ACIS+3115+Ch04+Student+Fall+2010

ACIS+3115+Ch04+Student+Fall+2010 - CHAPTER 4 INCOME...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER 4 INCOME STATEMENT AND INCOME RELATED INFORMATION RELATED Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 4 -1 Income Statement and Related Information Income Income Statement Statement Usefulness Limitations Quality of Quality Earnings Earnings Format of the Format Income Statement Statement Elements Single-step Multiple-step Condensed Condensed income statements income Reporting Reporting Irregular Items Irregular Discontinued Discontinued operations operations Extraordinary Extraordinary items items Unusual gains and Unusual losses losses Changes in Changes accounting principles principles Changes in Changes estimates estimates Corrections of Corrections errors errors Special Special Reporting Issues Reporting Intraperiod tax Intraperiod allocation allocation Earnings per share Retained earnings Retained statement statement Comprehensive Comprehensive income income Chapter 4 -2 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 -3 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. ee m nt s e Chapter 4 -4 LO 1 Understand the uses and limitations of an income statement. Income Statement Income Quality of Earnings C panie haveince om s ntive to manage income t o m e or be s et at Wall S e e ctations, so that tre t xpe m t priceof stock incre s and arke ase valueof stock options incre . ase Quality of earnings is re d if e duce arnings m anage e re m nt sults in inform ation that is le use for pre ss ful dicting futuree arnings and cash flows. Chapter 4 -5 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. liabilitie Examples of Revenue Accounts Chapter 4 -6 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. t hat Examples of Expense Accounts Chapter 4 -7 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. t ransactions. Losses - De ase in e cre s quity (ne asse frompe t ts) riphe or incide ral ntal transactions. t ransactions. Chapter 4 -8 LO 1 Understand the uses and limitations of an income statement. Single-Step Format Thesingle p state e consists of -ste m nt The just two groupings: just I ncome St at ement ( in t housands) Revenues: Sales I nt er est r evenue T ot 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 T ot al expenses N et 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 Re Expe s nse Ne I ncom t e Single Sp te Chapter 4 -9 LO 2 Prepare a single-step income statement. Multiple-Step Format Background S parate ope e s rating transactions fromnonope rating t ransactions. 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 4-10 LO 3 Prepare a multiple-step income statement. LO 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 4-11 LO 3 Prepare a multiple-step income statement. Multiple-Step Format I ncome St at ement ( in t housands) Thepre ntation divide s The se 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 T ot 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 T ot al ot her I ncome bef or e t axes I ncome t ax expense N et 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 4-12 LO 3 Prepare a multiple-step income statement. 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 4-13 LO 4 Explain how to report irregular items. Reporting Discontinued Operations Discontinue Ope d rations are re porte afte “I ncom from dr e continuing ope continuing 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 T ot 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 T ot al loss on discont inued operat ions N et 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 I ncom ”. e Move to d Chapter 4-14 LO 4 Explain how to report irregular items. Reporting Irregular Items Reporting 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 Are these items Extraordinary? (a) A largeportion of a tobacco m anufacture crops arede r’s stroye d by a hail storm S ve dam fromhail storm in thelocality . e re age s whe them re anufacture grows tobacco is rare r . A citrus growe Florida crop is dam d by frost. r's age A com pany se a block of com on stock of a publicly trade lls m d com pany. Theblock of share which re se le than 10%of s, pre nts ss t hepublicly-he com ld pany, is theonly se curity inve e the stm nt com pany has e r owne ve d. (b) (c) Chapter 4-16 LO 4 Explain how to report irregular items. Reporting Extraordinary Items Reporting Are these items Extraordinary? (d) A largedive rsifie com d pany se a block of share fromits lls s portfolio of se curitie which it has acquire for inve e s d stm nt purpose This is thefirst salefromits portfolio of se s. curitie s. (e An e ) arthquakede stroys oneof theoil re rie owne by a large fine s d m ulti-national oil com pany. Earthquake arerarein this s ge ographical location. (f) A com pany e rie s a m rial loss in there xpe nce ate purchaseof a large bond issuethat has be n outstanding for 3 ye Thecom e ars. pany re gularly re purchase bonds of this nature s . Chapter 4-17 LO 4 Explain how to report irregular items. Reporting Extraordinary Items Reporting Extraordinary Ite s are m re porte afte “I ncom from dr e continuing ope continuing 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 T ot 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 I ncom ”. e Move to d Chapter 4-18 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 T ot 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 T ot al loss on discont inued operat ions I ncome bef ore ext raordinary it em Ext raordinary loss, net of t ax N et 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 4-19 LO 4 Explain how to report irregular items. Reporting Irregular Items Unusual Gains and Losses Mate ite s that areunusual or infrequent, but not both, should rial m bere porte in a se d paratese ction just above“I ncom fromcontinuing e ope rations be incom taxe fore e s.” Exam s can include ple : Write -downs of inve ntorie s Fore e ign xchangetransaction gains and losse s TheBoard prohibits ne t-of-tax tre e for the ite s. atm nt se m Chapter 4-20 LO 4 Explain how to report irregular items. Reporting Irregular Items Unusual Gains and Losses Illustration 4-9 I ncom S m nt e tate e Pre ntation of Unusual se C harge s Chapter 4-21 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 4-22 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 4-23 LO 4 Explain how to report irregular items. Reporting Irregular Items Corrections of Errors Re from sult : mm 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 4-24 LO 4 Explain how to report irregular items. Special Reporting Issues Intraperiod Tax Allocation Re s theincom tax e nseto thespe ite s that giveriseto theam late e xpe cific m ount of t hetax e nse xpe . I ncom tax is allocate to thefollowing ite s: e d m (1) I ncom fromcontinuing ope e rations be tax fore (2) Discontinue ope d rations (3) Extraordinary ite s m (4) C hange in accounting principle s (5) C ction of e orre rrors Chapter 4-25 LO 5 Explain intraperiod tax allocation. Example of Intraperiod Tax Allocation I ncome St at ement (in t housands) Sales Cost of goods sold $ 285,000 149,000 (21,000) (4,000) 79,000 24,000 55,000 315 189 504 54,496 539 $ 53,957 I nt er est T ot al ot her I ncome f r om cont . oper . bef or e t axes I ncome t ax expense I ncome f rom cont inuing operat ions Discont inued operat ions: Note losse re : s ducethetotal tax t ax expense C alculation of Total Tax Tax $24,000 (135) (61) (231) $23,573 Loss on operat ions, net of $ 135 t ax Loss on disposal, net of $ 61 t ax T ot al loss on discont inued operat ions I ncome bef ore ext raordinary it em Ext raordinary loss, net of $ 231 t ax N et income Chapter 4-26 LO 5 Explain intraperiod tax allocation. 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 4-27 LO 6 Identify where to report earnings per share information. Special Reporting Issues Divideby we ighte dave share rage s outstanding EPS Chapter 4-28 LO 6 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 4-29 LO 7 Prepare a retained earnings statement. Special Reporting Issues Special Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2011 Balance, January 1 Net income Dividends Balance, December 31 $ 1,050,000 360,000 (300,000) 1,110,000 $ Be issuing there for theye e d De m r 31, 2011, you discove a $50,000 e fore port ar nde ce be r rror (ne of tax) that cause 2010 inve t d ntory to beove rstate (ove d rstate inve d ntory cause C d OGSto belowe and thus ne incom to behighe in 2010). Would this discove haveany im r t e r ry pact on t here porting of theS m nt of Re tate e taine Earnings for 2011? d Chapter 4-30 LO 7 Prepare a retained earnings statement. Special Reporting Issues Woods, Inc. StatementWoods, Inc. Earnings of Retained Statement of Retained Earnings For the Year Ended December 31, 2011 For 1, Year Ended reported Balance, January theas previouslyDecember 31, 2011 $ 1,050,000 Prior period adjustment - error correction (50,000) Balance, January 1 $ 1,050,000 Balance, January 1, as restated 1,000,000 Prior period adjustment - error correction (50,000) Netalance, January 1 (restated) income 360,000 B 1,000,000 Dividends (300,000) Net income 360,000 Balance, December 31 $ (300,000) 1,060,000 Dividends Balance, December 31 $ 1,060,000 Chapter 4-31 S olution on note page s 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 4-32 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 All 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 4-33 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 T ot 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 T ot al ot her I ncome bef or e t axes I ncome t ax expense N et income Chapter 4-34 $ 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 e Othe om he 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 4-35 LO 8 Explain how to report other comprehensive income. Special Reporting Issues Comprehensive Income S cond incom e e state e m nt Illustration 4-19 Chapter 4-36 LO 8 Explain how to report other comprehensive income. Special Reporting Issues Special Comprehensive Income V. Gill I nc. C bine incom om d e state e m nt Combined St at ement of Compr ehensive I ncome For t he Year Ended December 31, 2010 Sales r evenue Cost of goods sold Gr oss pr of it O per at ing expenses N et income Unr ealized holding gain, net of t ax Compr ehensive income $ 800,000 600,000 200,000 90,000 110,000 30,000 $ 140,000 Chapter 4-37 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 Re $90,000 is re d rs’ quity se ction of thebalanceshe t. e $90,000 porte in thestockholde e Chapter 4-38 LO 8 Explain how to report other comprehensive income. Single-Step Format Review Thesingle p incom state e e phasize -ste e m nt m s a. b. thegross profit figure . t he total re nue and total e nse xpe s. t otal ve s in the c. e xtraordinary ite s m than it is e phasize m ore m d m ultiple p incom state e -ste e m nt. d. t hevarious com nts of incom from continuing ope pone e continuing rations. Chapter 4-39 LO 2 Prepare a single-step income statement. Multiple-Step Format Review A se paration of ope rating and non ope rating activitie of a com s pany e xists in a. b. c. d. both a m ultiple p and single p incom state e -ste -ste e state nt. m am ultiple p but not a single p incom state e . -ste -ste e state nt m a single p but not a m -ste ultiple p incom state e . -ste e state nt m ne r a single p nor a m ithe -ste ultiple p incom -ste e state e . m state nt Chapter 4-40 LO 3 Prepare a multiple-step income statement. Reporting Irregular Items Review I rre gular transactions such as discontinue ope d rations and e xtraordinary ite s should bere m porte se d parate in ly ite a. b. c. d. both a single p and m -ste ultiple p incom -ste e a single p incom state e only. -ste e m nt single am ultiple p incom state e only. -ste e m nt ne r a single p nor a m ithe -ste ultiple p incom -ste e state e . m state nt state e . m state nt Chapter 4-41 LO 4 Explain how to report irregular items. Special Reporting Issues Review Gains and losse that bypass ne incom but affe stockholde e s t e ct rs' quity are Gains re rre to as fe d a. b. c. d. com he pre nsiveincom . e com othe com he r pre nsiveincom . e othe prior pe incom . e prior riod unusual gains and losse . s unusual Chapter 4-42 LO 8 Explain how to report other comprehensive income. Special Reporting Issues Review TheFAS de d that thecom nts of othe com he B cide pone r pre nsiveincom m e ust The bedisplaye d a. b. c. d. in a se parateincom state e e m nt. in cond se in a com d incom state e of com he bine e m nt pre nsive as a part of thestate e of stockholde e m nt rs' quity. Any of the options is pe issible se rm . Any incom . e incom Chapter 4-43 LO 8 Explain how to report other comprehensive income. IFRS Unit 3 – Income Statement No set format 6 required elements: Revenue Finance cost Profit or loss from associates/joint ventures Tax expense Discontinued operations Profit or loss (bottom line) Chapter 4-44 IFRS Unit 3 – Income Statement Expense IFRS 1. 2. presentation differences: allows expenses to be presented either: By nature (e.g., depreciation, purchases, advertising) By function (allocated to cost of sales, admin expense, etc.) By This would require additional disclosures GAAP requires expenses to be presented by function IFRS prohibits items from being presented as IFRS Extraordinary either on face of statements or in notes Extraordinary Chapter 4-45 IFRS Unit 3 – Income Statement Other Comprehensive Income for IFRS Through Through 2008, could use Statement of Recognized Income and Expenses (SoRIE) Recognized As of 2009, revised IAS1 to include As comprehensive income comprehensive Similar to GAAP format Either a combined income statement or two separate Either statements statements Can be reported net of tax Differences IFRS IFRS include does not allow presentation of OCI in Statement of changes in Stockholder’s Equity changes Chapter 4-46 IFRS Unit 3 – Income Statement Minority Interest Ownership Report of subsidiary with less than 50% interest US GAAP, if own over 50% 100% of subsidiary income Record expense equal to portion of income related to minority Record interest interest IFRS, if own over 50% Report 100% of subsidiary income Report amount attributed to parent company and minority Report interest on face, but do not subtract the minority interest interest FASB FASB issued FAS 160 which will mirror IFRS presentation and treatment, effective for years beginning on or after December 15, 2008 beginning Chapter 4-47 1. 1. What items are currently required elements of the IFRS income statement? elements A. Revenue B. Cost of sales C. Comprehensive income D. a and b E. All of the above Chapter 4-48 2. 2. Through 2008, other comprehensive income could be reported in which IFRS financial statement? financial A. Statement of comprehensive income B. Statement of changes in shareholders’ B. equity equity C. Statement of recognized income and C. expenses expenses D. b or c E. All of the above Chapter 4-49 3. 3. What change(s) is/are introduced in the revised IAS 1 Presentation of Financial Statements effective 2009? effective A. Allows statement of recognized income and expenses B. Allows statement of comprehensive income C. Prohibits comprehensive income from being presented in C. statement of changes in stockholders equity statement D. a and c E. b and c Chapter 4-50 4. 4. How is net income attributed to minority interest presented in the IFRS income statement? A. Included in net income B. As a reduction to net income C. Disclosed on the face of the income statement D. a and c E. b and c Chapter 4-51 ...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online