Chapter
4
The Income Statement and Statement of Cash
Flows
QUESTIONS FOR REVIEW OF KEY TOPICS
Question 4-1
The income statement is
a change statement that
reports
transactions
鈥?/p>
revenues,
expenses,
gains and losses
鈥?/p>
that cause owners鈥?nbsp;equity to chang
e 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鈥檚 futu
re 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.