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?
Signup and view all the answers
Which of the following income statement items is considered to be transitory?
Signup and view all the answers
Which of the following statements about earnings quality is false?
Signup and view all the answers
Each of the following is a motivation to engage in earnings management except ________.
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?
Signup and view all the answers
The 'cookie jar reserves' earnings management technique involves ________.
Signup and view all the answers
What is the most common approach to earnings management?
Signup and view all the answers
Which of the following income statement elements is an economic inflow that occurs from primary operations?
Signup and view all the answers
Which of the following income statement elements is an economic outflow that occurs from primary operations?
Signup and view all the answers
Which of the following transactions will most likely result in a loss reported on the income statement?
Signup and view all the answers
Which of the following is a classification of expenses using the nature approach?
Signup and view all the answers
Which of the following is a classification of expenses using the functional approach?
Signup and view all the answers
Which of the following is NOT a subtotal on the multi-step income statement?
Signup and view all the answers
Which of the multi-step income statement reports revenues and expenses related to secondary operations of the entity?
Signup and view all the answers
Which of the following is NOT a drawback of the single-step income statement?
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?
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?
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?
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?
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.
Signup and view all the answers
Which of the following is NOT typically included in the determination of income from continuing operations?
Signup and view all the answers
Which of the following is typically included in the determination of income from continuing operations?
Signup and view all the answers
Which of the following is typically included in the determination of operating income?
Signup and view all the answers
On the income statement, ________ is gross profit less all operating expenses.
Signup and view all the answers
Which of the following is typically included in the income tax provision?
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?
Signup and view all the answers
Evaluating whether the disposal of a component of an entity constitutes a discontinued operation begins with ________.
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 ________.
Signup and view all the answers
When a company decides to discontinue an operation, it values the assets and liabilities of that operation at ________.
Signup and view all the answers
When a company remeasures the value of a discontinued operation, a value adjustment is made to recognize ________.
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 ________.
Signup and view all the answers
There is a noncontrolling interest when ________.
Signup and view all the answers
The noncontrolling interest line item on the income statement represents ________.
Signup and view all the answers
The portion of income (loss) attributable to the noncontrolling interest is ________.
Signup and view all the answers
Companies report earnings per share for all of the following except ________.
Signup and view all the answers
Which of the following transactions is not reported as other comprehensive income according to U.S.GAAP?
Signup and view all the answers
Which of the following transactions is NOT reported as OCI by either U.S.GAAP or IFRS?
Signup and view all the answers
How is reporting for other comprehensive income (OCI) different between U.S.GAAP and IFRS?
Signup and view all the answers
Which of the following is an advantage of the two-statement approach to reporting other comprehensive income (OCI)?
Signup and view all the answers
Which of the following is not an account type reported in the statement of stockholders' equity?
Signup and view all the answers
Which of the following is not an account type reported in the statement of stockholders' equity?
Signup and view all the answers
Which of the following is FALSE concerning the 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 and Other Comprehensive Income
- 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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
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.