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Ch+4+PowerPoint+Slides+LAA+Part+I - CHAPTER 4 INCOME...

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Unformatted text preview: CHAPTER 4 INCOME STATEMENT AND INCOME RELATED INFORMATION RELATED Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 4-1 Usefulness of the Income Statement Usefulness of the Income Statement Evaluate past performance – feedback value Provided a basis for predicting future performance ­ predictive Help assess the risk or uncertainty of achieving future cash flows. Chapter 4 -2 LO 1 Understand the uses and limitations of an income statement. Limitations of the Income Statement Limitations of the Income Statement Companies omit items that cannot be measured reliably. Income is affected by the accounting methods employed. Income measurement involves judgment. Chapter 4-3 LO 1 Understand the uses and limitations of an income statement. Earnings Management Earnings Management Companies have incentives to manage income to meet or beat owner and creditor expectations • • Typically, used to increase current income at the expense of future periods • “pop the cork before the wine is ready” • Chapter 4 -4 Planning the recognition of earnings and expenses to smooth out earnings “store away some nuts for the winter” Format of the Income Statement Format of the Income Statement Elements of the Income Statement Revenues – Inflows or other enhancements of assets or settlements of its – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Examples of Revenue Accounts Sales Fee revenue Interest revenue Dividend revenue Rent revenue Chapter 4-5 LO 1 Understand the uses and limitations of an income statement. Format of the Income Statement Format of the Income Statement Elements of the Income Statement Expenses – Outflows or other using­up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Examples of Expense Accounts Cost of goods sold Depreciation expense Interest expense Rent expense Salary expense Chapter 4-6 LO 1 Understand the uses and limitations of an income statement. Format of the Income Statement Format of the Income Statement Elements of the Income Statement Gains – Increases in equity (net assets) from peripheral or incidental – Increases in equity (net assets) from peripheral or incidental transactions. Losses ­ Decreases in equity (net assets) from peripheral or incidental ­ Decreases in equity (net assets) from peripheral or incidental transactions. Gains and losses can result from sale of investments or plant assets, settlement of liabilities, write­offs of assets. Chapter 4 -7 LO 1 Understand the uses and limitations of an income statement. Single-Step Format Single-Step Format The single­step statement consists of just two groupings: Revenues Expenses Single­ Single­ Step Step Net Income No distinction between Operating and Non­operating categories. Chapter 4 -8 I ncome St at ement ( in t ho us and s ) Revenues: S a le s I nte r e s t r e ve nue T o t a l r e ve nue Expenses: $ 2 8 5 ,0 0 0 17 ,0 0 0 3 0 2 ,0 0 0 Co s t o f g o o d s s o ld S e lling e x pe ns e Ad m inis t r a t ive e x pe ns e I nte r e s t e x pe ns e I nc o m e t ax e x pe ns e T o t a l e x pe ns e s Net income 14 9 ,0 0 0 10 ,0 0 0 4 3 ,0 0 0 2 1,0 0 0 2 4 ,0 0 0 2 4 7 ,0 0 0 Earnings per share $ 0 .7 5 $ 5 5 ,0 0 0 LO 2 Prepare a single-step income statement. Multiple-Step Format Multiple-Step Format Separates operating transactions from nonoperating transactions. Classifies expenses by function – Cost of Goods Sold, selling, administrative, other expenses Highlights certain intermediate components of income that analysts use. Chapter 4-9 LO 3 Prepare a multiple-step income statement. Multiple-Step Format Multiple-Step Format Income Statement Sections 1. Operating section Sales or Revenue Cost of Goods Sold Selling Expenses Administrative or General Expenses 1. Nonoperating section Other Revenues and Gains Other Expenses and Losses 1. 2. Discontinued Operations 3. Extraordinary Items : unusual and infrequent in nature 4. Chapter 4-10 Income tax Earnings Per Share LO 3 Prepare a multiple-step income statement. Multiple-Step Format Multiple-Step Format The presentation divides The presentation divides information into major information into major sections. sections. 1. Operating Section 1. Operating Section 2. Nonoperating Section 2. Nonoperating Section 3. Income tax 3. Income tax Chapter 4-11 I ncome St at ement ( in tho us a nd s ) Sales $ 2 8 5 ,0 0 0 Co s t o f g o o d s s o ld Gr o s s pr o f it Operat ing expenses: 14 9 ,0 0 0 13 6 ,0 0 0 S e lling e x pe ns e s Ad m inis tr a tive e x pe ns e s T o ta l o pe r a ting e x pe ns e I ncome f rom operat ions 10 ,0 0 0 4 3 ,0 0 0 5 3 ,0 0 0 8 3 ,0 0 0 Ot her revenue (expense): I nte r e s t r e ve nue I nte r e s t e x pe ns e T o ta l o the r I nc o m e b e f o r e ta x e s I nc o m e ta x e x pe ns e Net income 17 ,0 0 0 ( 2 1,0 0 0 ) ( 4 ,0 0 0 ) 7 9 ,0 0 0 2 4 ,0 0 0 Ear nings per shar e $ 0 .7 5 $ 5 5 ,0 0 0 LO 3 Prepare a multiple-step income statement. Reporting Irregular Items Reporting Irregular Items Irregular items fall into six categories 1. 2. Extraordinary items. 3. Unusual gains and losses. 4. Changes in accounting principle. 5. Changes in estimates. 6. Chapter 4-12 Discontinued operations. Corrections of errors. LO 4 Explain how to report irregular items. Reporting Irregular Items Reporting Irregular Items Companies are required to report irregular items in the financial statements so users can determine the long­run earning power Illustration 4-5 N u m b e r Illustration of the company. o f Irre g u la r Ite m s R e p o rte d in a R e c e nt Y e a r b y 6 0 0 La rg e C o m p a nie s Chapter 4-13 LO 4 Explain how to report irregular items. Reporting Irregular Items Reporting Irregular Items Discontinued Operations occurs when, (a) company eliminates the results of operations and cash flows of a component. (b) there is no significant continuing involvement in that component. Amount reported “net of tax.” Chapter 4-14 LO 4 Explain how to report irregular items. Reporting Discontinued Operations Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.” Previously labeled as “Net Income”. I ncome St at ement ( in t h o us a nd s ) Sales Co s t o f g o o d s s o ld $ 2 8 5 ,0 0 0 14 9 ,0 0 0 Ot her revenue (expense): I nt e r e s t r e ve nue I nt e r e s t e x pe ns e T o t a l o t h e r I nc o m e b e f o r e t ax e s I nc o m e t ax e x pe ns e I ncome f rom cont inuing operat ions Discont inued operat ions: 17 ,0 0 0 (2 1,0 0 0 ) (4 ,0 0 0 ) 7 9 ,0 0 0 2 4 ,0 0 0 5 5 ,0 0 0 Loss f rom operat ions, net of t ax Loss on disposal, net of t ax Moved to Chapter 4-15 315 189 T ot al loss on discont inued operat ions N et income 504 $ 5 4 ,4 9 6 LO 4 Explain how to report irregular items. Reporting Irregular Items Reporting Irregular Items Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities. Extraordinary Item must be both of an Unusual Nature and Occur Infrequently Company must consider the environment in which it operates. Amount reported “net of tax.” Chapter 4-16 LO 4 Explain how to report irregular items. ...
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