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Unformatted text preview: Slide 4-1 UCSB, ANDERSON Statement of Income and Retained Earnings Chapter Slide 4-2 UCSB, ANDERSON 1. Identify the uses and limitations of an income statement. 2. Prepare a single-step income statement. 3. Prepare a multiple-step income statement. 4. Explain how irregular items are reported. 5. Explain intraperiod tax allocation. 6. Explain where earnings per share information is reported. 7. Prepare a statement of retained earnings. 8. Explain how other comprehensive income is reported. Learning Objectives Slide 4-3 UCSB, ANDERSON Income Statement Basics What is an income statement? Tells what happened; For a STATED PERIOD; Another way to think of it is retained earnings for this period Transaction based. Something has to actually HAPPEN first Can only purchase goodwill. But do you think that Maybe GM, Xerox, Palm, etcnames have value? Important Fact: Inherently relies upon estimates. Example: Valuation of receivables and inventories; Goodwill valuation Completeness of reported impairments Quality of earnings Is Management being conservative? Aggressive? Fraudulent? Slippery? Slide 4-4 UCSB, ANDERSON Elements of the Income Statement NOTE: See textbook for formal definition, which is within the scope of exam possibilities! Revenue: Inflow from the entities principal operations. Expenses: Costs of earning the revenue. Gains & Losses: Other income activities which are not from principal operations and which are presented Net on the income statement. Slide 4-5 UCSB, ANDERSON Income Statement Formats Single-Step Concise and simple Captions for (1) revenues (2) expenses Less detail, consequently less informative Multiple-Step More complex, more subtotals Captions to segregate operating activities from non- operating activities More detail, consequently more informative. Separates operating from non-operating Matches costs to revenue generating activities Slide 4-6 UCSB, ANDERSON Examples of Single-Step & Multiple-Step KWIC Single step.htm KWIC multiple step.htm Slide 4-7 UCSB, ANDERSON In an attempt to provide financial statement users with the ability to better determine the long-range earning power of an enterprise, certain professional pronouncements require that the following irregular items be highlighted in the income statement. Unusual gains and losses. NOT net of tax Extraordinary items. Net of tax Discontinued Operations. Net of tax CHANGES IN ACCOUNTING PRINCIPLE ARE TREATED WITH RETROACTIVE RESTATEMENT OF PRIOR FINANCIAL STATEMENTS. ALL BUT UNUSUAL GAINS AND LOSSES ARE PRESENTED NET OF TAX. IRREGULAR ITEMS Slide 4-8 UCSB, ANDERSON Unusual Gains & Losses Items that are: EITHER Unusual or Infrequent, but not both (which is an extraordinary item); Material Non-Operating Presentation: Separate line-item on income statement NOT net of tax Not necessarily special- can be lumped with other non- operating items such as interest expense....
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This note was uploaded on 12/25/2011 for the course ECON 136A taught by Professor Anderson during the Fall '08 term at UCSB.
- Fall '08