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FAR CH 3: Income Statement Items
Terms in this set (24)
What are the two criteria that a component must meet to qualify as a discontinued operation?
It (1) has been disposed of or (2) is classified as held for sale and
Its disposal is a strategic shift that has (or will have) a major effect on the entity's operations and financial results.
Define a component of an entity.
A component of an entity has operations and cash flows that are clearly distinguishable for operating and financial reporting purposes.
How are the operating results of a discontinued operation reported in the income statement?
The operating results of a discontinued operation are reported separately net of tax in the income statement. This section is presented after the results of continuing operations.
How is a component classified as held for sale measured?
It is measured at the lower of its carrying amount or fair value minus cost to sell.
What are the three types of accounting changes?
Change in accounting principle
Change in accounting estimate
Change in reporting entity
How is a change in accounting principle accounted for?
It is retrospectively applied unless it is impracticable to determine the cumulative effects of the change.
How is a change in accounting estimate accounted for?
It is prospectively applied. The prospective application must be made in the period of change and any future periods affected.
How is a change in accounting estimate inseparable from a change in accounting principle accounted for?
It is accounted for as a change in estimate, i.e., a prospective application is required.
How is a change in reporting entity accounted for?
It is retrospectively applied to interim and annual financial statements.
Is a change to a generally accepted accounting principle from one that is not generally accepted an accounting change?
It is an error correction, not an accounting change.
Which financial statement accounts are adjusted in a retrospective application?
the carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings (or other components of equity or net assets) at the beginning of the first period reported are adjusted for the cumulative effect of a change in principle or an error correction.
Income available to common shareholders/
Weighted-average number of common shares outstanding
How is income available to common shareholders calculated?
Income statement amount
Dividends on preferred stock for the current period (cumulative or declared noncumulative)
Income available to common shareholders
How is the diluted earnings per share (DEPS) denominator calculated?
The DEPS denominator is the BEPS denominator increased by the weighted-average number of additional shares of common stock that would have been outstanding if dilutive potential common shares had been issued.
How is the diluted earnings per share (DEPS) numerator calculated?
The DEPS numerator is the BEPS numerator increased by any dividends on convertible preferred stock and the after-tax interest expense related to any convertible debt (Multiply by 1-t)
When are call options and warrants dilutive when calculating diluted earnings per share (DEPS)?
They are dilutive only if the average market price for the period of the common shares is greater than the exercise price of the options or warrants.
When are put options or contracts to repurchase a company's own stock dilutive in calculating diluted earnings per share (DEPS)?
They are dilutive when their exercise prices exceed the average market prices.
What are the assumptions of the reverse treasury stock method in calculating diluted earnings per share (DEPS)?
Sufficient shares are issued at the beginning of the period to raise the proceeds needed to satisfy the contracts
The proceeds are used to repurchase shares
The excess of shares assumed to be issued over those assumed to be repurchased are included in the DEPS calculation
What are the criteria for a contract to be accounted for by revenue recognition?
The contract was approved by both parties.
The contract has commercial substance.
Each party's rights can be identified.
It is probable that the entity will collect substantially all of the consideration to which it is entitled according to the contract.
Expected value method. Used to estimate variable consideration in Revenue Recognition
Sum of probability-weighted amounts in the range of possible consideration amounts.
Most likely amount method. Used to estimate variable consideration in Revenue Recognition
Single most likely amount in a range of possible consideration amounts.
How are incremental costs of obtaining a contract with a customer accounted for?
The incremental costs of obtaining a contract with a customer must be capitalized (recognized as an asset) and amortized if the entity expects to recover them. Two exceptions for capitalization (i.e., the costs are expensed as incurred) are (1) the amortization period of the cost is 1 year or less, and (2) the costs have been incurred regardless of whether the contact is obtained.
What are the criteria to capitalize the costs incurred to fulfill a contract with a customer?
The costs relate directly to a current or anticipated contract
The costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future
The costs are expected to be recovered
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