Question 4–1
Question 4–2
Income from continuing operations includes the revenue, expense, gain, and loss
Question 4–3
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
Chapter 4 The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
QUESTIONS FOR REVIEW OF KEY TOPICS
4–2 Intermediate Accounting, 8/e
Question 4–5
The term earnings quality refers to the ability of reported earnings (income) to
Question 4–6
Question 4–7
The process of intraperiod tax allocation matches tax expense or tax benefit with
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
Question 4–9
GAAP permit alternative treatments for similar transactions. Common examples
are the choice among FIFO, LIFO, and average cost for the measurement of inventory
and the choice among alternative revenue recognition methods. A change in
accounting principle occurs when a company changes from one generally accepted
treatment to another.
Question 4–10
A change in accounting estimate is accounted for in the year of the change and in
subsequent periods; prior years’ financial statements are not restated. A disclosure
4–4 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 4–11
Prior period adjustments are accounted for by restating prior years’ financial
Question 4–12
Earnings per share (EPS) is the amount of income achieved during a period for
Question 4–13
Comprehensive income is the total change in equity for a reporting period other
Question 4–14
The purpose of the statement of cash flows is to provide information about the
Answers to Questions (continued)
Question 4–15
The three categories of cash flows reported on the statement of cash flows are:
1. Operating activities—Inflows and outflows of cash related to the transactions
entering into the determination of net income from operations.
Question 4–16
Noncash investing and financing activities are transactions that do not increase or
decrease cash but are important investing and financing activities. An example would
Question 4–17
The direct method of reporting cash flows from operating activities presents the
4–6 Intermediate Accounting, 8/e
Answers to Questions (concluded)
Question 4–18
These perspectives are referred to as the discrete and integral part approaches.
Current interim reporting requirements and existing practice generally view interim
Question 4–19
U.S. GAAP designates cash outflows for interest payments and cash inflows
Question 4–20
U.S. GAAP views interim reports as an integral part of the annual report, so
Brief Exercise 4–1
PACIFIC SCIENTIFIC CORPORATION
Income Statement
For the Year Ended December 31, 2016
($ in millions)
Revenues and gains:
Sales ………………………………………………………..
Gain on sale of investments ………………………..
Expenses and losses:
Cost of goods sold ……………………………………..
$1,240
Selling ………………………………………………………
126
General and administrative ………………………….
105
Interest ………………………………………………………
BRIEF EXERCISES
4–8 Intermediate Accounting, 8/e
Brief Exercise 4–2
(a) Sales revenue $2,106
Brief Exercise 4–3
PACIFIC SCIENTIFIC CORPORATION
Income Statement
For the Year Ended December 31, 2016
($ in millions)
Sales revenue ………………………………………………
$2,106
Cost of goods sold ……………………………………….
Gross profit …………………………………………………
Selling ………………………………………………………
Operating income ………………………………………..
Other income (expense):
Gain on sale of investments ………………………..
45
Interest expense …………………………………………
Income before income taxes ………………………….
Income tax expense* ……………………………………
Net income ………………………………………………….
4–10 Intermediate Accounting, 8/e
Brief Exercise 4–4
(a) Sales revenue $300,000
Less: Cost of goods sold (160,000)
(b) Operating income $25,000
(c)
Income before income taxes $ 7,000
Brief Exercise 4–5
WHITE AND SONS, INC.
Partial Income Statement
For the Year Ended December 31, 2016
Income from continuing operations before income taxes …
$ 850,000
Income tax expense* ………………………………………………….
340,000
Income from continuing operations ………………………………
Net income …………………………………………………………………
Earnings per share:
Income from continuing operations ……………………………….
Loss on discontinued operations ………………………………….
Net income ………………………………………………………………..
4–12 Intermediate Accounting, 8/e
Brief Exercise 4–6
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
For the Year Ended December 31, 2016
Income from continuing operations before income taxes …
$ 5,800,000
Income tax expense* …………………………………………………..
1,740,000
Income from continuing operations ……………………………..
Discontinued operations:
Loss on discontinued operations …………………………………..
Net income …………………………..……………………………………
* $5,800,000 x 30%
** Loss from operations of discontinued component:
Gain on sale of assets $ 2,000,000 ($10 million less $8 million)
Brief Exercise 4–7
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
For the Year Ended December 31, 2016
Income from continuing operations before income taxes …
$ 5,800,000
Income from continuing operations ………………………………
Discontinued operations:
Loss on discontinued operations …………………………………..
Net income …………………………………………………………………
4–14 Intermediate Accounting, 8/e
Brief Exercise 4–8
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
For the Year Ended December 31, 2016
Income from continuing operations before income taxes …
$ 5,800,000
Income tax expense* …………………………………………………..
Income from continuing operations ……………………………..
Discontinued operations:
Loss on discontinued operations …………………………………..
Net income …………………………..……………………………………
** Loss from operations of discontinued component:
Impairment loss ($8 million book value less
$7 million net fair value) $(1,000,000)
Brief Exercise 4–9
O’REILLY BEVERAGE COMPANY
Statement of Comprehensive Income
For the Year Ended December 31, 2016
Net income ………………………………………………….
$650,000
Other comprehensive income (loss):
Total other comprehensive loss ……………………..
Comprehensive income ………………………………..
4–16 Intermediate Accounting, 8/e
Brief Exercise 4–10
Cash flows from operating activities:
Collections from customers $ 660,000
Only these four cash flow transactions relate to operating activities. The others are
Brief Exercise 4–11
Cash flows from investing activities:
Proceeds from note receivable collection $100,000
Cash flows from financing activities:
Issuance of common stock $200,000
Brief Exercise 4–12
Cash flows from operating activities:
Net income $45,000
Adjustments for noncash effects:
Brief Exercise 4–13
Under IFRS, interest received and interest paid usually are classified as investing
Cash flows from operating activities:
Collections from customers $ 660,000
Cash flows from investing activities:
Proceeds from note receivable collection $100,000
Cash flows from financing activities:
Issuance of common stock $200,000
4–18 Intermediate Accounting, 8/e
Exercise 4–1
Sales revenue $12,500,000
Less operating expenses:
Cost of goods sold $6,200,000
Note: Interest revenue, loss on sale of investments, and interest expense are all
EXERCISES
Exercise 4–2
Requirement 1
GREEN STAR CORPORATION
Income Statement
For the Year Ended December 31, 2016
Revenues and gains:
Sales ………………………………………………………..
$1,300,000
Interest ……………………………………………………..
Expenses and losses:
Cost of goods sold ……………………………………..
$720,000
Selling ………………………………………………………
General and administrative ………………………….
Income before income taxes ………………………….
Income tax expense …………………………..…………
4–20 Intermediate Accounting, 8/e
Exercise 4–2 (concluded)
Requirement 2
GREEN STAR CORPORATION
Income Statement
For the Year Ended December 31, 2016
Sales revenue ……………………………………………….
$1,300,000
Cost of goods sold ………………………………………..
Gross profit ………………………………………………….
Operating expenses:
Selling ……………………………………………………….
$160,000
Operating income …………………………..…………….
Other income (expense):
Interest revenue ………………………………………….
30,000
Gain on sale of investments …………………………
50,000
Income before income taxes ………………………….
Income tax expense …………………………..………….
Net income …………………………..……………………..