (net of tax).

Front 95

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Back 95

Under IFRS, when it is impracticable to determine either the period-specific effect or the cumulative effect of an error the entity is required to restate information prospectively from the earliest date that is practicable. US GAAP does not have an impracticality exemption for error corrections.

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Back 96

RE statement usually presented immediately following the I/S