What are the 2 factors depicting the usefulness of the IS?

1. Evaluate past performance 2. Provide a basis for predicting future financial performance

What are the 2 limitations of the IS?

1. The IS depends on accounting methods used (ex. a different depreciation method can yield higher expense, and lower NI) 2. Requires extensive judgement and ESTIMATIONS

What is the difference between permanent and transitory components of the IS?

Permanent accounts are likely to continue (ex. regular customers' revenue). Transitory accounts are unlikely to continue (ex. gain/loss on sale of assets, income from discontinued operations, IMPAIRMENT LOSSES)

What expenses and revenues are a part of operating income?

Basic sales/service revenue, selling & general expenses, COGS, administrative expenses, and R & D expenses

What does the statement of comprehensive income include?

Net income minus (NET OF TAX) unrealized gains/losses, derivatives, and sale of securities.

What is the general rule behind classifying transactions on the statement of cash flow?

Operating entails general day-to-day operations (sales, INTEREST expense, dividends RECEIVED). Investing starts by PAYING (investment in PPE). Financing starts by RECEIVING (taking a bank loan, dividends PAID).

Where are restructuring costs found on the multi-step income statement?

Under continuing operations, before other income.

Interest expense is found where in the multi-step IS, and where on the statement of cash flows?

It is found under other non-operating income on IS, and operating cash flows

What does holding vs. fully selling an asset imply for the reporting process?

If you are holding an asset for sale, losses are reported but gains are not. If you have sold it, either is reported in whatever way the transaction ends.

What is comprehensive income defined as?

The change in equity from transactions with non-owners.

What mnemonic does Dr. Krivacek use to explain the multi-step IS?

OOCCD O-Operating O-Other Operating C-Cont. Op. Before Tax C-Cont. Op. After Tax D-Discont. Op. (ALWAYS NET OF TAX)

What related statement follows the multi-step IS, and what is a part of that statement?

The statement of comprehensive income follows. It starts with net income, then includes other comprehensive income (unrealized gains/losses, sale of securities/derivatives, always NET OF TAX) to wind up at the end, COMPREHENSIVE INCOME.

What is the conservatism principle?

Entities must recognize the least profitable scenario. In essence, companies must recognize expenses and liabilities even when there is uncertainty, but assets and revenues are only recorded when they are 100% certain of the outcome.

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Int. Financial Acc.

Financial Accounting Exam 2 (Ch. 4)

Question	Answer
What are the 2 factors depicting the usefulness of the IS?	1. Evaluate past performance 2. Provide a basis for predicting future financial performance
What are the 2 limitations of the IS?	1. The IS depends on accounting methods used (ex. a different depreciation method can yield higher expense, and lower NI) 2. Requires extensive judgement and ESTIMATIONS
What is the difference between permanent and transitory components of the IS?	Permanent accounts are likely to continue (ex. regular customers' revenue). Transitory accounts are unlikely to continue (ex. gain/loss on sale of assets, income from discontinued operations, IMPAIRMENT LOSSES)
What expenses and revenues are a part of operating income?	Basic sales/service revenue, selling & general expenses, COGS, administrative expenses, and R & D expenses
What does the statement of comprehensive income include?	Net income minus (NET OF TAX) unrealized gains/losses, derivatives, and sale of securities.
What is the general rule behind classifying transactions on the statement of cash flow?	Operating entails general day-to-day operations (sales, INTEREST expense, dividends RECEIVED). Investing starts by PAYING (investment in PPE). Financing starts by RECEIVING (taking a bank loan, dividends PAID).
Where are restructuring costs found on the multi-step income statement?	Under continuing operations, before other income.
Interest expense is found where in the multi-step IS, and where on the statement of cash flows?	It is found under other non-operating income on IS, and operating cash flows
What does holding vs. fully selling an asset imply for the reporting process?	If you are holding an asset for sale, losses are reported but gains are not. If you have sold it, either is reported in whatever way the transaction ends.
What is comprehensive income defined as?	The change in equity from transactions with non-owners.
What mnemonic does Dr. Krivacek use to explain the multi-step IS?	OOCCD O-Operating O-Other Operating C-Cont. Op. Before Tax C-Cont. Op. After Tax D-Discont. Op. (ALWAYS NET OF TAX)
What related statement follows the multi-step IS, and what is a part of that statement?	The statement of comprehensive income follows. It starts with net income, then includes other comprehensive income (unrealized gains/losses, sale of securities/derivatives, always NET OF TAX) to wind up at the end, COMPREHENSIVE INCOME.
What is the conservatism principle?	Entities must recognize the least profitable scenario. In essence, companies must recognize expenses and liabilities even when there is uncertainty, but assets and revenues are only recorded when they are 100% certain of the outcome.

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