Chapter 4 intermediate accounting
Terms
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- define income statement
- the report that measures the success of company operations for a given period of time
- why do investors and creditors use the income statement?
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1.evaluate past performance
2.provide a basis for predicting future performance
3. help assess the risk or uncertainty of achieving future cash flows - what elements are found in the income statement?
- revenue,expense,gain,and losses
- what are some limitations of the income statement?
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1. companies omit items from the i.s that they cannot measure reliably
2. income #'s are affected by the accounting methods employed
3. income measurement involves judgement. - what is earnings management?
- the planned timing of revenues, expenses, gains and losses to smooth bumps in earnings
- T/F. earnings management can negatively affect the quality of earnings.
- true. if it distorts the info in a way that is less useful for predicting future earnings and cash flows
- define revenues
- inflows or other enhancements of assets of an entity during a period from activities that constitute the entity's ongoing major operations
- define expenses
- outflows or other using up of assets during a period from carrying out activities that constitute the entity's ongoing major operations
- define gains
- increase in equity (net assets) from peripherial or incidental transactions of an entity
- define losses
- decrease in equity (net assets) from peripherial or incidental transactions of an entity
- name some examples of revenues
- sales,interest,rents
- what are some examples of expenses
- cost of goods sold,interest
- describe the format of a single step income statement
- it consists of only two groups: revenues and expenses. expenses are deducted from revenues to arrive at net income or loss
- what are the 6 sections of a multistep income statement (in order)
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1. operating section
2. non operating section
3. income tax
4. discontinued operations
5. extraordinary items
6. earnings per share - what are the four sections found in the operating section of a multistep i.s.
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1. sales/revenue
2. cost of goods sold
3. selling expense
4. administrative or general expense - what are the two sections found in the non operating section of a multistep i.s
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1. other revenue/gains
2. other expenses/losses - what are six categories of irregular items?
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1. discontinued operations
2. extraordinary items
3. unusual gains and losses
4. changes in accounting principle
5. changes in estimates
6. corrections of errors - when is something classified as a discontinued operation?
- a company eliminates the results of perations and cash flows of a component from its ongoing operations and there is no significant continuing involvement in that component after the disposal transaction.
- how is discontinued operations shown on the i.s
- shown net of tax before extraordinary items and after continuing operations
- what are extraordinary items
- events and transactions that are unusual in nature and infrequent in occurrence
- give two examples of an extraordinary item
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1. prohibition of a newly enacted law
2. earthquake in nyc - how are extraordinary items shown in the i.s?
- net of taxes in a seperate section just before net income
- define unusual gains and losses
- unusual or infrequent but not both
- how are unusual gains or losses shown on the income statement?
- in seperate section above income before extraordinary items. not shown net of tax
- what is changes of principle?
- change from one generally accepted principle to another
- what is intraperiod tax allocation?
- companies report irregular items (except for unusual gains and losses) on the income statement net of tax.
- what items on the income statement have intraperiod tax allocation?
- income from continuing operations, discontinued operations, and extraordinary items.
- what is earnings per share?
- net income - preferred dividends divided by weighted average of common shares outstanding.
- what is comprehensive income?
- all changes in equity during a period except those resulting from investments by owners nad distributions to owners.