Glossary Chapter 4

Glossary—Chapter 4 accumulated other comprehensive income An entry in the stockholders’ equity section of the balance sheet that reports the cumulative amounts of Other Comprehensive Income. Other Comprehensive Income measures the amounts of all gains and losses in a period that bypass the income statement but affect stockholders’ equity. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. (p. 183). Appropriated Retained Earnings A retained earnings account that is restricted for a specific use, usually to comply with contractual requirements, board of directors’ policy, or current necessity. (p. 180). capital maintenance approach An income measurement approach in which a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions (dividends). An alternative to the transaction approach for income measurement. (p. 162) (n). changes in estimates Adjustments or changes that companies must make because financial circumstances did not turn out as expected. Companies account for changes in estimates in the period of change if they affect only that period, or in the period of change and future periods if the change affects both. They do not carry back such changes to prior years. Changes in estimate are not considered errors or extraordinary items. (p. 175). comprehensive income Income measure that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income includes all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders’ equity. These latter amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. (p. 182). current operating performance approach Income-reporting approach that advocates reporting only regular and recurring revenue and expense elements, but not irregular items, in income. (p. 168). discontinued operation Occurs for a company when two things happen: (1) a company eliminates the results of operations and cash flows of a component from its ongoing operations, and (2) there is no significant continuing involvement in that component after the disposal transaction. Companies report a discontinued operation (in a separate income statement category), indicating the gain or loss from disposal of a business. In addition, companies report separately from continuing operations the results of operations of a component that has been, or will be, disposed of. (p. 169). earnings management The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings. (p. 161). earnings per share (EPS) A distilled and important income figure, calculated as net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding. Companies must disclose earnings per share on the face of the income statement. (p. 178). extraordinary items Nonrecurring material items that differ significantly from a company’s typical business activities. They are distinguished by their unusual nature and by the infrequency of their occurrence. (p. 170). income statement The financial report that measures the success of company operations for a given period of time. It is also often called the statement of income or statement of earnings. (p. 160). intraperiod tax allocation Reporting of irregular items within an accounting period on the income statement or statement of retained earnings net of tax. Such allocation relates the income tax expense of the fiscal period to the specific items that give rise to the amount of the tax provision. It helps financial statement users better understand the impact of income taxes on the various components of net income, and it discourages statement readers from using pretax measures of performance when evaluating financial results. (p. 177). irregular items Income-statement components for which the FASB has established special reporting rules. These items fall into six general categories: (1) discontinued operations, (2) extraordinary items, (3) unusual gains and losses, (4) changes in accounting principle, (5) changes in estimates, and (6) corrections of errors. (p. 169). modified all-inclusive concept Approach, adopted by the accounting profession, that dictates that companies record just about all items, including irregular ones, as part of net income, and that companies must highlight irregular items in the financial statements. (p. 169). multiple-step income statement Income statement format that separates operating transactions from nonoperating transactions, and matches costs and expenses with related revenues. It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. (p. 164). other comprehensive income Measure of the amounts of all gains and losses in a period that bypass the income statement but affect stockholders’ equity. These amounts arise from such items as unrealized gains or losses on certain investments and unrealized gains and losses on certain hedging transactions. (p. 182). prior period adjustments Corrections of accounting errors made in previous accounting periods. Companies correct such errors by making proper entries in the accounts and reporting the corrections in the financial statements (as an adjustment to the beginning balance of retained earnings) in the year in which they are discovered. If a company prepares comparative financial statements, it should restate the prior statements for the effects of the error. (p. 175). quality of earnings The extent to which earnings is useful to investors and creditors in making resource allocation decisions, generally in terms of predicting future earnings and cash flows. Thus, higher-quality earnings exhibit higher levels of relevance and faithful representation. Earnings of high quality boost investors’ confidence in the financial statements. Earnings management negatively affects the quality of earnings when it distorts the information in a way that does not accurately predict future earnings and cash flows. (p. 161). single-step income statement Income statement format that consists of just two groupings: revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss. Companies that use the single-step income statement in financial reporting typically do so because of its simplicity. (p. 163). statement of stockholders’ equity One of the basic financial statements, which reports the changes in each stockholders’ equity account and in total stockholders’ equity during the year. It typically shows balances at the beginning of the period, additions and deductions, and balances at the end of the period. Companies disclose changes in the separate accounts either in separate statements or in the basic financial statements or notes thereto. (p. 183). transaction approach Method of income measurement that focuses on the income-related activities— revenue, expense, gain, and loss transactions—that have occurred during the period. (p. 162).