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22 Cards in this Set

  • Front
  • Back

Big Bath Accounting

Involves the inclusion of recurring operating expenses in "special charge" categories such as restructuring costs.

Income Statement Classification

The most common form of income statement classification is sometimes called "big bath" accounting.

Channel Stuffing

Accelerates revenue recognition by persuading distributors to purchase more of your product than necessary near the end of a reporting period.

Income Shifting

Is achieved by accelerating or delaying the recognition of revenues or expenses, which could be done through a practice called channel stuffing.

The Two Ways Managers Manipulate Income

1. Income shifting


2. Income statement classification

Other Income(expense)

Often is the classification used by companies in the income statement for nonoperating items.

Transitory Earnings

Result from transactions or events that are not likely to occur again in the foreseeable future or that are likely to have a different impact on earnings in the future.

Should Restructuring Costs be considered part of a company's permanent earnings stream

A financial statement user must interpret restructuring charges with consideration of the company's past history.

Some Unusual Items that warrant Additional Scrutiny

1. Restructuring Costs


2. Goodwill impairments


3. Asset impairments


4. Loss from write down of inventory


5. Loss from natural disasters


6. Gain or loss from litigation settlements




These items require investigation to determine their permanent or transitory nature.





Revenue Issues related to Unusual Items and Earnings Quality

1. Company loses a major customer that can't be replaced


2. Timing of revenue recognition in which pressure to meet certain earnings expectations may lead to premature revenue recognition.

Intraperiod Income Tax Allocation

The fact that discontinued operations is reported net of tax and separately from continuing operations.

When the component has been sold

Reported income effects of discontinued operations will include two elements:




1. Income or loss from operations of the component from the beginning of the reporting period to the disposal date


2. Gain or loss on disposal of component's assets

When the component is considered held for sale

Reported income effects of discontinued operation:




1. Income or loss from operations of the component from the beginning of the reporting period to the end of the reporting period.


2. An "impairment loss" if the book value of the assets of the component is more than fair value less cost to sell.

Discontinued Operations Disclosure Note

Provides additional details about the discontinued component, including its identity, its major classes of assets and liabilities, the major revenues and expenses constituting pretax income or loss from operations, the reason for the discontinuance, and the expected manner of disposition if held for sale.

Interim Reports

Financial statements covering periods of less than a year.




Benefits:




1. Enhance timeliness of financial information


2. Provide external users with additional insight on seasonality of business operations




Disadvantages:


1. Relative unreliability because of issues with estimation and allocation


2. Should smaller companies use lower tax rates in earlier quarters and higher rates in later quarters.


3. Should unusual material gains and losses be allocated over the entire year?





Reporting Revenues and Expenses

1. Under GAAP, interim reports are viewed as integral part of annual statements.


2. Most expenses are recognized in interim periods as incurred, but when they clearly benefit more than just one period, the expenses must be allocated among the periods through the use of accruals and deferrals.


3. Income tax expense at each interim period should be based on estimates of the effective tax rate for the whole year.

Interim Reporting Unusual Items

Discontinued operations and unusual items are reported entirely within the interim period in which they occur, which is more consistent with the discrete view rather than the integral view.

EPS

Follow same procedures as annual calculations; treated in manner consistent with the discrete view

Retrospectively

To recast prior years' financial statements when those statements are reported again in comparative form; those statements are made to appear as if the newly adopted accounting method had been used in those prior years.

Reporting accounting changes

Changes affecting: IFCO, NI, and related per share amounts for the postchange interim period are disclosed.

Minimum Disclosures

Complete financial statements not required, but certain minimum disclosures are required:




1. Sales, Income taxes, and net income


2. Earnings per share


3. Seasonal revenues, costs, and expenses


4. Significant changes in estimates for income taxes


5. Discontinued operations and unusual items


6. contingencies


7. Changes in accounting principles and estimates


8. Information about fair value of financial instruments and the methods and assumptions used to estimate fair values


9. Significant changes in accounting position



OCI Items

1. Foreign currency translation adjustments


2. Unrealized gains/losses on securities(AFS)


3. Minimum pension liabilities


4. Gain or loss from cash flow hedge