Motivations

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Roxanne, you should believe in yourself. Stay awake. I know you can do more. I know you can be on the top. I know that you will crash the exam

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Go!

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Aa

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Aa

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Aa

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Aa

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A

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INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME 1. Income Statement Elements a. The income statement reports the results of an entity’s operations over a period of time, such as a year. The Income Equation Income (Loss) = Revenues + Gains – Expenses – Losses b. The following are the elements of an income statement: 1) Revenues are inflows or other enhancements of assets or settlements of liabilities (or both) from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations. 2) Gains are increases in equity (or net assets) other than from revenues or investments by owners. 3) Expenses are outflows or other usage of assets or incurrences of liabilities (or both) from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations. 4) Losses are decreases in equity (or net assets) other than from expenses or distributions to owners. c. All transactions affecting the net change in equity during the period are included in income except 1) Transactions with owners 2) Prior-period adjustments (such as error correction or a change in accounting principle) 3) Items reported initially in other comprehensive income 4) Transfers to and from appropriated retained earnings d. Revenues, expenses, gains, and losses are recorded in temporary (nominal) accounts because they record the transactions, events, and other circumstances during a period of time. These accounts are closed (reduced to zero) at the end of each accounting period, and their balances are transferred to real accounts. 1) For example, income or loss for the period (a nominal account) is closed to retained earnings (a real account) at the end of the reporting period.

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A

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Section A – External Financial Reporting Decisions A.1. Financial Statements Note: References to the relevant sections of the FASB’s Accounting Standards Codification® and to other publications of the FASB are provided throughout Section A. The references are supplied for candidates who wish to do further research on the topics. Candidates are not expected to memorize the relevant ASC reference numbers or Concepts Statement numbers. Financial accounting is the process of reporting the results and effects of the financial transactions a business undertakes. The objective of financial reporting is to provide useful financial information about the entity for decision-making. Those using the financial information to make decisions include present and potential equity investors, lenders, and other creditors who need to make decisions about providing resources to the entity. The decisions relate to buying, selling, or holding debt or equity instruments and providing credit. In order to make these decisions, investors, lenders, and other creditors need information to help them assess the amount of, timing of, and prospects for future net cash inflows to the entity.2 Other users who may or may not be providing capital to the firm—such as management, employees, financial analysts and regulators—may also find financial statements useful as well. The types of decisions potential investors, lenders, and other creditors are making are numerous and varied. It is not possible for accounting information to provide all of the information that all users need to make their decisions. Users need to access information from other sources as well, such as economic forecasts, the political climate, and industry outlooks.3 However, the financial statements do attempt to provide as much useful information as possible. Users of Financial Information Published financial information must be in compliance with the established accounting standards because outside users will rely on it to make a variety of decisions. Accounting standards are in place to protect outside users by ensuring that the information is accurate and useful and can be understood by everyone. Because so many people are using financial information for so many diverse purposes, the reasons people need the financial information are also diverse, such as: • Making investment decisions. • Extending or withholding credit. • Assessing areas of strength and weakness within the company. • Evaluating management performance. • Determining whether or not the company is in compliance with regulatory requirements. Users of financial information can be classified by various distinctions: Direct and Indirect Users. Direct users are directly affected by the results of a company. Direct users include investors and potential investors, employees, management, suppliers, and creditors. Direct users stand to lose money if the company has financial problems. Indirect users are people or groups who represent direct users. They include financial analysts and advisors, stock markets, and regulatory bodies.