Chapter 04 - Slides

Chapter 04 - Slides - Chapter 4 Objectives Income Statement...

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Income Statement rofessor Dennis Chambers Professor Dennis Chambers ACC 301 Chapter 4 Objectives ± Identify the uses and limitations of an income statement ± Prepare a single-step income statement pg p ± Prepare a multi-step income statement ± Explain how irregular items are reported xplain intraperiod tax allocation ± Explain intraperiod tax allocation ± Explain where earnings per share information is reported xplain how other comprehensive income is ± Explain how other comprehensive income is reported ± Prepare a retained earnings statement 6/9/2008 ACC 301 2 Usefulness of the Income Statement ± Evaluate past performance of the entity ± Provide a basis for predicting future erformance performance ± Assess the risk or uncertainty of future ash flows cash flows 6/9/2008 ACC 301 3 Limitations of the Income Statement ± Unreliable items are not reported { Unrealized gains and losses oreign currency translations { Foreign currency translations ± Income numbers affected by accounting method { e.g., depreciation methods ± Income measurements involve judgment any accounting standards give management { Many accounting standards give management discretion to report or measure income or expense items g asset useful lives 6/9/2008 ACC 301 4 { e.g., asset useful lives
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Quality of Earnings ± Accounting standards permit significant discretion g bad debt estimates revenue recognition { e.g., bad debt estimates, revenue recognition ± Managers face many performance incentives { Avoid reporting a loss { Avoid reporting a reduction in income { Avoid missing financial analyst earnings targets gy g g ± Managers sometimes “manage” earnings to meet these incentive targets 6/9/2008 ACC 301 5 Evidence of Earnings Management 6/9/2008 ACC 301 6 Elements in the Income Statement ± Revenues { Sales, fees, interest, dividends, and rents ± Expenses { Cost of goods sold, depreciation, interest, rent, salaries and wages, and taxes ± Gains and Losses { Result from sales of investments, plant assets, settlement of liabilities, and write-offs of assets 6/9/2008 ACC 301 7 Income Statement Formats ± Single-step format ulti- tep format ± Multi step format ± We will practice preparing each of these formats 6/9/2008 ACC 301 8
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Single-Step Format ± This statement presents information in broad categories. ± Major sections are Revenues and Expenses. ± The Earnings per Share amount is shown at the bottom of the statement. ± There is no distinction between operating and non-operating activities. 6/9/2008 ACC 301 9 evenues Revenues Single-Step Format Revenues Sales Other Revenues xpenses - Expenses Cost of Goods Sold Selling Expense Admin. Expense Expenses = Interest Expense Income Tax Expense come from continuing operations Income from continuing operations Irregular Items Discontinued Operations (net of tax) Extraordinary Items (net of tax) 6/9/2008 ACC 301 10 Earnings per share Net Income Multi-Step Format ± The presentation divides information into major sections on the statement.
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This note was uploaded on 01/20/2011 for the course ACC 301 taught by Professor Staff during the Fall '08 term at Kentucky.

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Chapter 04 - Slides - Chapter 4 Objectives Income Statement...

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