Elements of the Income Statement

1. Elements of the Income Statement Revenuesare inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activity that constitutes the entity’s ongoing major or central operations Gainsare increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners. Expensesare outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out the entity’s ongoing major or central operations. Lossesare decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions by owners.

2. Income Statement:What should be included on the current period’s income statement? 3 schools of thought: Current Operating Performance All-Inclusive Modified all-inclusive

3. (1) Current-operating-performance-school-of thought. “Income includes all usual items that affect income and have their origins in this period. Items from prior periods or unusual items would be excluded from the current income calculation.” 3 Schools of Thought on Income • (2) All-inclusive-school-of thought. “Income includes all items that effect income regardless if they had their origins in prior periods or were unusual in nature.”

4. (3)Modified all-inclusive. (Adopted by APB #9.) “All income items should be reported on the income statement for current operations, except the following: • Disposal of a segment of a business (Discontinued operations). • Extraordinary items. • Cumulative effect of a change in accounting principle.” • Prior period adjustments (PPA). These flow directly to the statement of retained earnings, net of tax, as an adjustment to the beginning balance. 3 Schools of Thought on Income

5. Income Statement Format Net Sales - COGS = Gross Margin - Operating Expenses =Operating Income Other Revenues & Grains Interest Revenue Equity in Subsidiary Earnings Gain on Sale of Available-for sale securities Other Expenses & Losses Interest Expense Loss from permanent impairment in value of mfg, facilities Income from Continuing Operations before Provisions for Tax Provisions for Income Taxes (both current & deferred, separately) Income After Tax from Continuing operations Discontinued Operations: Loss from operations of discontinued Old Division (net of tax) Loss on disposal of Old Division (net of tax) Income before extraordinary item & cumulative effect of acctg change Extraordinary item (net of tax) Cumulative effect on prior years of retroactive application of___ (net of tax) Net Earnings (Loss) Other comprehensive income: Foreign currency translation adjustment (net of tax) Unrealized gains on securities: Unrealized holding gains arising during period (net of tax) Less reclassification adj. (net of tax) for gains included in income above Minimum pension liability (net of tax) Other comprehensive income Comprehensive Income

6. Income Statement Format Revenues: Net Sales Interest Revenue Equity in Subsidiary Earnings Gain on Sale of Available-for sale securities Total Revenues Expenses: COGS Selling expenses Administrative expenses Interest expenses Loss from permanent impairment in value of ... Income Tax Expense Total Expenses Income after Tax from continuing operations