Question 1

In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell 46% due to losses related to discontinued operations, but earnings from continuing operations jumped 19% amid a modest increase in sales. The specialty athletic retailer said net was $20 million for the quarter ended May 4, compared with net of $37 million a year earlier. The latest results included a loss of $18 million from discontinued operations. Last year, the company had earnings of $5 million, or four cents a share, from discontinued operations. Foot Locker said earnings from continuing operations were $38 million, compared with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings quality.

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Question 2

List at least four operating activities that would be reported in the statement of cash flows for Wal-Mart. Assume the use of the direct method.

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Question 3

Net income, often referred to as "the bottom line," is not always a good predictor of future income. Explain this statement.

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Question 4

Explain, using an example, how a company can use earnings management and justify it by conservatism.

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Question 5

In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skincare and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.

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Question 6

Give an example of a non-cash financing and investing activity and explain when and how it would be reported in the financial statements.

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Question 7

Briefly describe the difference between U.S. GAAP and International Accounting Standards in the determination of what constitutes a component of the entity requiring separate reporting as a discontinued operation.

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Question 8

Many income statement numbers are based on estimates. Explain the reporting required when the income effect of a change in estimate is material.

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Question 9

Presented below is an excerpt ($ in millions) from the 2007 annual report to shareholders of General Mills Inc. Explain how the shareholder should interpret the difference between the net income and total comprehensive income for General Mills in 2007.

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Question 10

Give an example of a major investing activity cash outflow that would be reported in the statement of cash flows for a manufacturing company.

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Question 11

Briefly define extraordinary items and explain how they are reported.

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Quiz 4: The Income Statement and Statement of Cash Flows