Intermediate Accounting Chapter 4

Front 1

Understand the uses and limitations of an income statement

Back 1

The income statement provides investors and creditors with info that helps them predict the amount. timing, and uncertaintyh of future cash flows. Also, the income statement helps users determine the risk (level of uncertainty) of not achieving partifular cash flows. The limitations are: 1. The statement does not include many items that contribute to the general growth and well being of a company. 2. Income numbers are often affected by the accounting methods used. 3. Income measures are subject to estimates. The transaction approach focuses on the activities that occurred during a given period. Instead of presenting only a net change in net assets, it discloses the components of the change. The transaction approach to income measurement requires the use of revenue, expense, loss, and gain account.

Front 2

Prepare a single-step income statement

Back 2

In a single step income statement just two groupings exist; revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss--a single subtraction. Frequently, companies report income tax separately as the last item before net income.

Front 3

Prepare a multiple step income statement

Back 3

A multi step income statement shows two further classifications 1. a separation of operating results from those obtained through the subordinate or nonoperating activities of the company; and 2. a classification of expenses by functions such as merchandising or manufacturing, selling, and administration.

Front 4

Explain how to report irregular items.

Back 4

Companies generally include irregular gains or losses or nonrecurring items in the income statement as follows 1. Discontinued iperations of a component of a business are classified as a separate item, after continuing operations. 2. The unusual, material, nonrecurring items that are significantly different from the customary business activities are shown in a separate section for extraordinary items below discontinued ops. 3. other items of a material amount that are of an unusual or nonrecurring nature and are not considered extraordinary are separately disclosed as a component of continuing ops. Canges in accounting principle and corrections of errors are adjusted through retained earnings.

Front 5

Explain intraperiod tax allocation.

Back 5

Companies should relate the tax expense for the year to specific items on the income statement to provide a more informative disclosure to statement users. This procedure, intraperiod tax allocation, relates the income tax expense for the fiscal periodto the following items that affect the amount of the tax provisions: 1. Income from continuing operations, 2. Discontinued operations, 3. extraordinary items.

Front 6

Identify where to report EPS info.

Back 6

Because of the inherent dangers of focusing attention solely on EPS, the profession concluded that companies must disclose EPS on the face of the income statement, a company that reports a discontinued ops or extraordinary item must report per share amounts for these line items either on the face of the income statement or in the notes to the financial statement.

Front 7

Prepare a retained earnings statement

Back 7

The retained earnings statement sould dislose net income (loss), dividends, adjustments due to changes in accounting principles, error corrections, and restrictions of retained earnings.

Front 8

Explain how to report other comprehensive income

Back 8

Companies report the components of other comprehensive income in a second statement, a combined statement of comprehensive income or in a statement of stockholder's equity.

Front 9

Accumulated other comprehensive income

Back 9

Stockholder's equity minus commonm stock and retained earnings.

Front 10

appropriated retained earnings

Back 10

Companies often restrict retained earnings to comply with contractual requirements from te board of director's policy or current necessity. Generally disclosed in the financial statements.transfered from restricted retained earnings to this account.

Front 11

change in estimates

Back 11

not infrequently, due to time, circumstances, or new info, even estimates originally made in good faith must be changed. A company accounts for these estimates in the period of change only if they affect that period or if it affects that and future periods. Companies do not handle changes in estimates respectively. Changes are not consitered errrors or extraordinary items.

Front 12

Comprehensive income

Back 12

Includes all changes in equity during a period except those resulting from investments by owners and distributions to woners. It includes: All revenues, gains, expenses, and losses reported in net income and all gains and losses that bypass net income but affect stockholder's equity.

Front 13

current operating performance approach

Back 13

they argue that the most useful income measure reflects a company's regular and recurring revenue and exp elements. IOrregular items do not reflect a company's future earning power.

Front 14

discontinued operation

Back 14

These occur when 2 things happen. 1. A company eliminates the results of operations and cash flows of a component from its ongiong operations, and 2. there is no significant continuing involvement in that component after the disposal transaction. Component would be like if several product groups have diff product lines and brands a product group is the lowest level at which it can clearly distinguish the operations and cash flows from the rest of the company's ops.Therefore each product group is a component of the company.

Front 15

Earnings management

Back 15

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

Front 16

Earnings per share

Back 16

net income minus preferred dividends (income available to common stockholder's divided by the weighted average of common shares outstanding. Companies must disclose this on the face of the income statement.

Front 17

Extraordinary items

Back 17

Non recurring material items that differ from a company's normal business activities. Unusual nature: the underlying event should possess a high degree of abnormality and be of a type clearly unrelated to, or incidentally related to the ordinary and typical activities of the company, taking into account the environment in which it operates. Infrequent occurrence: The underlying event should be of a nature that the company doesn't expect it to recur in the forseeable future.

Front 18

Not extraordinary items

Back 18

1. write downs/offs of receivables, inventories, equip, deferred research and development costs, and other intangible assets. 2. Gains or losses from exchange or translation of foreign currencies. 3. Gains or losses on disposal of a component of an entity (reported as discontinued ops.) 4. Gains or losses from sale or abandomnent of porperty, plant, or equipment. 5. Effects of a strike, including those against competitiors and major suppliers. 6. Adjustments of accruals on long term contracts.

Front 19

Income statement

Back 19

repoirt that measures the success of company operations for a given time period. Helps creditors with amounts, timing, and uncertainty of future cash flows.

Front 20

Intraperiod tax allocation

Back 20

allocation within a period. Have to assign it to specific items. This helps the statement users better understand the affect of tax on various components of net income.

Front 21

Irregular items

Back 21

1. Discontinued ops.
2. Extraordinary items
3. Unusual gains/losses
4. Changes in accounting principle
5. Changes in estimate
6. Corrections of errors.

Front 22

Modified all inclusive concept

Back 22

companies record most items, including irregular ones, as part of net income, In addition they highlight irregular items in financial statement s so users can better determine long term earning power.

Front 23

prior period adjustments

Back 23

corrections of errors and are included in retained earnings. Changes are reported in the beginning balance of retained earnings.

Front 24

write offs

Back 24

included in income from cont. ops.

Front 25

prepaid rent expense

Back 25

is an asset on the balance sheet