PPT4 - Income Statement and Related Information Income...

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Unformatted text preview: Income Statement and Related Information Income Statement Usefulness Limitations Quality of Earnings Format of the Income Statement Elements Single-step Multiple-step Condensed income statements Reporting Irregular Items Discontinued operations Extraordinary items Unusual gains and losses Changes in accounting principles Changes in estimates Corrections of errors Special Reporting Issues Intraperiod tax allocation Earnings per share Retained earnings statement Comprehensive income Chapter 4-1 Income Statement Usefulness Evaluatepast pe rform . ance Pre dicting futurepe rform . ance He asse therisk or unce lp ss rtainty of achie ving futurecash flows. Chapter 4-2 LO 1 Understand the uses and limitations of an income statement. Income Statement Limitations C panie om ite s that cannot bem asure om s it m e d re liably. I ncom is affe d by theaccounting m thods e cte e e ploye m d. I ncom m asure e involve judgm nt. e e m nt s e Chapter 4-3 LO 1 Understand the uses and limitations of an income statement. Format of the Income Statement Elements of the Income Statement Revenues I nflows or othe e r nhance e of asse or se m nts of its m nts ts ttle e liabilitie that constitutethee s ntity's ongoing m or ce ajor ntral ope rations. Examples of Revenue Accounts S s ale Fe re nue e ve I nte st re nue re ve Divide re nue nd ve Re re nue nt ve Chapter 4-4 LO 1 Understand the uses and limitations of an income statement. Format of the Income Statement Elements of the Income Statement Expenses Outflows or othe using-up of asse or incurre s of liabilitie r ts nce s that constitutethee ntity's ongoing m or ce ajor ntral ope rations. Examples of Expense Accounts C of goods sold ost De ciation e nse pre xpe I nte st e nse re xpe Re e nse nt xpe S alary e nse xpe Chapter 4-5 LO 1 Understand the uses and limitations of an income statement. Format of the Income Statement Elements of the Income Statement Gains I ncre s in e ase quity (ne asse frompe t ts) riphe or incide ral ntal transactions. Losses - De ase in e cre s quity (ne asse frompe t ts) riphe or incide ral ntal transactions. Gains and losse can re from s sult saleof inve e or plant asse stm nts ts, se m nt of liabilitie ttle e s, write -offs of asse ts. Chapter 4-6 LO 1 Understand the uses and limitations of an income statement. Single-Step Format Thesingle p state e consists of -ste m nt just two groupings: I ncome St at ement (in t housands) Revenues: Sales I nt er est r evenue Tot al r evenue Expenses: Cost of goods sold Selling expense Administ r at ive expense I nt er est expense I ncome t ax expense Tot al expenses Net income Earnings per share $ 285,000 17,000 302,000 149,000 10,000 43,000 21,000 24,000 247,000 $ 55,000 $ 0.75 Re nue ve s Expe s nse Ne I ncom t e S ingle S p te No distinction be e Ope twe n rating and Non-ope rating cate s. gorie Chapter 4-7 LO 2 Prepare a single-step income statement. Multiple-Step Format Background S parate ope e s rating transactions fromnonope rating transactions. Matche costs and e nse with re d re nue s xpe s late ve s. Highlights ce rtain inte e rm diatecom nts of incom that pone e analysts use . Chapter 4-8 LO 3 Prepare a multiple-step income statement. Multiple-Step Format Income Statement Sections 1. Ope rating se ction 2. Nonope rating se ction 3. I ncom tax e 4. Discontinue ope d rations 5. Extraordinary ite s m 6. Earnings pe share r Chapter 4-9 LO 3 Prepare a multiple-step income statement. Multiple-Step Format I ncome St at ement (in t housands) Thepre ntation divide se s inform ation into m ajor se ctions. 1. Ope rating S ction e 2. Nonope rating S ction e Sales Cost of goods sold Gr oss pr of it Operat ing expenses: Selling expenses Administ r at ive expenses Tot al oper at ing expense I ncome f rom operat ions Ot her revenue (expense): I nt er est r evenue I nt er est expense Tot al ot her I ncome bef or e t axes I ncome t ax expense Net income Ear nings per shar e $ 285,000 149,000 136,000 10,000 43,000 53,000 83,000 17,000 (21,000) (4,000) 79,000 24,000 $ $ 3. I ncom tax e 55,000 0.75 Chapter 4-10 LO 3 Prepare a multiple-step income statement. Reporting Irregular Items Irregular items fall into six cate s gorie 1. Discontinue ope d rations. 2. Extraordinary ite s. m 3. Unusual gains and losse s. 4. C hange in accounting principle s . 5. C hange in e ate s stim s. 6. C ctions of e orre rrors. Chapter 4-11 LO 4 Explain how to report irregular items. Reporting Irregular Items Discontinued Operations occurs when, (a) com pany e inate the lim s re sults of ope rations and cash flows of a com nt . pone (a) the is no significant continuing involve e in that re m nt com nt. pone Am ount re porte "net of tax." d Chapter 4-12 LO 4 Explain how to report irregular items. Reporting Discontinued Operations Illustration: KCCorporation had afte tax incomefromcontinuing ope r rations of $55,000,000 in 2008. During 2008, it dispose of its re d staurant division at a pre loss of $270,000. Prior to disposal, thedivision ope d at a pre loss of tax rate tax $450,000 in 2008. Assum a tax rateof 30% Pre e . parea partial incom state e e m nt for KC . I ncom fromcontinuing ope e rations Discontinue ope d rations: Loss fromope rations, ne of $135,000 tax t Loss on disposal, ne of $81,000 tax t Total loss on discontinue ope d rations Ne incom t e Chapter 4-13 $55,000,000 315,000 189,000 504,000 $54,496,000 LO 4 Explain how to report irregular items. Reporting Discontinued Operations Discontinue Ope d rations are re porte afte "I ncom from d r e continuing ope rations." I ncome St at ement (in t housands) Sales Cost of goods sold Ot her revenue (expense): I nt er est r evenue I nt er est ex pense Tot al ot her I ncome bef or e t ax es I ncome t ax ex pense I ncome f rom cont inuing operat ions Discont inued operat ions: Loss f rom operat ions, net of t ax Loss on disposal, net of t ax Tot al loss on discont inued operat ions Net income $ 315 189 504 54,496 17,000 (21,000) (4,000) 79,000 24,000 55,000 $ 285,000 149,000 Pre viously labe d as "Ne le t Incom ". e Move to d Chapter 4-14 LO 4 Explain how to report irregular items. Reporting Irregular Items Extraordinary items arenonrecurring material items that diffe significantly froma com r pany's typical busine activitie ss s. Extraordinary I te m beboth of an m ust Unusual Natureand Occur I nfre ntly que C pany m conside theenvironment in which it ope s. om ust r rate Am ount re porte "net of tax." d Chapter 4-15 LO 4 Explain how to report irregular items. Reporting Extraordinary Items Illustration: KCCorporation had afte tax incomefromcontinuing ope r rations of $55,000,000 in 2007. I n addition, it suffe d an unusual and infre nt pre re que tax loss of $770,000 froma volcano e ruption. Thecorporation's tax rateis 30% Pre . pare a partial incom state e for KCCorporation be e m nt ginning with incom from e continuing ope rations. I ncom fromcontinuing ope e rations Extraordinary loss, ne of $231,000 tax t Ne incom t e ($770,000 x 30%= $231,000 tax) Chapter 4-16 $55,000,000 539,000 $54,461,000 LO 4 Explain how to report irregular items. Reporting Extraordinary Items Extraordinary Ite s are m re porte afte "I ncom from d r e continuing ope rations." I ncome St at ement (in t housands) Sales Cost of goods sold $ 285,000 149,000 Ot her revenue (expense): I nt er est r evenue I nt er est ex pense Tot al ot her I ncome bef or e t ax es I ncome t ax ex pense I ncome f rom cont inuing operat ions Ext raordinary loss, net of t ax N et income $ 17,000 (21,000) (4,000) 79,000 24,000 55,000 539 54,461 Pre viously labe d as "Ne le t Incom ". e Move to d Chapter 4-17 LO 4 Explain how to report irregular items. Reporting Irregular Items Re porting whe both n Discontinue Ope d rations and Extraordinary I te s are m pre nt. se I ncome St at ement (in t housands) Sales Cost of goods sold I nt er est expense Tot al ot her I ncome bef or e t axes I ncome t ax expense I ncome f rom cont inuing operat ions Discont inued operat ions: Loss f rom operat ions, net of t ax Loss on disposal, net of t ax Tot al loss on discont inued operat ions I ncome bef ore ext raordinary it em Ext raordinary loss, net of t ax Net income $ $ 285,000 149,000 (21,000) (4,000) 79,000 24,000 55,000 315 189 504 54,496 539 53,957 Discontinue d Ope rations Extraordinary Ite m Chapter 4-18 LO 4 Explain how to report irregular items. Reporting Irregular Items Changes in Accounting Principles Re trospe ctiveadjustm nt e C ulativee ct adjustm nt to be um ffe e ginning re taine e d arnings Approach pre rve com se s parability Exam s include ple : changefromFI FO to ave ragecost changefromthepe ntage rce -of-com tion to thecom te ple ple d- contract m thod e Chapter 4-19 LO 4 Explain how to report irregular items. Reporting Irregular Items Change in Accounting Principle: Gaubert I nc. decided in March 2010 to changefromFIFO to we ighte d-ave inve rage ntory pricing. Gaube incom be rt's e fore taxe using thene we s, w ighte d-ave m thod in 2010, is $30,000. rage e Pretax Income Data Illustration 4-10 C alculation of a Changein Accounting Principle Illustration 4-11 I ncom S m nt e tate e Pre ntation of a C se hange in Accounting Principle(Base on d 30%tax rate ) Chapter 4-20 S olution on note page s LO 4 Explain how to report irregular items. Reporting Irregular Items Changes in Estimate Accounte for in thepe of changeand futurepe d riod riods Not handle re d trospe ly ctive Not conside d e re rrors or e xtraordinary ite s m Exam s include ple : Use live and salvagevalue of de ciableasse ful s s pre ts Allowancefor uncolle ctiblere ivable ce s I nve ntory obsole nce sce Chapter 4-21 LO 4 Explain how to report irregular items. Reporting Irregular Items Corrections of Errors Re from sult : m m athe atical m istake s m istake in application of accounting principle s s ove rsight or m isuseof facts C ctions tre d as prior period adjustments orre ate Adjustm nt to thebe e ginning balanceof re taine e d arnings Chapter 4-22 LO 4 Explain how to report irregular items. Reporting Irregular Items Corrections of Errors: To illustrate in 2011, Hillsboro Co. , de rm d that it incorre ove te ine ctly rstate its accounts d re ivableand sale re nueby $100,000 in 2010. I n 2011, Hillboro m s the ce s ve ake following e to corre for this e (ignoreincom taxe ntry ct rror e s). Re taine e d arnings Accounts re ivable ce 100,000 100,000 Chapter 4-23 LO 4 Explain how to report irregular items. Special Reporting Issues Earnings Per Share Ne incom - Pre rre divide t e fe d nds We ighte ave num r of share outstanding d rage be s An im portant busine indicator. ss Me asure thedollars e d by e shareof com on stock. s arne ach m Must bedisclose on thetheincom state e d e m nt. Chapter 4-24 LO 6 Identify where to report earnings per share information. Special Reporting Issues Earnings Per Share (BE4-8): I n 2010, Hollis Corporation reported ne incom of $1,000,000. I t de d and paid pre rre stock divide of t e clare fe d nds $250,000. During 2010, Hollis had a we ighte ave of 190,000 com on share d rage m s outstanding. C puteHollis's 2010 e om arnings pe share r . Ne incom - Pre rre divide t e fe d nds We ighte ave num r of share outstanding d rage be s $1,000,000 - $250,000 190,000 Chapter 4-25 = $3.95 per share LO 6 Identify where to report earnings per share information. Special Reporting Issues Retained Earnings Statement Increase Ne incom t e C hangein accounting principle Error corre ctions Decrease Ne loss t Divide nds C hangein accounting principle s Error corre ctions Chapter 4-26 LO 7 Prepare a retained earnings statement. Special Reporting Issues Restricted Retained Earnings Disclose d I n note to thefinancial state e s m nts As Appropriate Re d taine Earnings d Chapter 4-27 LO 7 Prepare a retained earnings statement. Special Reporting Issues Comprehensive Income All change in e s quity during a pe e pt thosere riod xce sulting from inve e by owne and distributions to owne stm nts rs rs. Includes: all re nue and gains, e nse and losse re ve s xpe s s porte in ne incom , d t e and all gains and losse that bypass ne incom but affe stockholde s t e ct rs' e quity. Chapter 4-28 LO 7 Prepare a retained earnings statement. Special Reporting Issues Comprehensive Income I ncome St at ement (in t housands) Sales Cost of goods sold Gr oss pr of it Operat ing expenses: Selling expenses Administ r at ive expenses Tot al oper at ing expense I ncome f rom operat ions Ot her revenue (expense): I nt er est r evenue I nt er est expense Tot al ot her I ncome bef or e t axes I ncome t ax expense Net income Chapter 4-29 $ 285,000 149,000 136,000 10,000 43,000 53,000 83,000 17,000 (21,000) (4,000) 79,000 24,000 $ 55,000 + Othe C pre nsiveIncom r om he e Unre d gains and losse alize s on available -for-sale se curitie s. Translation gains and losse s on fore curre ign ncy. Plus othe rs Re porte in S d tockholde rs' Equity LO 8 Explain how to report other comprehensive income. Special Reporting Issues Thre approache to re e s porting C pre nsiveI ncom (S om he e FAS No. 130, June1997): 1. 2. 3. A se cond se parateincom state e e m nt; A com d incom state e of com he bine e m nt pre nsiveincom ; or e As part of thestate e of stockholde e m nt rs' quity Chapter 4-30 LO 8 Explain how to report other comprehensive income. Special Reporting Issues Comprehensive Income - BalanceS e Pre ntation he t se Illustration 4-21 Re gardle of thedisplay form use theaccum ss at d, ulate othe com he d r pre nsiveincom of e $90,000 is re porte in thestockholde e d rs' quity se ction of thebalanceshe t. e Chapter 4-31 LO 8 Explain how to report other comprehensive income. ...
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This note was uploaded on 08/31/2009 for the course DRXL 100 taught by Professor All during the Spring '09 term at Drexel.

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