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Unformatted text preview: 130 C H A P T E R 4 INCOME STATEMENT AND RELATED INFORMATION LEARNING OBJECTIVES After studying this chapter, you should be able to: Understand the uses and limitations of an income statement. Prepare a single-step income statement. Prepare a multiple-step income statement. Explain how to report irregular items. Explain intraperiod tax allocation. Identify where to report earnings per share information. Prepare a retained earnings statement. Explain how to report other comprehensive income. 8 7 6 5 4 3 2 1 Pro forma reporting, in which companies provide investors a choice in reported income numbers, has been very popular among com- panies in the S&P 500. For example, in 2001, in addition to income measured according to generally accepted accounting principles (GAAP), 77 percent of S&P 500 companies also reported an income measure that they adjusted for certain items. Com- panies make these adjustments because they believe the items are not representative of operating results. Characteristic of pro forma reporting practices is Amazon.com . It has adjusted for items such as stock-based compensation, amortization of goodwill and intangibles, impairment charges, and equity in losses of investees. All of these adjustments make pro forma earn- ings higher than GAAP income. In its earnings announcement, Amazon defended its pro forma reporting, saying that it gives better insight into the fundamental operations of the business. An update to this earlier report on non-GAAP reporting indicates a decline in pro forma income reporting. In 2003, the percentage of companies practicing pro forma reporting dropped to 54 percent, and the flavor of pro forma reporting also changed between these two periods. For example, in 2003, there were fewer income-increasing pro forma reports, and there was a narrowing in the magnitude of the gap between the pro forma and GAAP earnings (Entwistle et al., 2006). Which Income Number? PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark 131 What happened? Several commentators point to a couple of factors. First, Sarbanes-Oxley was passed in 2002, and it put a new focus on more transparent reporting. Second, the SEC issued Regulation G, which requires compa- nies to reconcile non-GAAP financial measures to GAAP. This regulation provides investors with a roadmap to analyze adjustments companies make to their GAAP numbers to arrive at pro forma results. Regulation G addresses the concern that investors have a hard time comparing one companys pro forma measures with results reported by another com- pany that has a different idea of what is fundamental to its business. Also, there is concern that companies may use pro forma reporting to deflect investor attention from bad news....
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- Income Statement