Kieso's 13th Edition Intermediate Accounting, Ch. 4

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Chapter 4: Income Statement and Related Information

An entry in the stockholders' equity section of the balance sheet that reports the cumulative amounts of Other Comprehensive Income. Other Comprehensive Income measures the amounts of all gains and losses in a period that bypass the income statement but affect stockholders' equity. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions.

accumulated other comprehensive income

A retained earnings account that is restricted for a specific use, usually to comply with contractual requirements, board of directors' policy, or current necessity

appropriated retained earnings

An income measurement approach in which a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions (dividends). An alternative to the transaction approach for income measurement

capital maintenance approach

Adjustments or changes that companies must make because financial circumstances did not turn out as expected. Companies account for changes in estimates in the period of change if they affect only that period, or in the period of change and future periods if the change affects both. They do not carry back such changes to prior years. Changes in estimate are not considered errors or extraordinary items

changes in estimates

Income measure that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income includes: all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders' equity. These latter amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions.

comprehensive income

Income-reporting approach that advocates reporting only regular and recurring revenue and expense elements, but not irregular items, in income.

current operating performance approach

Occurs for a company when two things happen: (1) a company eliminates the results of operations and cash flows of a component from its ongoing operations, and (2) there is no significant continuing involvement in that component after the disposal transaction. Companies report a discontinued operation (in a separate income statement category), indicating the gain or loss from disposal of a business. In addition, companies report separately from continuing operations the results of operations of a component that has been, or will be, disposed of.

discontinued operation

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

earnings management

A distilled and important income figure, calculated as net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding. Companies must disclose earnings per share on the face of the income statement

earnings per share (EPS)

Nonrecurring material items that differ significantly from a company's typical business activities. They are distinguished by their unusual nature and by the infrequency of their occurrence.

extraordinary items

The financial report that measures the success of company operations for a given period of time. It is also often called the statement of income or statement of earnings.

Income statement

Reporting of irregular items within an accounting period on the income statement or statement of retained earnings net of tax. Such allocation relates the income tax expense of the fiscal period to the specific items that give rise to the amount of the tax provision. It helps financial statement users better understand the impact of income taxes on the various components of net income, and it discourages statement readers from using pretax measures of performance when evaluating financial results. (p. 148).

intraperiod tax allocation

Income-statement components for which the FASB has established special reporting rules. These items fall into six general categories: (1) discontinued operations, (2) extraordinary items, (3) unusual gains and losses, (4) changes in accounting principle, (5) changes in estimates, and (6) corrections of errors.

irregular items

Approach, adopted by the accounting profession, that dictates that companies record just about all items, including irregular ones, as part of net income, and that companies must highlight irregular items in the financial statements

modified all-inclusive concept

Income statement format that separates operating transactions from nonoperating transactions, and matches costs and expenses with related revenues. It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company - also uses a functional expense classification

multiple-step income statement

Measure of the amounts of all gains and losses in a period that bypass the income statement but affect stockholders' equity. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions.

other comprehensive income

Corrections of accounting errors made in previous accounting periods. Companies correct such errors by making proper entries in the accounts and reporting the corrections in the financial statements (as an adjustment to the beginning balance of retained earnings) in the year in which they are discovered. If a company prepares comparative financial statements, it should restate the prior statements for the effects of the error.

prior period adjustments

The extent to which earnings is useful to investors and creditors in making resource allocation decisions, generally in terms of predicting future earnings and cash flows. Thus, higher quality earnings exhibit higher levels of relevance and reliability. A high quality of earnings boosts investors' confidence in the financial statements. Earnings management negatively affects the quality of earnings when it distorts the information in a way that does not accurately predict future earnings and cash flows

quality of earnings

Income statement format that consists of just two groupings: revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss. Companies that use the single-step income statement in financial reporting typically do so because of its simplicity.

single-step income statement

One of the basic financial statements, which reports the changes in each stockholders' equity account and in total stockholders' equity during the year. It typically shows balances at the beginning of the period, additions and deductions, and balances at the end of the period. Companies disclose changes in the separate accounts either in separate statements or in the basic financial statements or notes thereto.

statement of stockholders' equity

Method of income measurement that focuses on the income-related activities—revenue, expense, gain, and loss transactions—that have occurred during the period.

transaction approach

evaluate the past performance of the company, provide a basis for predicting future performance, help assess the risk or uncertainty of achieving future cash flows

What are some things that investors and creditors use the income statement information for?

companies omit items from the income statement that they cannot measure reliably; income numbers are affected by the accounting methods employed; income measurement involves judgement

What are some limitations of the Income Statement?

(1) Operating section, (a) Sales or Revenue Section, (b) Cost of Goods Sold Section, (c) Selling Expenses, (d) Administrative or General Expenses; (2) Nonoperating section, (a) Other Revenues and Gains, (b) Other Expenses and Losses; (3) Income tax; (4) Discontinued operations; (5) Extraordinary items; (6) Earnings per share

What are the sections and subsections of a multiple-step income statement?

Recommended for manufacturing and merchanding companies - COGS, selling expenses, and administrative expenses

natural expense classification

Reccomended for retail stores - administrative, occupancy, publicity, buying, and selling expenses

functional expense classification

two important areas: what to include in income and how to report certain unusual or irregular items.

FASB developed specific guidelines in ___

only when gains or losses on discontinuted operations occur.

Companies use the phrase "Income from continuing operations" ___

Write-down or write-off receivables, inventories, equipment leased to others, deferred research and development costs, or other intangible assets; Gains or losses from exchange or translation of foreign currencies, including those relating to major devaluations and revaluations; Gains or losses on disposal of a component of an entity (reported as discontinued operation); Other gains or losses from sale or abandonment or property, plant, or equipment used in the business; Effects of a strike, including those against competitors and major suppliers; Adjustment of accruals on long-term contracts

What are several examples of gains and losses that do NOT qualify as extraordinary items?

If they resulted directly from a major casualty (such as an earthquake), an expropriation, or a prohibition under a newly enacted law or regulation

What are some example events that could constitute as an extraordinary gain or loss?

a company must consider the environment in which it operates.

In determining whether an item is extraordinary, ___

up or down to their market value at the end of each accounting period.

Accounting standards require that companies adjust most investments in stocks and bonds ____

trading securities must be reported as a unrealized gain or loss, while available-for-sale securities are reported as part of "Other comprehensive income"

How are the different stocks and bonds reported?

bought and held primarily for sale in the near term to generate income on short-term price differences; goes in the other rev. and gains or other exp. and losses on the income statement

trading security

held with the intent of selling them sometime in the future, reported as "other comprehensive income" (which can be reported three different ways)

available-for-sale securities

They appear on the balance sheet (debit to retained earnings and credit to dividends payable), they are a distribution of corporate income, not a determinant of net income.

Where do dividends declared go; why?

Increases in the market value of assets held (such as plant assets, inventory, and most investments) are generally not recognized in the accounts until they are realized through the sale of the assets, therefore the market apreciation of an asset does not show up on the income statement.

Do market appreciations of assets show up on the income statement?

(1) investing and financing revenues and expenses such as interest revenue, dividend revenue (from dividends received), and interest expense, and the (2) results of nonoperating items such as the sale of plant assets and investments

What do "other revenues and gains" and "other expenses and losses" include?

calls for all irregular gains and losses and corrections of revenues and expenses of prior periods to be taken directly into the RE accounts, rather than reported in the current period's income statement

current operating performance concept

calls for all irregular gains and losses and corrections of revenues and expenses of prior periods to be reported in the current period's income statement

all-inclusive concept

GAAP requires this - correction of revenues and expenses of prior periods go directly to RE (along with the effect of prior periods of a change in accounting principle) and, with minor exceptions, all other items (such as unusual gains and losses, discontinued operations and extraordinary items) are reported on the income statement.

modified all-inclusive approach

comprehensive income, such as gains and losses, that bypass net income but are included as part of comprehensive income

other comprehensive income

(1) in a separate (second) income statement, (2) in a combined statement of comprehensive income, or (3) as part of the statement of stockholders' equity

What three ways does the FASB require components of other comprehensive income to be reported?

Accumulated other comprehensive income, the accumulated other comprehensive income (if you choose to use this method) is reported in the stockholder's equity section of the balance sheet

What account is other comprehensive income closed to, and where is it reported?

income from operations.

In a multiple-step income statement, the excess of gross profit over operating expenses is called ___

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