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Information in the income Statement

Revenues, expenses, gains, and losses help users evealuate past performance.

Limitations of the Income Statement

Comapnies omit items from the income statement that they cannot measure.
Income numbers are affected by the accounting methods employed.(choosing different methods to depreciate)
Income measurement involves judgement.(estimating the useful life of an asset the correct way)

The major elements of the income statement are

revenues, expenses, gains, and losses.

Information in the income statement helps users to

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

Nonoperating items include all of the following except:

interest expense.
****rent expense.****(is an opretating expense)
rent revenue.
interest revenue.

Income measurement is based on the transaction approach

True, Net income results from revenue, expense, gain and loss transactions. The transaction approach focuses on the income-related activities that have occured during the period.

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.

As in U.S. GAAP, the statement of income is a required statement for IFRS

True, Both IFRS and U.S. GAAP require a statement of income.

A company who manages earnings may establish a "cookie jar reserve" by increasing current earnings in order to decrease future earnings.

False, A company who manages earnings may establish a "cookie jar reserve" by decreasing current earnings in order to increase future earnings.

The single-step income statement emphasizes

total revenues and total expenses.
Net income
The primary advantage of the single step fromat lies in ists simple presentation and the absence of any implication that one type of revenue or expense item has priority over another.

In Wolverton's single-step income statement, gross profit will be:

Will not be reported, Gross profit is an element of the multiple-step income statement, not the single-step income statement.

In the single-step income statement:

just two groupings exist - revenues and expenses.

Irregular transactions such as discontinued operations and extraordinary items should be reported separately in:

both a single-step and multiple-step income statement, discontinued operations and extraordinary items should be separately reported.

Which of the following is an acceptable method of presenting the income statement?

A condensed income statement
A single-step income statement
A multiple-step income statement

The single-step income statement differentiates between operating and nonoperating activities?

False, The single-step makes no distinction between operating and nonoperating items and only contains two groupings: revenues and expenses.

Which of the following highlights the difference between regular and irregular activities?

Income from operations is the result of normal recurring operations; irregular activities are disclosed after this measure of regular profitability.

Which of the following is not included in the operating section of a multiple-step income statement?

Income tax expense, Income tax expense is disclosed in a separate section just above net income.

Classification as an extraordinary item on the income statement would be appropriate for the

gain from condemnation settlement, Correct! Gains from condemnation settlements meet the unusual nature and infrequency of occurrence requirements.

Which one of the following types of losses is excluded from the determination of net income in income statements?

Material losses resulting from correction of errors related to prior periods, Prior period corrections appear on the retained earnings statement.

Multi-Step Income Statement

companies use it to recognize these additional relationships, this statement separetas operating transactions from non-operating transactions, and matches costs and expenses with related revenues.

Operating Section

A report of the revenues and expenses of the company's principal operations.
*Sales or revenue section
*Cost of goods sold section
*Selling expenses
*Administrative or General expenses

Sales or Revenue section (Operating section)

A subsection presenting sales, discounts, allowances, returns and other related information, its purpose is to arrive at the net amount of sales revenue.

Cost of Goods Solod section (Operating section)

A subsection that shows the cost of goods that were sold to produce the sales
-Merchandise Inventory
-Purchase discounts
-Purchase returns
-Transportation IN
-Ending Inventory

Selling Expenses (Operating section)

A subsection that lists expenses resulting from the company's efforts to make sales.
-Sales salaries and commissions
-Travel and Entertainment
-Advertising expenses
-Freight and Transportation OUT
-Shipping supplies and expenses

Administrative or General Expenses (Operating section)

A subsection reporting expenses of general administration.
-Office salaries
-Legal and Profesional services
-Insurance expense
-Miscellaneous office expenses

Nonoperating Section

A report of revenues and expenses resulting from secondary or auxiliary activities of the company. Special GAINS and LOSSES that are INFREQUENT or UNUSUAL, but not both are normally reported in this section.

Other Revenues and Gains (Nonoperating section)

A list of the revenues earned or gains incurred, generally net of related expenses, from nonoperating transactions.

Other Expenses and Losses (Nonoperating section)

A list of the expenses or losses incurred, generally net of any related incomes, from operating transactions.

Income Tax

A short section reporting federal and state taxes levied on income from continuing operations.

The following six categories are considered irregular items on the income statement

-Discontinue Operations
-Extraordinary Items
-Unusual Gains and Losses
-Changes in Accounting Principle
-Changes in Estimate
-Correction of Errors

Discontinued operations

Material gains or losses resulting from disposition of a segment of the business.
Occurs when 2 things happen:1- a company eliminates the results of operations and cashflows of a component from its ongoing operations. 2- there is no significant continuing involvement in that component after disposal.

Extraordinary Items

Unusual and infrequent material gains and losses.

The occurrence which most likely would have no effect on 2010 net income (assuming that all amounts involved are material) is the

collection in 2010 of a receivable from a customer whose account was written off in 2009 by a charge to the allowance account, The collection of a written off account would not effect net income.

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?

Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate

Cordoba Corporation has an extraordinary loss of $150,000, an unusual gain of $350,000, and a tax rate of 20%. At what amount should Cordoba report each item?

Extraordinary loss $(120,000)
Unusual gain $350,000

The gain or loss from disposal of a component of a business is shown as a (an):

part of discontinued operations, discontinued operations include the gain or loss from disposal of a component of a business.

All of the following would meet the criteria for an extraordinary item except gains or losses from:

loss on exchange of foreign currencies, All of the options would be classified as an extraordinary item except gains or losses from exchange of foreign currency.

A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an):

Changes in accounting principle would include a change in the method of inventory pricing.

Prior period adjustments are reported as:

Prior period adjustments are added to (or deducted from) the beginning retained earnings balance.

Irregular items, such as extraordinary items, should be reported separately following income from continuing operations.

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 criteria must be met in order for an item to be considered extraordinary.

Changes in estimates result in restatement of prior period's financial statements and an adjustment to the beginning balance of retained earnings.

False, Changes in estimates effect the current and future periods.

Which of the following occur from peripheral or incidental transactions?

Gain on the sale of equipment, Gains and losses result from peripheral or incidental transactions.

Which of the following items are not reported net of their applicable taxes?

Unusual gains and losses, All of the options except unusual gains and losses are reported net of their tax effects.

Acompany classifies gains or losses sushc as EXTRAORDINARY IF

They resulted directly from a major casualty (such as an earthquake), an expropiation, or a prohibition under a newly enacted law or regulation.
ex: write down or write off of receibables, inventories, or
Other gains or losses from sale or abandonment of property, plant, or equipment used in the business

Which of the following is not accounted for as a change in estimate?

A change from the FIFO inventory cost flow assumption to the weighted-average cost flow assumption,A change from the FIFO inventory cost flow assumption to the weighted-average cost flow assumption is accounted for as a change in accounting principle. A change in estimate of uncollectibles account receivables(bad debt expense) and a change in the estimated service life of a plant (fixed) asset (depreciation expense)

Which of the following is true about intraperiod tax allocation?

Its purpose is to relate the income tax expense to the items which affect the amount of tax.
Intraperiod tax allocation helps financial users better understand the impact of income taxes on the various components of income. EX: readers of financial statements will understand how much income tax expense relates to Income from continuing operations.

Companies use intraperiod tax allocation on the income statement for the following items:

1-Income from continuing operations. 2- Discontinued operations. 3- Extraordinary Items. "let the tax flow the income"

Intraperiod tax allocation is used for all of the following except:

changes in accounting principle.
discontinued operations.
extraordinary items.
****unusual gains/losses.****

Which of the following statements related to extraordinary items and intraperiod tax allocation is correct?

Both extraordinary gains and losses are reported net of tax.

Intraperiod tax allocation:

This procedure allowed companies to report irregular items (except for unusual gains or losses) on the income statement or statement of retained earnings net of tax.

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