What are increases or decreases in equity from peripheral or incidental transactions?

The report that measures the success of company operations.

Why is the income statement useful?

1. Evaluate past performance, comparison of company's performance w/ competitors.

2. Predicting future cash flows. Info from the past helps to determine important trends that could give info about the future.

3. Help assess rick or uncertainty in future CF's - highlight key relationships among items

What are the limitations of the Income Statement?

1. Companies omit items that cannot be measured reliably.

2. Income is affected by the accounting methods employed. (comparability)

3. Income measurement involves judgment.

Define earnings management.

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings.

What is the issue associated with Quality of Earnings?

Companies have incentives to manage income to meet or beat WS expectations so that market price of stock increases and values of stock options increase.

How does pressure by WS negatively affect Quality of Earnings?

Q of earnings is reduced if earnings managmenet results in information that is less useful for predicting future earnings and cash flows.

Inflows or other enhancements of assets or settlement of its liabilities that consititue the entity's ongoing major or central operations. SALES, FEE REVENUE, INTEREST REVENUE, DIVIDEND REVENUE, RENT REVENUE.

Outflows or other using-up of assets or incurrences of liabilities that constitue the entity's ongoing major or central operations.  COGS, DEP EXP, INTEREST EXP, RENT EXP, SALARY EXP..

Increases in equity (net assets) from peripheral or incidental transactions.

Decreases in equity (net assets) from peripheral or incidental transactions.

• Consists of only Revenues - Expenses = Net Income.


• no distinction betw. Operating and non-operating


• no subtotals


• advantage: simple presentation and equality of revenue or expense items

• Separates operating(recurring) tranactions from nonperating transactions


• matches costs and expenses with related revenues


• highlights certain intermediate components(subtotals) of income that analysts use

ONIDEE

1. Operatin section


2. Nonoperating section


3. income tax


4. discontinued operations


5. extraordinary items


6. earnings per share

1. Discontinued Operations


2. Extraordinary Items


3. Unusual Gains and Losses


4. Changes in accounting principal


5. Changes in estimates


6. Corrections of errors

Occurs when, 1.) a company eliminates the results of oerations and cash flows of a component 2.) there is no significant contuings involvement in that component.

reported NET OF TAX

Why is it important to include discontinued operations?

It is useful to study future cash flows.

Non-recurring material items that differ significantly form a company's typical business activities. MUST BE:

1. UNUSUAL


2. INFREQUENT (so company must consider it's environment)

reported NET OF TAX

What does net of tax mean?

Means that where the item is placed on the income statement, the value must be adjusted for tax purposes at the same time. Tax for that item cannot be included in tax expense, because taking the value of the item net of tax functions as a tax credit.

Material items that are unusual or infrequen, but not both, should be reported in a separate secitons just above "Income from continuing operations before income tax."

NOT recorded net of tax

Examples of NOT extraordinary items.

1. Write-downs of A.R, inventories, PPE, etc.


2. Gains or losses from foreign currency trans


3. Other gains or losses from sale of PPE


4. Effect of a strike


5. Effect of a terrorist attack

What are the attributes of changes in accounting principles?

1. Retrospective adjustment - occurs after the fact


2. Cumulative effect adjustment to beginning retained earnings


3. Approach preserves comparability

eg) change from LIFO to FIFO affects inventory on B.S. and COGS on I.S.

What are the attributes of changes in estimates?

1. Accounted for in the period of change and future periods


2. Not handled retrospectively


3. Not considered errors or extraordinary items.

eg) Usueful lives and salvage values of depreciable assets, allowance for uncollectible receivalbes, iventory obsolescence

How to account for changes in estimates?

1. Make the change in current period and future periods


2. Include a footnote indicated such a change has been made.

How to account for corrections of errors?

1. treated as prior period adjustments


2. Adjustment to the begging balance of retained earnings

Equation for Earnings per Share.

Net income - Preferred Dividends

Weighted Ave. # of shares outstanding

What is the significance of EPS?

• An important business indicator


• measures the dollars earned by each share of common stock


• must be disclosed on the income statement

• Net income


• Change in accounting principle


• error corrections

What items affect a decrease in RE?

• Net loss


• Dividends


• Change in accounting principles


• error corrections

What can management do with its earnings?

1. plow back into the business part or all of the earnings


2. distribute all current income


3. distribute current income plus acc. earnings of prior years

What to do with restricted Retained Earnings?

1. Disclose in notes to the financial statements under Appropriated Retained Earnings.

Define Comprehensive Income.

Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

What does the Comprehensive income include?

• all revenues and gains, expenses and losses reported in net income


• all gains and losses that bypass net income but affect stockholder's equity

What does Other Comprehensive income include?

• unrealized gains and losses on available for sale securities


• translation gains and losses on foreign currency


• Plus others

How to report Comprehensive Income?

1. a second separate income statement


2. a combined income statment of comprehensive income


3. as part of the statement of stockholders' equity

*ALWAYS included in the balance sheet as ACCUMULATED OTHER COMPREHENSIVE INCOME under SE.

What is iGAAP's stance on single/multiple step income statements?

How does iGAAP treat extraordinary items?

What formats does iGAAP allow for presenting the Comprehensive income statement?

1. on the statement of stockholder's equity


2. on the statement of recognized income and expense (SoRIE format)

Does iGAAP allow the reevaluation of certain fixed assets?

Yes, it permits the reevaluation of land, buildings, and intangible assets.

What arises from peripheral or incidental transactions?

What are decreases in equity net assets of a company from peripheral or incidental transactions and other events and circumstances during the period?

What is an increase in equity from nonowner transactions?

What types of transactions increase equity what types decrease equity?