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1、Chapter 04 - The Income Statement and Statement of Cash FlowsCHAPTER 4 THE INCOME STATEMENT AND STATEMENT OF CASH FLOWSQUESTIONS FOR REVIEW OF KEY TOPICSQuestion 4-5 The term earnings quality refers to the ability of reported earnings (income) to predict a companys future earnings. After all, an inc
2、ome statement simply reports on events that already have occurred. The relevance of any historical-based financial statement hinges on its predictive value.Question 4-7 The process of intraperiod tax allocation matches tax expense or tax benefit with each major component of income, specifically cont
3、inuing operations and any item reported below continuing operations. The process is necessary to achieve the desired result of separating the total income effects of continuing operations from the two separately reported items - discontinued operations and extraordinary items, and also to show the a
4、fter-tax effect of each of those two components.Question 4-9 Extraordinary items are material gains and losses that are both unusual in nature and infrequent in occurrence, taking into account the environment in which the entity operates. Question 4-11 GAAP permit alternative treatments for similar
5、transactions. Common examples are the choice among FIFO, LIFO, and average cost for the measurement of inventory and the choice among alternative revenue recognition methods. A change in accounting principle occurs when a company changes from one generally accepted treatment to another.In general, w
6、e report voluntary changes in accounting principles retrospectively. This means revising all previous periods financial statements as if the new method were used in those periods. In other words, for each year in the comparative statements reported, we revise the balance of each account affected. Sp
7、ecifically, we make those statements appear as if the newly adopted accounting method had been applied all along. Also, if retained earnings is one of the accounts whose balance requires adjustment (and it usually is), we revise the beginning balance of retained earnings for the earliest period repo
8、rted in the comparative statements of shareholders equity (or statements of retained earnings if theyre presented instead). Then we create a journal entry to adjust all account balances affected as of the date of the change. In the first set of financial statements after the change, a disclosure not
9、e would describe the change and justify the new method as preferable. It also would describe the effects of the change on all items affected, including the fact that the retained earnings balance was revised in the statement of shareholders equity along with the cumulative effect of the change in re
10、tained earnings. An exception is a change in depreciation, amortization, or depletion method. These changes are accounted for as a change in estimate, rather than as a change in accounting principle. Changes in estimates are accounted for prospectively. The remaining book value is depreciated, amort
11、ized, or depleted, using the new method, over the remaining useful life.Question 4-15Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Reporting comprehensive income can be accomplished with a separate statement or by including the in
12、formation in either the income statement or the statement of changes in shareholders equity.Question 4-22 U.S. GAAP designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. Dividends paid to shareholders are classified as financing
13、 cash flows. IFRS allows more flexibility. Companies can report interest and dividends paid as either operating or financing cash flows and interest and dividends received as either operating or investing cash flows. Interest and dividend payments usually are reported as financing activities. Intere
14、st and dividends received normally are classified as investing activitiesBRIEF EXERCISESBrief Exercise 4-6WHITE AND SONS, INC.Partial Income StatementFor the Year Ended December 31, 2011Income before income taxes and extraordinary item $ 850,000Income tax expense* 340,000Income before extraordinary
15、item 510,000Extraordinary item: Loss from earthquake, net of $160,000 tax benefit(240,000)Net income $ 270,000Earnings per share:Income before extraordinary item$ 5.10 Loss from earthquake (2.40)Net income $ 2.70*$850,000 x 40%Note: Restructuring costs, interest revenue, and loss on sale of investments are included in income before income taxes and extraordinary item. Brief Exercise 4-9CALIFORNIA MICROTECH CORPORATIONPartial Income StatementFor the Year Ended December 31, 2011Income from continuing operations before income taxes $ 5,800,000Income tax expense* 1,740,000Income from contin
