Principles of Accounting: Chapter Fifteen

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Chapter Summary

Chapter 15 begins by delving into more advanced reporting issues, and building an awareness of the accounting profession's conceptual underpinnings. The chapter provides detailed illustrations and explanations of special reporting scenarios, including corrections of errors, discontinued operations, extraordinary items, other comprehensive income, and changes in accounting methods.

Calculations relating to earnings per share and book value per share are discussed and illustrated. This is followed by a discussion of the use and interpretation of selected dividend and return ratios.

The next major section of the chapter takes a broad overview perspective on the objectives and qualities of accounting information. A brief history of the development of generally accepted accounting principles and the audit profession is provided. This section concludes with a review of key assumptions inherent to the accounting model, many of which have been introduced throughout the book.

The chapter concludes with coverage of issues arising from global commerce. This topic divides into issues related to reporting issues for global subsidiaries and foreign exchange transactions. Illustrative entries are shown for the foreign exchange transactions.

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Objectives: Chapter Fifteen

The following learning objectives for this chapter map to the curriculum design for our online university-level courses. These courses are offered through Utah State University, and result in the awarding of up to 6 hours of highly transferrable college credit. To learn more, check out the classroom link.

Special reporting situations.

What is a prior period adjustment, and when is this accounting device used?

Know the journal entry and financial statement effect of restatements for errors.

Be able to define a business component.

Identify the nature of discontinued operations.

Know the special accounting treatment associated with discontinued operations.

Describe intraperiod tax allocation, and state why this approach is used.

Know the special accounting rules for extraordinary items.

Prepare a comprehensive income statement that includes elements such as discontinued operations and extraordinary items.

Know how to account for and report changes in accounting principle.

Distinguish between the terms restatement and retrospective adjustment, knowing which is applicable to changes in principle.

Be familiar with EBIT and EBITDA.

Earnings per share and other key indicators.

Be able to calculate basic earnings per share.

Understand the concepts and computations for weighted-average shares and earnings available to common stockholders.

Be familiar with diluted earnings per share.

Understand the price/earnings ratio.

What is book value per share, how should it be interpreted, and how is it calculated?

Understand the confounding effects on book value calculations, when there is more than one class of stock.

Be able to calculate the dividend payout ratio and the dividend yield.

Be able to calculate return on assets and return on equity.

The objectives and qualities of accounting information.

What are the key objectives of accounting.

What primary and secondary characteristics serve to make accounting useful?

Provide specific definitions for relevance, reliability, comparability, consistency, and understandability.

The development of generally accepted accounting principles.

Define generally accepted accounting principles.

What bodies are instrumental in the development of GAAP?

What body influences the formulation of international accountancy?

What is the purpose of an audit?

What is the nature of an audit report?

What government entity oversees the audit profession?

Key assumptions of financial accounting and reporting.

Be able to define the following assumptions: entity, going-concern, periodicity, monetary unit, and stable currency.

Issues in accounting for global commerce.

What are two key accounting issues that can arise from global commerce?

Distinguish between translation and remeasurement, and to what subject do they relate?

Know how to account for typical foreign currency transactions, with special attention to appropriate year-end adjustments.

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