Solutions-Ch04 - CHAPTER 4 Income Statement and Related...

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CHAPTER 4 Income Statement and Related Information 1. 2. Answers to Questions 2. Information on past transactions can be used to identify important trends that, if continued, provide information about future performance. If a reasonable correlation exists between past and future performance, predictions about future earnings and cash flows can be made. For example, a loan analyst can develop a prediction of future performance by estimating the rate of growth of past income over the past several periods and project this into the next period. Additional information about current economic and industry factors can be used to adjust the trend rate based on historical information. 10. The major distinction between revenues and gains (or expenses and losses) depends on the typical activities of the enterprise. Revenues can occur from a variety of different sources, but these sources constitute the entity’s ongoing major or central operations. Gains also can arise from many different sources, but these sources occur from peripheral or incidental transactions of an entity. The same type of distinction is made between an expense and a loss. 19. You should tell Greg that a company’s reported net income is the same whether the single-step or multiple-step format is used. Either way, the company has the same revenues, gains, expenses, and losses; they are simply organized in a different format. 25. Tax allocation within a period is the practice of allocating the income tax for a period to such items as income before extraordinary items, extraordinary items, and prior period adjustments. The justification for tax allocation within a period is to produce financial statements which disclose an appropriate relationship, for example, between income tax expense and (a) income before extraordinary items, (b) extraordinary items, and (c) prior period adjustments (or of the opening balance of retained earnings). 30. The major items reported in the retained earnings statement are: (1) adjustments of the beginning balance for corrections of errors or changes in accounting principle, (2) the net income or loss for the period, (3) dividends for the year, and (4) restrictions (appropriations) of retained earnings. It should be noted that the retained earnings statement is sometimes composed of two parts, unappropriated and appropriated. 34. Other comprehensive income must be displayed (reported) in one of three ways: (1) a second separate income statement, (2) a combined income statement of comprehensive income, or (3) as part (separate columns) of the statement of stockholders’ equity.
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BRIEF EXERCISE 4-4 Income from continuing operations. .................................................. $10,600,000
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This note was uploaded on 02/21/2011 for the course ACCT 3410 taught by Professor Vicky during the Spring '11 term at Aarhus Universitet, Aarhus.

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Solutions-Ch04 - CHAPTER 4 Income Statement and Related...

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