Chapter 4 Income Statement and Related Information
INCOME STATEMENT AND RELATED INFORMATION
This IFRS Supplement provides expanded discussions of accounting guidance under
International Financial Reporting Standards (IFRS) for the topics in Intermediate
Accounting. The discussions are organized according to the chapters in
Editions) and therefore can be used to supplement the U.S.
GAAP requirements as presented in the textbook. Assignment material is provided
for each supplement chapter, which can be used to assess and reinforce student
understanding of IFRS.
FORMAT OF THE INCOME STATEMENT
Elements of the Income Statement
Net income results from revenue, expense, gain, and loss transactions. The income state-
ment summarizes these transactions. This method of income measurement, the
, focuses on the income-related activities that have occurred during the
The statement can further classify income by customer, product line, or func-
tion or by operating and non-operating, and continuing and discontinued. The two
major elements of the income statement are as follows.
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.
Decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to shareholders.
ELEMENTS OF FINANCIAL STATEMENTS
The most common alternative to the transaction approach is the
to income measurement. Under this approach, a company determines income
for the period based on the change in equity, after adjusting for capital contributions (e.g.,
investments by owners) or distributions (e.g., dividends). The main drawback associated
with the capital maintenance approach is that the components of income are not evident in
its measurement. Various tax authorities use the capital maintenance approach to identify
unreported income and refers to this approach as the “net worth check.”
The IASB takes the position that income includes both revenues and gains because they
both increase economic benefits. Similarly, expenses include both expenses and losses
because they both decrease economic benefits.
The definition of income includes both revenues and gains. Revenues arise from
the ordinary activities of a company and take many forms, such as sales, fees, interest,
dividends, and rents. Gains represent other items that meet the definition of income
and may or may not arise in the ordinary activities of a company. Gains include, for
example, gains on the sale of long-term assets or unrealized gains on trading securities.
The definition of expenses includes both expenses and losses. Expenses generally