CHAPTER 4 The Income Statement and Comprehensive Income

CHAPTER 4 The Income Statement and Comprehensive Income -...

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The Income Statement and Statement of Cash Flows THE INCOME STATEMENT The income statement reports the business entities’ net income or loss for a specific period of time (the accounting period). It is a summary of the activities of the business entities economic activities. COMPREHENSIVE INCOME Some economic activities are not included in net income (loss) and therefore are not included in the change to retained earnings at the end of the accounting period. Comprehensive income is defined as the total chance in equity as a result of transactions during the period except those between the owners and the enterprise. Comprehensive income includes net income and any other transactions with non-owners that change the equity section of the balance sheet. The transactions that are not part of net income are called other comprehensive income and include unrealized holding gains/losses on investments, foreign currency translation adjustments and several other types of transactions that will be discussed in Intermediate Accounting II. As we have moved closer and closer to fair value accounting as opposed to historical cost the FASB has allowed business entities to record changes in the net assets as charge or credit to the equity section of the balance sheet. This means that some income or loss items have not made it to the income statement. To compensate for this lack of information the FASB now requires that comprehensive income be reported as part of the financial reporting process. This can be accomplished in three different ways. 1. Separate statement: Comprehensive Income Statement 2. Combined with the regular income statement: Combined Statement of Comprehensive Income , or 3. Incorporated into a Statement of Stockholders’ Equity . INCOME FROM CONTINUING OPERATIONS The income statement reflects the transactions that have taken place during the current accounting period. There are four elements of the income statement: (1) Revenues -increases in assets or decreases in liabilities as a result of selling products or services (2) Expenses -use of assets or incurrence of debt as a result of delivering the products or services (3) Gains- increases in net assets as a result of transactions that are not part of the normal business activities (4) Losses -decreases in net assets as a result of transactions that are not part of the normal business activities Multi-Step Income Statements The textbook talks about single-step and a multi-step income statement formats. We are primarily interested in learning how to prepare multi-step income statements as they are the most widely used in the business world. The multi-step income statement separates operating and
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CHAPTER 4 The Income Statement and Comprehensive Income -...

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