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Chapter 04 - The Income Statement and Statement of Cash FlowsQuestion 4-1The income statement is a change statement that reports transactions — revenues, expenses,gains and losses — that cause owners’ equity to change during a specified reporting period.Question 4-2Income from continuing operations includes the revenue, expense, gain, and loss transactionsthat will probably continue in future periods. It is important to segregate the income effects ofthese items because they are the most important transactions in terms of predicting future cashflows.Question 4-3 Operating income includes revenues and expenses and gains and losses that are directlyrelated to the principal revenue generating activities of the company. Nonoperating incomeincludes items that are not directly related to these activities.Question 4-4 The single-stepformat first lists all revenues and gains included in income from continuingoperations to arrive at total revenues and gains. All expenses and losses are then grouped andsubtotaled, subtracted from revenues and gains to arrive at income from continuing operations.The multiple-stepformat reports a series (multiple) of intermediate totals such as gross profit,operating income, and income before taxes. Very often income statements adopt variations of theseformats, falling somewhere in between the two extremes.Question 4-5 The term earnings qualityrefers to the ability of reported earnings (income) to predict acompany’s future earnings. After all, an income statement simply reports on events that alreadyhave occurred. The relevance of any historical-based financial statement hinges on its predictivevalue.Question 4-6 Restructuring costsinclude costs associated with shutdown or relocation of facilities ordownsizing of operations. They are reported as an operating expense in the income statement.4-1Chapter4The Income Statement and Statement of Cash FlowsQUESTIONS FOR REVIEW OF KEY TOPICS
Chapter 04 - The Income Statement and Statement of Cash FlowsQuestion 4-7 The process of intraperiod tax allocation matches tax expense or tax benefit with each majorcomponent of income, specifically continuing operations and any item reported below continuingoperations. The process is necessary to achieve the desired result of separating the total incomeeffects of continuing operations from the two separately reported items - discontinued operationsand extraordinary items, and also to show the after-taxeffect of each of those two components.Answers to Questions (continued)