Income Statement Characteristics and Limitations

Questions and Answers

Which of the following is considered to be a limitation of income statements? (Select all that apply)

Income statements predict future performance.

Income statements evaluate past performance.

Income statements depend on accounting methods selected. (correct)

Income statements assess uncertainties of achieving future cash flows.

Which of the following is considered to be a characteristic of the usefulness of income statements?

Income statements require judgment.

Income statements exclude unreliable information.

Income statements depend on the accounting methods selected.

Income statements evaluate past performance. (correct)

Assuming that all of the transactions are material, which of them will most likely have NO effect on current year net income?

Retirement of callable bonds at a premium

Advance in technology that renders certain inventory items obsolete

Increase in the fair value of certain available-for-sale securities held as an investment (correct)

Sale of used equipment that had been fully depreciated in prior years

Which of the following income statement items is considered to be permanent?

Interest expense Signup and view all the answers

Which of the following income statement items is considered to be transitory?

Income from discontinued operations Signup and view all the answers

Which of the following statements about earnings quality is false?

Earnings quality is enhanced when managers are afforded discretion and judgment in applying accounting standards. Signup and view all the answers

Each of the following is a motivation to engage in earnings management except ________.

separate other comprehensive income from net income Signup and view all the answers

Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income?

Big bath Signup and view all the answers

The 'cookie jar reserves' earnings management technique involves ________.

Increasing losses in the current period to allow the firm to show increased net income in the future Signup and view all the answers

What is the most common approach to earnings management?

Rearrange expenses and losses Signup and view all the answers

Which of the following income statement elements is an economic inflow that occurs from primary operations?

Revenue Signup and view all the answers

Which of the following income statement elements is an economic outflow that occurs from primary operations?

Expense Signup and view all the answers

Which of the following transactions will most likely result in a loss reported on the income statement?

A grocery store sells marketable securities after a decline in value. Signup and view all the answers

Which of the following is a classification of expenses using the nature approach?

Postage expense Signup and view all the answers

Which of the following is a classification of expenses using the functional approach?

Administration expense Signup and view all the answers

Which of the following is NOT a subtotal on the multi-step income statement?

Income from discontinued operations Signup and view all the answers

Which of the multi-step income statement reports revenues and expenses related to secondary operations of the entity?

Non-operating section Signup and view all the answers

Which of the following is NOT a drawback of the single-step income statement?

It misrepresents net income due to oversimplification. Signup and view all the answers

Which of the following items does IFRS require to be presented on the income statement that U.S.GAAP does not require?

Finance costs Signup and view all the answers

Which of the following items does IFRS require to be disclosed but not necessarily presented on the income statement?

Litigation settlements Signup and view all the answers

Which of the following is the key performance measure reported on the income statement that is typically presented first in sequence?

Gross profit Signup and view all the answers

Which of the following is the key performance measure reported on the income statement that is typically presented last in sequence?

Earnings per share Signup and view all the answers

Companies use ________ income statements when a large number of line items distracts the user from identifying key measures and relationships.

condensed Signup and view all the answers

Which of the following is NOT typically included in the determination of income from continuing operations?

Other comprehensive income (OCI) Signup and view all the answers

Which of the following is typically included in the determination of income from continuing operations?

Non-operating gains and losses Signup and view all the answers

Which of the following is typically included in the determination of operating income?

Gross profit Signup and view all the answers

On the income statement, ________ is gross profit less all operating expenses.

Operating income Signup and view all the answers

Which of the following is typically included in the income tax provision?

State and local income tax Signup and view all the answers

Which of the following is NOT a characteristic that must be considered when determining that a business activity is a component of an entity for purposes of classifying that activity as a DISCO-OP?

The activity constitutes a strategic advantage. Signup and view all the answers

Evaluating whether the disposal of a component of an entity constitutes a discontinued operation begins with ________.

Assessing whether a strategic shift has occurred Signup and view all the answers

On May 1, Jonson Industries decided to discontinue its prepackaged business segment. At the end of the year, the company is still holding the business segment for disposal, which is expected early in the following year. On its year-end income statement, Jonson Industries will report as income from discontinued operations the profits generated by the prepackaged business segment ________.

For the entire year, net of taxes Signup and view all the answers

When a company decides to discontinue an operation, it values the assets and liabilities of that operation at ________.

Net current cost (fair value less selling costs) Signup and view all the answers

When a company remeasures the value of a discontinued operation, a value adjustment is made to recognize ________.

A loss, but not a gain, for the difference between book value of the net assets and their fair value net of selling costs. Signup and view all the answers

If a company writes down the net assets of a discontinued operation from original carrying value to a remeasurement of fair value in one year, then in the next year the fair value changes ________.

The company will recognize any subsequent loss but limited gains up to the original carrying value before re-measurement. Signup and view all the answers

There is a noncontrolling interest when ________.

A company controls another company but owns less than 100% of that other company Signup and view all the answers

The noncontrolling interest line item on the income statement represents ________.

The portion of the subsidiary owned by others, which is deducted to determine net income Signup and view all the answers

The portion of income (loss) attributable to the noncontrolling interest is ________.

Closed to noncontrolling interest in the equity section Signup and view all the answers

Companies report earnings per share for all of the following except ________.

Operating income Signup and view all the answers

Which of the following transactions is not reported as other comprehensive income according to U.S.GAAP?

Unrealized gains on the upward valuation of property, plant, and equipment Signup and view all the answers

Which of the following transactions is NOT reported as OCI by either U.S.GAAP or IFRS?

Unrealized gains and losses from trading securities Signup and view all the answers

How is reporting for other comprehensive income (OCI) different between U.S.GAAP and IFRS?

Both U.S.GAAP and IFRS allow either a one-statement approach or a two-statement approach while IFRS allow more items to be classified as OCI. Signup and view all the answers

Which of the following is an advantage of the two-statement approach to reporting other comprehensive income (OCI)?

Net income retains its emphasis as the primary income measure. Signup and view all the answers

Which of the following is not an account type reported in the statement of stockholders' equity?

Controlling interest Signup and view all the answers

Which of the following is not an account type reported in the statement of stockholders' equity?

Comprehensive income Signup and view all the answers

Which of the following is FALSE concerning the statement of stockholders' equity?

U.S.GAAP do not require a statement of stockholders' equity. Signup and view all the answers

Study Notes

Income Statement Limitations and Characteristics

Income statements depend on the chosen accounting methods, which can limit comparability and reliability.
A key feature of income statements is that they evaluate past performance, providing insights for stakeholders.
Income statements do not assess uncertainties regarding future cash flows or predict future performance.

Income Statement Items and Their Effects

Transactions like an increase in fair value of available-for-sale securities typically do not impact current year net income.
Interest expense is considered a permanent item in an income statement, while income from discontinued operations is classified as transitory.

Earnings Quality and Management Motivation

High earnings quality is achieved through permanent earnings; transitory earnings lower quality.
Motivations for earnings management include avoiding losses and presenting trends, but separating other comprehensive income from net income is not a reason.

Techniques in Earnings Management

The "big bath" technique involves taking a larger current loss to boost future earnings.
"Cookie jar reserves" allow firms to increase losses now for higher future net income.

Income Statement Elements

Revenue represents economic inflows from primary operations, while expenses reflect economic outflows.
Operating income is derived from gross profit minus operating expenses.

Income Statement Formats

The multi-step income statement distinguishes between operating and non-operating revenues and expenses, emphasizing key subtotal measures.
A condensed income statement is used when too many line items overshadow critical measures and relationships.

Discontinued Operations and Noncontrolling Interests

Discontinued operations must be clearly distinguished for financial reporting, with income reported net of taxes for the entire year if held for disposal.
Noncontrolling interest indicates ownership by others in a subsidiary, deducted from net income in financial reporting.

Earnings per share is not reported for operating income but is crucial for net income and continuing operations.
U.S. GAAP and IFRS have different requirements for reporting other comprehensive income, with IFRS allowing more items to be classified as such.

Stockholders' Equity Statement Characteristics

The statement of stockholders' equity includes accounts like accumulated other comprehensive income, treasury stock, and contributed capital.
Net income and dividends close into retained earnings, while OCI does not close into the Retained Earnings but is presented separately.

Key Reporting Practices

IFRS requires specific disclosures, including finance costs on income statements, that U.S. GAAP does not mandate.
Understanding the differences in reporting and classification across accounting frameworks is essential for accurate financial analysis.

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Explore the fundamental characteristics and limitations of income statements in this quiz. Discover how accounting methods affect comparability and the evaluation of past performance. Additionally, delve into concepts like earnings quality and management motivations.

Income Statement Characteristics and Limitations

Questions and Answers

Which of the following is considered to be a limitation of income statements? (Select all that apply)

Which of the following is considered to be a characteristic of the usefulness of income statements?

Assuming that all of the transactions are material, which of them will most likely have NO effect on current year net income?

Which of the following income statement items is considered to be permanent?

Which of the following income statement items is considered to be transitory?

Which of the following statements about earnings quality is false?

Each of the following is a motivation to engage in earnings management except ________.

Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income?

The 'cookie jar reserves' earnings management technique involves ________.

What is the most common approach to earnings management?

Which of the following income statement elements is an economic inflow that occurs from primary operations?

Which of the following income statement elements is an economic outflow that occurs from primary operations?

Which of the following transactions will most likely result in a loss reported on the income statement?

Which of the following is a classification of expenses using the nature approach?

Which of the following is a classification of expenses using the functional approach?

Which of the following is NOT a subtotal on the multi-step income statement?

Which of the multi-step income statement reports revenues and expenses related to secondary operations of the entity?

Which of the following is NOT a drawback of the single-step income statement?

Which of the following items does IFRS require to be presented on the income statement that U.S.GAAP does not require?

Which of the following items does IFRS require to be disclosed but not necessarily presented on the income statement?

Which of the following is the key performance measure reported on the income statement that is typically presented first in sequence?

Which of the following is the key performance measure reported on the income statement that is typically presented last in sequence?

Companies use ________ income statements when a large number of line items distracts the user from identifying key measures and relationships.

Which of the following is NOT typically included in the determination of income from continuing operations?

Which of the following is typically included in the determination of income from continuing operations?

Which of the following is typically included in the determination of operating income?

On the income statement, ________ is gross profit less all operating expenses.

Which of the following is typically included in the income tax provision?

Which of the following is NOT a characteristic that must be considered when determining that a business activity is a component of an entity for purposes of classifying that activity as a DISCO-OP?

Evaluating whether the disposal of a component of an entity constitutes a discontinued operation begins with ________.

When a company decides to discontinue an operation, it values the assets and liabilities of that operation at ________.

When a company remeasures the value of a discontinued operation, a value adjustment is made to recognize ________.

If a company writes down the net assets of a discontinued operation from original carrying value to a remeasurement of fair value in one year, then in the next year the fair value changes ________.

There is a noncontrolling interest when ________.

The noncontrolling interest line item on the income statement represents ________.

The portion of income (loss) attributable to the noncontrolling interest is ________.

Companies report earnings per share for all of the following except ________.

Which of the following transactions is not reported as other comprehensive income according to U.S.GAAP?

Which of the following transactions is NOT reported as OCI by either U.S.GAAP or IFRS?

How is reporting for other comprehensive income (OCI) different between U.S.GAAP and IFRS?

Which of the following is an advantage of the two-statement approach to reporting other comprehensive income (OCI)?

Which of the following is not an account type reported in the statement of stockholders' equity?

Which of the following is not an account type reported in the statement of stockholders' equity?

Which of the following is FALSE concerning the statement of stockholders' equity?

Study Notes

Income Statement Limitations and Characteristics

Income Statement Items and Their Effects

Earnings Quality and Management Motivation

Techniques in Earnings Management

Income Statement Elements

Income Statement Formats

Discontinued Operations and Noncontrolling Interests

Earnings Per Share and Other Comprehensive Income

Stockholders' Equity Statement Characteristics

Key Reporting Practices

Studying That Suits You

Description

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