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Chapter 3 - Six pages of detailed notes - Midterm Material!.docx

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ACTG 3110
Elizabeth Farrell

Chapter 3: Statements of Income and Comprehensive Income Nature of Income Economic income – based on events approach rather than on completed transactions Accounting income – based largely on the transactions approach  IFRS now allows fair-value write-up or write-down Comprehensive income – all changes to owners’ equity that are not the result of transactions with the owners (shareholders) in their capacity as owners. Purpose:  Eliminate direct entries to shareholders’ equity except those resulting from transactions with the actual shareholders  Differentiate between (1) those value changes recognized both in net assets and in income, and (2) those that are recognized in net assets but not in the year’s net income (unrealized) 2 categories of comprehensive income: Net Income, and Other comprehensive income (OCI) Statement of comprehensive income – starts with revenue, goes down to profit (or loss), and then continues to items of OCI. 2 different statements can also be made: 1. Income statement; or 2. Statement of comprehensive income (SCI) that starts with net income What can be left out of the normal Income Statement?  Other comprehensive income – recognized in balance sheet but have not been realized – Value changes that will be recognized in income only when realized, or that will be matched by an offsetting gain/loss in the future  Cumulative changes to retained earnings resulting from changes in accounting policies or corrections from the past General Presentation Format Line Items Required for Profit/Loss Section:  Revenues (aggregated or separated)  Finance costs (interest expense)  Enterprise’s share of earnings from associated companies/joint ventures  Income tax expense on continuing operations  Profit/loss on discounted operations, not of tax  Net earnings  Earnings per share The following items can be disclosed either in the statement or disclosure notes:  Depreciation and amortization expense  Employee benefits expense (wages, payroll taxes, benefits, etc.)  Cost of Goods Sold (I think) Alternative Formats: 1. Classification by nature of expense - all expenses are aggregated as opposed to broken down by function and listed in descending order 2. Classification by function within the enterprise – expenses are broken down into segments based on function – when this is done, the other required information is disclosed in the notes Non-controlling Interest Non-controlling interest (NCI) – when a parent company does not own 100% of the subsidiary, the shares they don’t hold is the NCI (allocate the final net income of the parent and the subsidiary)  Under IFRS, it is required to disclose NCI (you can’t just deduct it) Single Step vs. Multiple Step Statements Single-step statements – revenues minus expenses = net income (this is rare since companies are required to segregate) Multiple-step statements – shows several subtotals before arriving at net income 1. Operating revenues and expenses 2. Non-operating revenues and expenses and gains and losses 3. Financing cots 4. Income taxes before reaching a subtotal Discontinued operations must always be shown separately Segregate unusual items – gains and losses that are not part of normal earnings Other Choices Fiscal year-end – many try to choose a point during a low point in seasonal pattern so they have time to do it, sometimes its based on competitors, sometimes its based on the parent company, sometimes its mandated, mostly aligned with the calendar Reporting period – normally it is expected that there is a 12-month period, but firms will often prepare quarterly, or semi-annual reports for shareholders Comparative data – many companies prepare a 2-year comparison (3 total years) because it compliers with US SEC rules Special aspects of income reporting – includes discontinued operations (rare), and income tax allocation (affects everyone) Asset Disposals and Restructuring When a company wants to improve its operations, it can do so in various ways: 1. Shut down a part of its operations 2. Significantly reorganize the company’s operations (but continue businesses) 3. Sell a major business line as an operating unit while keeping it intact (discontinued operation) Asset Disposals – getting rid of excess assets 1. Disposing of individual non-current assets 2. Disposing of several assets as a group When they are put up for sale, they are moved from non-current to current (different for ASPE) Abandoned asset – asset that a company continues to own but has permanently stopped using (stop amortization and write it down to its recoverable value)  Recoverable value – fair value less the costs to sell the asset (also known as the net realizable value) (can be written back up) Idle asset – asset that the company temporarily is not using Current assets – no treatment is necessary except to be certain that carrying value does not exceed recoverable value (write-down may be necessary) Non-current assets – it is subject to impairment test and written down to recoverable value if lower than carrying value  Held-for-sale – meets the conditions above Conditions for held-for-sale classification for a non-current asset – 2 conditions: 1. Asset is available for immediate sale in its present condition 2. Asset’s sale is highly probable  Price being asked for is reasonable relative to current condition  Active program to find a buyer must have been started  Management committed to sell the asset  Unlikely the offer will be withdrawn or terms to be changed significantly  Sale is expected to take place within one year of it being classified If the delay is out of the control of the company, it can remain a current asset The Held-for-sale two-step – two sets to recording a non-current asset as held-for- sale: 1. Must first be “remeasured” to the lower of its carrying value and fair value (less costs to sell) 2. Can be reclassified assuming it meets the 5 requirements from above The write-down
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