The Complete CPA Reference

CHAPTER 1

Financial Statement Reporting: The Income Statement

The reporting requirements of the income statement, balance sheet, statement of changes in cash flows, and interim reporting guidelines must be carefully examined. Individuals preparing personal financial statements have to follow certain unique reporting requirements, as do those who are accounting for a partnership. Points to note are:

• Income statement preparation involves proper revenue and expense recognition. The income statement format is highlighted in this chapter along with the earnings per share computation.
• Balance sheet reporting covers accounting requirements for the various types of assets, liabilities, and stockholders’ equity.
• The statement of cash flows presents cash receipts and cash payments classified according to investing, financing, and operating activities. Disclosure is also provided for certain noncash investment and financial transactions. A reconciliation is provided between reported earnings and cash flow from operations.
• Interim financial reporting allows for some departures from annual reporting, such as the gross profit method to estimate inventory. The tax provision is based on the effective tax rate expected for the year.
• Personal financial statements show the worth of the individual. Assets and liabilities are reflected at current value in the order of maturity.

This chapter deals with the reporting requirements on the income statement. Chapter 2 deals with the balance sheet, and ...