Question

What is disclosed in an income statement? Be specific.

What are the criteria (in addition to materiality) that must be met to classify an event or transaction as extraordinary

When does a discounted operation occur

Indicate how earnings per share is computed

State the primary category of prior period adjustments and indicate how they are reported in the financial statements

Answer 1

1. An income statement is part of your company’s set of complete financial statements. It discloses information about your daily operating activities and highlights the money coming into and out of your business. Banks and lenders use income statements as a partial indication of your business’s ability to pay loans and lines of credit, but you might also use this information to create budgets and gauge the profitability of your business throughout the year. Income statements are also used to prepare tax returns for your business and may be requested by your accountant or bookkeeper.

Revenue

The first item listed on your income statement is your revenue or gross receipts. This includes all money your business earns during the period covered by the statement. The primary source of your income is from the sale of your products and services, but you may have other sources of business income, such as interest earned on investments or rental income from property the company owns and leases.

Expenses

After revenue is disclosed, your income statement lists all the operating expenses paid during the reported period. Operating expenses include wages, taxes, rent, utilities and insurance costs, plus supplies and inventory you purchase to produce your good or service. If you have non-operating expenses, such as interest expenses or losses on the sale of assets, your income statement also discloses these items in this section.

Profit or Loss

The profit or loss for your business for the period is one of the main focal points of the income statement. After expenses are subtracted from income, your income statement shows whether you have a profit or a loss. Although you should account for income statement items at least once per month, you can use the statement to determine if you have daily, monthly, quarterly or annual profits or losses. If your business is seasonal, the income statement can show which months are more profitable for you and which are not. This helps you make decisions about your budget and savings so you have funds available for operating expenses during tough months.

2.Extraordinary Items Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item:

a. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates .

b. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates .

3.Discontinued operation occurs when the operations and cash flows of that component have been or will be eliminated from the ongoing operations of the entity and the entity and the activity will have no significant continuing involvement in that component after its disposal.

4.

Earnings per share or EPS is an important financial measure, which indicates the profitability of a company. It is calculated by dividing the company’s net income with its total number of outstanding shares.

Earnings per share can be calculated in two ways:

1) Earnings per share: Net Income after Tax/Total Number of Outstanding Shares

2) Weighted earnings per share: (Net Income after Tax - Total Dividends)/Total Number of Outstanding Shares

5. A prior period adjustment can be one of the following two items:

• The correction of an error in the financial statements that were reported for a prior period; or

• Adjustments caused by the realization of the income tax benefits arising from the operating losses of purchased subsidiaries before they were acquired.

• Since the second situation is both highly specific and rare, a prior period adjustment really applies to just the first item - the correction of an error in the financial statements of a prior period. An error in a financial statement may be caused by:

• Mathematical mistakes;

• Mistakes in the application of GAAP or some other accounting framework; or

• The oversight or misuse of facts that existed at the time the financial statements were prepared

• You should account for a prior period adjustment by restating the prior period financial statements. This is done by adjusting the carrying amounts of any impacted assets or liabilities as of the first accounting period presented, with an offset to the beginning retained earnings balance in that same accounting period.