Problem Solving Survival Guide to accompany Intermediate Accounting, Volume 1: Chapters 1 - 14, 15th Edition

CHAPTER 4

INCOME STATEMENT AND RELATED INFORMATION

OVERVIEW

An income statement reports on the results of operations of an entity for a period of time. It is important to classify revenues, expenses, gains, and losses properly on the income statement. In this chapter, we discuss the income statement classifications and the content of the statement of retained earnings along with related disclosure issues. It is imperative that charges (debits) and credits that represent elements of income determination be properly reflected in the financial statements. Errors in the determination of income cause errors on the income statement, statement of retained earnings, and balance sheet.

SUMMARY OF LEARNING OBJECTIVES

1. Understand the uses and limitations of an income statement. The income statement provides investors and creditors with information that helps them predict the amount, timing and uncertainty of future cash flows. Also, the income statement helps users determine the risk (level of uncertainty) of not achieving particular cash flows. The limitations of an income statement are: (1) The income statement does not include many items that contribute to general growth and well-being of an enterprise. (2) Income numbers are often affected by the accounting methods used. (3) Income measures are subject to estimates.

   The transaction approach focuses on the activities that have occurred during a given period; instead of presenting only a net change in net assets, it discloses the components ...