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4 - Chapter 04 The Income Statement and Statement of Cash...

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Chapter 04 - The Income Statement and Statement of Cash Flows (Spiceland 6 th ed) Question 4-1 The 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 4-2 Income from continuing operations includes the revenue, expense, gain, and loss transactions that will probably continue in future periods. It is important to segregate the income effects of these items because they are the most important transactions in terms of predicting future cash flows. Question 4-3 Operating income includes revenues and expenses and gains and losses that are directly related to the principal revenue generating activities of the company. Nonoperating income includes items that are not directly related to these activities. Question 4-4 The single-step format first lists all revenues and gains included in income from continuing operations to arrive at total revenues and gains. All expenses and losses are then grouped and subtotaled, subtracted from revenues and gains to arrive at income from continuing operations. The multiple-step format reports a series (multiple) of intermediate totals such as gross profit, operating income, and income before taxes. Very often income statements adopt variations of these formats, falling somewhere in between the two extremes. Question 4-5 The term earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. After all, an income statement simply reports on events that already have occurred. The relevance of any historical-based financial statement hinges on its predictive value. Question 4-6 Restructuring costs include costs associated with shutdown or relocation of facilities or downsizing of operations. They are reported as an operating expense in the income statement. 4-1 Chapter 4 The Income Statement and Statement of Cash Flows QUESTIONS FOR REVIEW OF KEY TOPICS
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Chapter 04 - The Income Statement and Statement of Cash Flows Question 4-7 The process of intraperiod tax allocation matches tax expense or tax benefit with each major component of income, specifically continuing 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 after-tax effect of each of those two components. Answers to Questions (continued) Question 4-8 The net-of-tax income effects of a discontinued operation must be disclosed separately in the income statement, below income from continuing operations. The income effects include income (loss) from operations and gain (loss) on disposal. The gain or loss on disposal must be disclosed either on the face of the statement or in a disclosure note. If the component is held for sale but not
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