Chapter Outline
Teaching Notes
IV. Supplement 13A: Nonrecurring and Other Special Items
LO 13-S1 Describe how nonrecurring and other comprehensive income items are reported.
A. Nonrecurring Items
1. Until 2005, three different types of nonrecurring items
were reported in income statements: discontinued
operations, extraordinary items, and the cumulative
effects of changes in accounting methods.
2. New accounting standards have nearly eliminated income
statement reporting of extraordinary items and the
cumulative effects of changes in accounting methods.
3. The cumulative effects of changes in accounting methods
are reported as adjustments to Retained Earnings rather
than as part of the income statement in the period when
the change is made.
Covered in Intermediate
Accounting.
4. Discontinued operations––Result from the disposal of a
major component of the business and are reported net of
income tax effects.
Illustrated in Exhibit 13A.1
a. The results of an abandoned or sold business unit for
the current year are reported on a separate line of the
income statement immediately after Income Tax
Expense.
b. This discontinued operations line includes any gain or
loss on disposal of the discontinued operation as well
as any operating income generated before its disposal.
c. Because it appears below the Income Tax Expense
line, any additional tax effects related to the gains or
losses are included in the reported amounts.
B. Other Items in Comprehensive Income
1. Comprehensive income = Net Income + Other
Comprehensive Income (OCI); OCI includes gains and
losses arising from changes in the values of certain assets
and liabilities.
Covered in Intermediate
Accounting courses.
a. These items represent gains or losses relating to
changes in the value of certain balance sheet accounts.
b. While most gains and losses are included in the
computation of net income, some (relating to changes
in foreign currency exchange rates and the value of
certain investments, for example) are excluded from
net income and included only in comprehensive
income.
V. Supplement 13B: Reviewing and Contrasting IFRS and GAAP
LO 13-S2 Describe significant differences between GAAP and IFRS.
A. Overview
1. Generally speaking, IFRS and GAAP are similar.
a. Both aim to guide businesses in reporting financial
information that is relevant and that faithfully
represents the underlying activities of businesses.
Chapter Outline
Teaching Notes
b. At a basic level, these accounting rules describe:
i. When an item should be recognized.
ii. How that item should be classified (e.g., asset or
expense, revenue or liability).
iii. How the amount at which each item should be
measured.
c. Although some exceptions exist, both IFRS and
GAAP require that items be recorded only after an
exchange between the company and another party.
i. Initially, these items are recorded at the value they
enter the company (called the entry price or
historical cost).
ii. Later, this value may be revised (upwards or
downwards) as a result of events or changes in
circumstances.
iii. The new value may be
(a) The entry price adjusted for items such as
interest, depreciation, and amortization,
(b) A current market price, or
(c) Another computed amount (such as the fair
value or exit price that the company would
receive or pay in the future for that item).
d. Many differences between IFRS and GAAP relate to
cases where IFRS requires or allows companies to
report items using values that differ from those
required or allowed by GAAP.
B. Specific Topics Integrated in Earlier Chapters
1. Chapter 1: Discusses the joint work of the Financial
Accounting Standards Board and the International
Accounting Standards Board to establish accounting rules
and a unified conceptual framework.
2. Chapter 7: Explains that IFRS prohibits LIFO and
discusses the potential financial impact of switching to
from FIFO to LIFO.
3. Chapter 9:
a. Discusses IFRS’s accounting for component costs.
b. Discusses IFRS’s accounting for R&D and revaluation
at fair value.
4. Chapter 10:
a. Discusses IFRS’s current classification of long-term
debt involving violated loan covenants.
b. Discusses IFRS’s threshold for accruing contingent
liabilities.
5. Chapter 11: Discusses classification of certain preferred
stock as a liability.
6. Chapter 12: Illustrates differences in classification of
dividends and interest received and paid, under IFRS and
GAAP.
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Unless you used it in connection with Chapter 1, consider showing the first segment of following
video in class; most students will be able to identify with the “fraudster.” Lively discussion of the
manner in which the fraud was perpetrated will follow.
The National Association of Certified Fraud Examiners produced a video in 1991 called “Cooking the
Books: What Every Accountant Should Know about Fraud.” If you do not have the tape, the toll free
number to order it is 1-800-245-3321, or visit the web site at http://www.cfenet.com. At this writing,
the cost to a college or university is $139.00 for nonmembers. Three frauds are overviewed: ZZZZ
Best Carpet, Regina Vacuum Cleaner Company, and ESM Group, Inc. (ESM Government Securities).
ZZZZ Best Carpet might be the best one to use. Barry Minkow, the CEO and major stockholder, is
interviewed in prison. The video segment discusses revenue overstatements, deferred costs, asset
valuations, inadequate disclosures, and horizontal and vertical analysis. It is very well done.
2. Handout 13–1
Use Handout 13–1 for an in-class activity designed to review the classification of financial ratios. The
solution follows the handout master.
3. Handout 13–2
Use Handout 13–2 for an in-class activity designed to review the formulas of financial ratios. The
solution follows the handout master.
HANDOUT 13–1
CLASSIFICIATON OF FINANCIAL RATIOS
Indicate whether each of the following financial ratios would be classified as a profitability, liquidity, or
solvency ratio when performing ratio analysis.
Financial Ratio
Profitability Ratio
Liquidity Ratio
Solvency Ratio
Current Ratio
Days to Collect
Days to Sell
Debt-to–Assets
Earnings per Share (EPS)
Fixed Asset Turnover
Gross Profit Percentage
Inventory Turnover
Net Profit Margin
Price/ Earnings Ratio
Receivables Turnover
Return on Equity (ROE)
Times Interest Earned
HANDOUT 13–1 SOLUTION
CLASSIFICIATON OF FINANCIAL RATIOS
Indicate whether each of the following financial ratios would be classified as a profitability, liquidity, or
solvency ratio when performing ratio analysis.
Financial Ratio
Profitability Ratio
Liquidity Ratio
Solvency Ratio
Current Ratio
X
Days to Collect
X
Days to Sell
X
Debt-to–Assets
X
Earnings per Share (EPS)
X
Fixed Asset Turnover
X
Gross Profit Percentage
X
Inventory Turnover
X
Net Profit Margin
X
Price/ Earnings Ratio
X
Receivables Turnover
X
Return on Equity (ROE)
X
Times Interest Earned
X
HANDOUT 13–2
FINANCIAL RATIO FORMULAS
Match each of the following financial ratios with its formula:
Ratios:
Current Ratio
Inventory Turnover
Days to Collect
Net Profit Margin
Days to Sell
Price/Earnings (P/E) Ratio
Debt-to–Assets
Receivables Turnover
Earnings Per Share (EPS)
Return on Equity (ROE)
Fixed Asset Turnover
Times Interest Earned
Gross Profit Percentage
Formulas:
A. Cost of sales divided by Average inventory
B. Current assets divided by Current liabilities
C. Stock price divided by EPS
D. Total liabilities divided by Total assets
E. 365 divided by Inventory turnover ratio
F. (Net income minus Preferred dividends) divided by Average number of common shares
G. (Net income minus Preferred dividends) divided by Average common stockholders’ equity
H. (Net income divided by Net sales revenue) × 100
I. (Net income + Interest expense + Income tax expense) divided by Interest expense
J. [(Net sales revenue − Cost of goods sold) divided by Net sales revenue] × 100
K. Total revenue divided by Average net fixed assets
L. Net sales revenue divided by Average net receivables
M. 365 divided by Receivables turnover ratio
HANDOUT 13–2 SOLUTION
FINANCIAL RATIO FORMULAS
Match each of the following financial ratios with its formula:
Ratios:
Current Ratio
Inventory Turnover
Days to Collect
Net Profit Margin
Days to Sell
Price/Earnings (P/E) Ratio
Debt-to–Assets
Receivables Turnover
Earnings Per Share (EPS)
Return on Equity (ROE)
Fixed Asset Turnover
Times Interest Earned
Gross Profit Percentage
Formulas:
A. Cost of sales divided by Average inventory
B. Current assets divided by Current liabilities
C. Stock price divided by EPS
D. Total liabilities divided by Total assets
E. 365 divided by Inventory turnover ratio
F. (Net income minus Preferred dividends) divided by Average number of common shares
G. (Net income minus Preferred dividends) divided by Average common stockholders’ equity
H. (Net income divided by Net sales revenue) × 100
I. (Net income + Interest expense + Income tax expense) divided by Interest expense
J. [(Net sales revenue ÷ Cost of goods sold) divided by Net sales revenue] × 100
K. Total revenue divided by Average net fixed assets
L. Net sales revenue divided by Average net receivables
M. 365 divided by Receivables turnover ratio