ACCT251Ch4InstructorReviewNotes - CHAPTER REVIEW 1. Chapter...

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CHAPTER REVIEW 1. Chapter 4 presents a detailed discussion of the concepts and techniques that underlie the preparation of the Income Statement and Retained Earnings Statement and the reporting of other comprehensive income. The requirements for adequate presentation of reported net income are described and illustrated throughout the chapter. 2. (S.O. 1) The income statement helps users of financial statements (1) evaluate the past performance of the company, (2) provide a basis for predicting future performance, and (3) help assess the risk or uncertainty of achieving future cash flows. The limitations of the income statement include (1) items that cannot be measured reliably are not reported in the income statement, (2) income numbers are affected by the accounting methods employed, and (3) income measurement involves judgment. 3. Quality of earnings is important because markets are based on trust and it is imperative that investors have faith in the numbers reported. If that trust is damaged, capital markets will be damaged. Elements of the Income Statement 4. The major elements of net income, as described in Chapter 2, are: revenues, expenses, gains, and losses. The distinction between revenues and gains and the distinction between expenses and losses depend to a great extent on the typical activities of a business enterprise. When inflows or enhancements of assets result from typical business activities (generally the activities the entity is in business to perform), revenues result. Likewise, outflows or the using up of assets resulting from typical business activities will generate expenses. Nontypical business activities resulting in inflows or outflows of assets will normally generate transactions classified as gains or losses. Single-Step vs. Multiple-Step 5. (S.O. 2 and 3) The income statement may be presented in the single-step format or the multiple-step format. Single-step income statements derive their name from the fact that total costs and expenses are subtracted from total revenues in a “single step” to arrive at net income. Income taxes are normally shown as a separate item among the expenses (usually last) to indicate their relationship to income before taxes. The multiple-step format separates results achieved by regular operations of the entity from those obtained by nonoperating activities. Expenses are also classified by function such as cost of sales, selling, and administrative. The multiple-step format provides more information to financial statement users than does the single-step format; however, both are found in actual practice.
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This note was uploaded on 11/04/2009 for the course ACCTG 301 taught by Professor Staff during the Spring '08 term at University of Washington.

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ACCT251Ch4InstructorReviewNotes - CHAPTER REVIEW 1. Chapter...

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