Slide 4-11.Understand the uses and limitations of an income statement.2.Understand the content and format of the income statement.3.Prepare an income statement.4.Explain how to report items in the income statement.5.Identify where to report earnings per share information.6.Explain intraperiod tax allocation.7.Understand the reporting of accounting changes and errors.8.Prepare a retained earnings statement.9.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Income Statement and Related Information4LEARNING OBJECTIVESLEARNING OBJECTIVES
Slide 4-2Evaluate past performance.Help assess the risk or uncertainty of achieving future cash flows.Predict future performance.UsefulnessINCOME STATEMENTINCOME STATEMENTLO 1
Slide 4-3LimitationsCompanies omit items that cannot be measured reliably.Income numbers are affected by the accounting methods employed.Income measurement involves judgment.INCOME STATEMENTINCOME STATEMENTLO 1
Slide 4-4Companies have incentives to manage incometo meet earnings targets or to make earnings look less risky. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out earnings.Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.Quality of EarningsINCOME STATEMENTINCOME STATEMENTLO 1
Slide 4-5FORMAT OF THE INCOME STATEMENTFORMAT OF THE INCOME STATEMENTINCOME– Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from shareholders.Elements of the Income StatementLO 2
Slide 4-6INCOMEincludes both revenues and gains. Revenues- ordinary activities of a company Gains- may or may not arise from ordinary activities.FORMAT OF THE INCOME STATEMENTFORMAT OF THE INCOME STATEMENTElements of the Income StatementRevenue AccountsSales revenueFee revenueInterest revenueDividend revenueRent revenueGain AccountsGains on the sale of long-term assetsUnrealized gains on trading securities.LO 2
Slide 4-7FORMAT OF THE INCOME STATEMENTFORMAT OF THE INCOME STATEMENTEXPENSES– Decreases in economic benefits during the accounting period in the form ofoutflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to shareholders.Elements of the Income StatementLO 2
Slide 4-8Expense AccountsCost of goods soldDepreciation expenseInterest expenseRent expenseSalary expenseEXPENSESinclude both expenses and losses.