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Investors and creditors can use the information in the income statements to
evaluate the past performance of the enterprise, provide a basis for predicting future performance, help assess the risk or uncertainity of achieving future cash flows
Expenses include all of the following:
Cost of Goods Depreciation Salaries and Wages
In the single step income statement what two groupings exist?
Revenues and expenses
A separation of operating and non operating activities of a company exists in
Multi step income statement
Irregular transactions such as discontinued operations and extraordinary items should be reported separately in?
Single Step and Multi Step Income statement
The Gain and Loss from disposal of a component of a business is known as
part of discontinued operations
Extraordinary Items must meet those criteria
major casualty Prohibition under a newly enacted law/regulation Expropriation of assets
A change in method of inventory pricing would be accounted for as a?
Change in Accounting Principles
Intraperiod Tax Allocation is NOT used for
Usual Gains/Losses
Both Extraordinary gains and losses are
reported net of tax
Earnings per share is computed
as a net income minus preferred dividends divided by the weighed average of common shares outstanding
Earnings per share are reported for
Discontinued operations and extraordinary items
Prior period adjustments are reported as
An addition to (or deduction from) net income in the income statement
Gains and losses that bypass net income but affect stockholders’ equity are referred to as
Other comprehensive income
The FASB decided that the components of other comprehensive income must be displayed
In a second separate income statement In a combined statement of comprehensive income As a part of the statement of stockholders’ equity
Income measurement is based on the transaction approach
True Net income results from revenue, expense, gain and loss transactions
Irregular items, such as extraordinary items, should be reported separately following income from continuing operations
True Income from continuing operations should be separated from irregular items to provide statement users to differentiate between what normal and recurring and what is not.
Extraordinary items must be both unusual in nature and infrequent in occurrence
True Both must be met
EPS is only calculated using
the weighted average number of shares of common stock outstanding
Typically, companies that manage earnings increase current year profits at the expense of future profits.
True Earnings management is the planned timing of revenues, expenses, gains, and losses and is usually used to boost current period profits by accelerating revenue or gain recognition or delaying expense or loss recognition.
A company who manages earnings may establish a “cookie jar reserve”
by decreasing current earnings in order to increase future earnings.
Material gains or losses resulting from the disposition of a component of the business are reported in Discontinued Operations.
The accounting profession has adopted a modified all-inclusive concept which
requires that companies report most items, including irregular ones, as part of net income.
The limitations of the income statement include:
Items that cannot be measured reliably are not reported. Income numbers that are affected by the accounting method used. Income measurement involves judgment.
Only gains come from
peripheral or incidental transactions.
Decreases in net assets from peripheral or incidental transactions occur from
What highlights the difference between regular and irregular activities?
Income from operations Income from operations is the result of normal recurring operations, irregular activities are disclosed after this measure of regular profitability.
Income tax expense is disclosed
in a separate section just above net income.
The cumulative effect of a change in accounting principle is disclosed
as an adjustment to beginning retained earnings of the earliest year presented
Intraperiod tax allocation means
allocating taxes to the specific items that caused the tax.
The balance sheet reports information as of
a specific date, not for a period of time.
Major limitations of the balance sheet include all of the following except
Most assets and liabilities are stated at historical cost. Judgments and estimates are used in determining many of the items reported. It necessarily omits many items that are of financial value but cannot be recorded objectively.
Current assets are presented in
order of liquidity
Trading securities should always be reported
as current assets
Current liabilities include all of the following
Accrued warranty costs. Advances received from customers. Current portion of long-term debt.
the following are stockholders' equity sections
Additional paid in capital. Capital stock. Retained earnings.
The report form
lists liabilities and stockholders' equity below assets on the same page.
The following is a type of information that is supplemental to amounts presented in the Balance Sheet
Accounting Policies Contingencies Contractual Situations
Companies are required to disclose information about all of the options except
the identity of all stockholders.
If additional explanations cannot be conveniently shown as parenthetical explanations, the information should be disclosed by
The primary purpose of a statement of cash flows is to
provide relevant information about the cash receipts and cash payments during a period.
Activities that involve the cash effects of transactions that enter into the determination of net income are classified as
Operating Activities
The last step in preparing the statement of cash flows is to
Reconcile the change in cash with the beginning and the ending cash balances
The cash debt coverage ratio is computed by
dividing net cash provided by operating activities by average total liabilities
Free cash flow is calculated as net cash provided by operating activities less
Capital expenditures and dividends
The balance sheet is sometimes referred to as
Statement of Financial Position
Solvency refers to
the ability to pay debts as they mature
Current assets are presented in the order
that they will be converted to cash or used up, which is their order of liquidity
The statement of cash flows is divided into three different activities which are
Operating Investing Financing
A lower debt coverage ratio and negative free cash flow are indicators
Poor Financial Flexibility
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