Int. Acct. Ch. 4 Income Statement & Statement Of Cash Flows

Front 1

What is the purpose of the income statement?

Back 1

To summarize the profit generating activities that occured during a particular reporting period.

Front 2

Which financial statement is most useful for investors and creditors to predict future profitability?

Back 2

The Income Statement.

Front 3

What is the purpose of the statement of cash flows?

Back 3

To provide information about the cash receipts and cash disbursements of an enterprise that occured during the period.

Front 4

Why are the income statement and statement of cash flows considered change statements?

Back 4

The income statement is considered a change statement because it reports the change in stockholders equity as a result of revenues, expenses, gains and losses. The statement of cash flows is considered a change statement because it reports events that caused cash to change during a period.

Front 5

What are the components of income from continuing operations?

Back 5

Revenues, Expenses, Gains and Losses that will probably continue in future periods, excluding those related to discontinued operations and extraordinary items.

Front 6

What are gains and losses?

Back 6

They are increases or decreases in equity resulting from peripheral or incidental transactions.

Front 7

Is income tax expense reported as a separate expense in the income statement?

Back 7

Yes.

Front 8

What is the difference between operating and non-operating income?

Back 8

Operating income includes revenues and expenses directly related to the primary revenue-generation activities of the company. Non-operating income relates to peripheral or incidental activities (ie interest/dividend revenue, gains or losses from selling investments)

Front 9

What is the primary advantage of the multi-step format of the income statement?

Back 9

By separately classifying operating and non-operating items, the multi step income statement provides information that might be useful in analyzing trends.

Front 10

Do the bottom line numbers differ depending on which income statement format you use?

Back 10

No, bottom line numbers are the same regardless if you use single step or multi step.

Front 11

What is earnings quality?

Back 11

The term refers to the ability of reported earnings (income) to predict a company's future earnings.

Front 12

What two methods can managers use to manipulate income?

Back 12

1) Income Shifting and 2) Income statement classification

Front 13

What is income Shifting?

Back 13

It is achieved by accelerating or delaying the recognition of revenues or expenses.

Front 14

What are some examples of income statement classification?

Back 14

Inclusion of recurring operating expenses in "special charge" categories. Also called "big bath" accounting.

Front 15

Restructuring costs are incurred in connection with...?

Back 15

A program that is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted.

Front 16

When are restructuring costs recognized?

Back 16

In the period the exit or disposal cost obligation actually is incurred.

Front 17

What does the Sarbanes-Oxley Act require in regards to pro forma earnings?

Back 17

A reconciliation between pro forma earnings and earnings determined according to GAAP.

Front 18

What are the two types of events that require separate reporting below income from continuing operations?

Back 18

1) discontinued operations and 2) extraordinary items

Front 19

What is intraperiod tax allocation?

Back 19

It allocates income tax expense (or benefit if a loss) with each major component of income that causes it.

Front 20

How are the two items reported separately below income from continuing operations presented in terms of tax?

Back 20

They are presented net of the related income tax effect.

Front 21

What two requirements characterize extraordinary items?

Back 21

They must be both unusual in nature and infrequent in occurrence.

Front 22

How are extraordinary gains and losses presented in the income statement?

Back 22

They are presented net of tax in the income statement below discontinued operations.

Front 23

What are the three categories of accounting changes?

Back 23

1) change in accounting principle, 2) change in estimate 3) change in reporting entity

Front 24

How are voluntary changes in accounting principles accounted for?

Back 24

They are accounted for retrospectively, by revising prior years' financial statements.

Front 25

What is a prior period adjustment?

Back 25

The correction of material errors in the financial statements.It is an addition to or reduction in the beginning retained earnings balance in a statement of shareholders equity.

Front 26

What is the EPS ratio?

Back 26

Earnings per share, which shows the amount of income earned by a company expressed on a per share basis.

Front 27

How is basic EPS computed?

Back 27

Basic EPS is computed by dividing income available to shareholders (minus preferred stock dividends) by the weighted average number of common shares outstanding.

Front 28

What is included in comprehensive income?

Back 28

It incomes net income as well as other gains and losses that change shareholders equity but are not included in traditional income.

Front 29

Does comprehensive have to be included in the income statement?

Back 29

No, it can be presented as a separate statement.

Front 30

The statement of cashflows classifies all transactions affecting cash into what 3 categories?

Back 30

1) operating activities 2) investing activities 3) financing activities

Front 31

What are the two acceptable methods to report operating activities?

Back 31

Indirect and Direct method

Front 32

What is the difference between the direct and indirect method?

Back 32

By the direct method, the cash effect of each operating activity is reported directly in the SCF. By the indirect method, cash flow from operating activities is derived indirectly by starting with reported net income and adding or subtracting items to convert that amount to cash basis.

Front 33

Name three cash outflows from investing activities.

Back 33

1. Cash paid for the purchases of long lived assets used in the business.

2. The purchase of investment securities.

3. Loans to other entities.

Front 34

Name three cash inflows from investing activities.

Back 34

1. The sale of long lived assets used in the business.

2. The sale of investment securities.

3. The collection of a nontrade receivable (excludes interest which is an operating activity.)

Front 35

Name 2 cash inflows from operating activities.

Back 35

Cash received from 1. customers from the sale of goods or services. 2 Interest and dividends from investments.

Front 36

Name 4 cash outflows from operating activities.

Back 36

Cash paid for 1. the purchases of inventory. 2. salaries, wages and other operating expenses, 3. interest on debt. 4. income taxes

Front 37

Name 2 cash inflows from financing activities.

Back 37

Cash received from 1. owners when shares are sold to them. 2 creditors when cash is borrowed through notes, loans, mortgages, and bonds.

Front 38

Name 3 cash outflows from financing activities.

Back 38

Cash paid to 1. owners in the form of dividends or other distributions. 2 owners for the reacquisition of shares previously sold 3. creditors are repayment of the principal amounts of debt.

Front 39

In addition to discontinued operations, what other events sometimes are reported separately in the income statement?

Back 39

Extraordinary items. The predictive ability of an income statement is enhanced if normal and recurrent transactions are separated from unusual and nonrecurrent items.