Ch 4 Handout-1 - CHAPTER 4 Income Statement and Related...

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CHAPTER 4: Income Statement and Related Information Usefulness of the Income Statement Evaluate past performance. Predicting future performance Help assess the risk or uncertainty of achieving future cash flows. Limitations of the Income Statement 1. Companies omit items that cannot be measured reliably (Unrealized gain, Brand value) 2. Income is affected by the accounting methods employed 3. Income measurement involves judgment. (being too optimistic) 4 Elements on the Income Statement 1. Revenues (Sales,Fee revenue,Interest revenue,Dividend revenue,Rent revenue) 2. Expenses (CGS, Depreciation Expense, Interest Expense, Rent Expense, Salary Expense) 3. Gains 4. Losses What is the difference between Revenues vs. Gains and Expenses vs. Losses? Revenues and Expenses are a part of regular operations; Gains and Losses are not (peripheral activities) Income Statement Format: GAAP permits either single-step or multiple-step format Single-Step IS: 4-
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Revenues – Expenses = NI No distinction between Operating and Non-operating categories. Example of a Multi-Step Income Statement Company Name Income Statement For period ending xx/xx/xx Net Sales XX Less: COGS (XX) Gross Margin on Sales XX Less: Operating Expenses: Selling Expenses (See p. 132) XX General and Administrative expenses XX (XX) Income from Operations XX Interest XX 000111111111111111111111111Rent XX Dividend Revenue00 XX Gains on sale of non-current assets XX Gains where the transaction is Unusual OR Infrequent but not both XX Unrealized Holding Gains on Trading Securities XX XX XX Other Expenses and Losses: Interest XX Losses on sale of non-current assets XX Losses where transaction is Unusual OR Infrequent but not both XX Unrealized Holding Losses on Trading Securities XX (XX) Income from Continuing Operations before taxes XX Income Tax Expense (XX) Income from Continuing Operations XX Discontinued Operations (Note X): Income/Loss on Operations of Discontinued Ops (Net of tax XX) XX Income/Loss on Disposal of Discontinued Ops (Net of tax XX) XX XX Income before Extraordinary Items XX Extraordinary Items (Note Y): First Extraordinary Item (Net of tax XX) XX Second Extraordinary Item (Net of tax XX) XX XX Net Income XX Per Share: Continuing Operations Inc. from Continuing Oper.-Pref. Dividends = $X.xx Average number of C.S. Shares Outstanding Discontinued Operations Inc. from discontinued operations = $X.xx Average number of C.S. shares outstanding 4-
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Extraordinary Items Inc. from extraordinary items = $X.xx Average number of C.S. shares outstanding Net Income Net Income-Preferred Dividends = $X.xx Average number of C.S. Shares Outstanding 4-
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Multiple-Step IS: results from regular operations are presented separately from results from non-operating activities, expenses are classified by matching costs (e.g., cost of sales, selling, and administrative) and expenses to corresponding revenues
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Ch 4 Handout-1 - CHAPTER 4 Income Statement and Related...

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