1. Intermediate Accounting I - Fall 2011 3-1 Session 3 Accounting Assumptions and Principles Balance Sheet Wrap-up The Complete Income Statement Separately Reported Items

2. Intermediate Accounting I - Fall 2011 3-2 SFAC Schematic-I (updated) SFAC 8: OBJECTIVES OF FINANCIAL REPORTING Useful Cash Flow Prediction Economic Resource Information SFAC 2: QUALITATIVE CHARACTERISTICS (Understandibility) Primary Relevance Predictive value Confirmatory value Faithful Representation Completeness Neutrality Free from material error Enhancing Comparability (including consistency) Verifiability Timeliness Understandability Constraints Cost Effectiveness Materiality SFAC 5: RECOGNITION & MEASUREMENT SFAC 7: CASH FLOWS & P,V. MEASUREMENT Recognition Definition Measurability Relevance Reliability Measurement Unit Method Underlying Assumptions Economic entity Going concern Periodicity Monetary unit Principles Historical cost Realization Matching Full disclosure (1 X 3) (2 X 3) + 2 + 3 4 + 2 + (2 X 4)

3. Intermediate Accounting I - Fall 2011 3-3 Additional Disclosures n Footnotes n Accounting Policies n Subsequent Events n Noteworthy Transactions n Management Discussion and Analysis (MD&A) n Management’s Responsibilities n Auditors’ Report n Compensation in the Proxy Statement

4. Intermediate Accounting I - Fall 2011 3-4 The Complete Income Statement n Single or multiple step n Major components n Income from continuing operations n Gross margin n Operating income n Other income and expense n Separately reported items n Discontinued operations n Extraordinary items n Earnings per share n Basic n Diluted

5. Intermediate Accounting I - Fall 2011 3-5 Earnings Quality Issues n Income shifting n One time gains and losses n Operating versus non-operating income n Specific topics n Restructuring costs—ASC 420-10-20 or FAS 146, when incurred n Transitory or routine n Investment gains and losses n Pro-forma reporting, reconciliation required

6. Intermediate Accounting I - Fall 2011 3-6 Comprehensive Income n Net income n Other Comprehensive Income* n Unrealized gains & losses on available for sale securities n Translation gains and losses n Deferred gains & losses from derivatives n Post retirement benefit plan adjustments (*all net of tax)

7. Intermediate Accounting I - Fall 2011 3-7 Comprehensive Income-- Reporting n Flexible n Extension to the P&L (p.194) n Separate statement (p.195) n Often in footnotes

8. Intermediate Accounting I - Fall 2011 3-8 Balance Sheet Presentation n Accumulated Other Comprehensive Income n Note that the “accumulated” net income is included in Retained Earnings (Astro-Med Inc. p. 196)

9. Intermediate Accounting I - Fall 2011 3-9 Separately Reported Items n Discontinued Operations n Extraordinary Items n Mandated Changes in Accounting Principles

10. Intermediate Accounting I - Fall 2011 3-10 Reporting Format Income from continuing operations before income taxes and extraordinary items Income tax expense Income from continuing operations before extraordinary items Discontinued operations, net of tax Extraordinary items, net of tax Net Income

11. Intermediate Accounting I - Fall 2011 3-11 Intraperiod Income Tax Allocation n Associate tax on a pro-rata basis with continuing operations and separately reported items

12. Intermediate Accounting I - Fall 2011 3-12 Discontinued Operations n What is an operation? n Component of an entity n Two key requirements n Operations and cash flows will be eliminated (generally this means separate internal reporting), and n No further significant involvement

13. Intermediate Accounting I - Fall 2011 3-13 Reporting Discontinued Operations n Footnote disclosure, as appropriate n Sale before the end of the reporting period n Operating income and loss thru the disposal date n Gain or loss on disposal (clearly presented) n Held for sale (sale after the end of the reporting period) n Operating income and loss thru the end of the reporting period n Impairment loss (clearly presented) n B/S assets valued at lower of BV or FV less cost to sell n B/S assets reported separately n Additional gain or loss on sale reported when sold

14. Intermediate Accounting I - Fall 2011 3-14 Held for Sale Definition n See ASC 360-10-45-9 or FAS 144 n Likely to be sold within a year

15. Intermediate Accounting I - Fall 2011 3-15 Impairment on Held for Sale n Selling price versus FV less cost to sell n Footnote disclosure, as appropriate (p. 185)

16. Intermediate Accounting I - Fall 2011 3-16 Extraordinary Items n Unusual and infrequent n Unusual or infrequent n Separate item in operating income n Footnote disclosure as appropriate

17. Intermediate Accounting I - Fall 2011 3-17 Accounting Changes n Change in accounting principle n Change in estimate n Change in reporting entity n Correction of errors (not an accounting change)

18. Intermediate Accounting I - Fall 2011 3-18 Change in Actg. Principle n Footnote disclosure, as necessary n Voluntary n Retrospective: apply historically n Journal entry in current year, impacts R/E n Mandated n FASB may allow voluntary treatment n Cumulative effect as Separately Reported Item

19. Intermediate Accounting I - Fall 2011 3-19 Change in Estimate n Prospective n Footnote disclosure, if material n Includes depreciation with mandated footnote disclosure

20. Intermediate Accounting I - Fall 2011 3-20 Change in Entity n Not comparative; therefore, restate prior F/S n Footnote disclosure, as appropriate

21. Intermediate Accounting I - Fall 2011 3-21 Correction of Errors n If not material, just correct n If material n Prior period adjustment and restatement of prior financial statements n Adjust Retained earnings and Statement of R/E

22. Intermediate Accounting I - Fall 2011 3-22 Earnings Per Share n Basic n Income to common shareholders / weighted average of common shares outstanding n Diluted n Adjusted income to common shareholders / weighted average of total common share outstanding n Disclose for continuing operations, discontinued operations and extraordinary items