Prepared by Coby Harmon University of California, Santa Barbara

1. Intermediate Accounting Prepared by Coby Harmon University of California, Santa Barbara

2. Income Statement and Related Information 4 Intermediate Accounting 14th Edition Kieso, Weygandt, and Warfield

3. Income Statement Usefulness • Evaluate past performance. • Predicting future performance. • Help assess the risk or uncertainty of achieving future cash flows. LO 1 Understand the uses and limitations of an income statement.

4. Income Statement Limitations • Companies omit items that cannot be measured reliably. • Income is affected by the accounting methods employed. • Income measurement involves judgment. LO 1 Understand the uses and limitations of an income statement.

5. Income Statement Quality of Earnings • Companies have incentives to manage income to meet or beat Wall Street expectations, so that • market price of stock increases and • value of stock options increase. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows. LO 1 Understand the uses and limitations of an income statement.

6. Format of the Income Statement Elements of the Income Statement Revenues – 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 LO 1 Understand the uses and limitations of an income statement.

7. Format of the Income Statement Elements of the Income Statement Expenses – Outflows or other using-up 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 LO 1 Understand the uses and limitations of an income statement.

8. Format of the Income Statement Elements of the Income Statement Gains – Increases in equity (net assets) from peripheral or incidental transactions. Losses - 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, • write-offs of assets. LO 1 Understand the uses and limitations of an income statement.

9. Single-Step Format Single-Step Income Statement Revenues Expenses Net Income Single- Step No distinction between Operating and Non-operating categories. LO 2 Prepare a single-step income statement.

10. Single-Step Format E4-4: Prepare an income statement from the data below. LO 2 Prepare a single-step income statement.

11. Single-Step Format Review The single-step income statement emphasizes • the gross profit figure. • total revenues and total expenses. • extraordinary items more than it is emphasized in the multiple-step income statement. • the various components of income from continuing operations. LO 2 Prepare a single-step income statement.

12. Format of the Income Statement Multiple-Step Income Statement • Separates operating transactions from nonoperating transactions. • Matches costs and expenses with related revenues. • Highlights certain intermediate components of income that analysts use. LO 3 Prepare a multiple-step income statement.

13. Multiple-Step Format Intermediate Components of the Income Statement • Operating section • Nonoperating section • Income tax • Discontinued operations • Extraordinary items • Earnings per share LO 3 Prepare a multiple-step income statement.

14. Multiple-Step Format The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax LO 3 Prepare a multiple-step income statement.

15. Multiple-Step Format Illustration (E4-4): Prepare an income statement from the data below.

16. Reporting Discontinued Operations Illustration:KC Corporation had after tax income from continuing operations of $55,000,000 for the year. During the year, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 for the year. Assume a tax rate of 30%. Prepare a partial income statement for KC. Income from continuing operations $55,000,000 Discontinued operations: Loss from operations, net of $135,000 tax 315,000 Loss on disposal, net of $81,000 tax 189,000 Total loss on discontinued operations 504,000 Net income $54,496,000 LO 4 Explain how to report irregular items.

17. Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.” Previously labeled as “Net Income”. Moved to LO 4

18. Reporting Extraordinary Items Illustration:KC Corporation had after tax income from continuing operations of $55,000,000 during the year. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for KC Corporation beginning with income from continuing operations. Income from continuing operations $55,000,000 Extraordinary loss, net of $231,000 tax 539,000 Net income $54,461,000 ($770,000 x 30% = $231,000 tax) LO 4 Explain how to report irregular items.

19. Balance Sheet and Statement of Cash Flows 5 Intermediate Accounting 14th Edition Kieso, Weygandt, and Warfield

20. Balance Sheet Classification LO 2 Identify the major classifications of the balance sheet.

21. Balance Sheet Classification Illustration 5-1 In practice you usually see little departure from these major subdivisions. LO 2 Identify the major classifications of the balance sheet.

22. Classification in the Balance Sheet Current Assets Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Illustration 5-2 LO 2 Identify the major classifications of the balance sheet.

23. Classification in the Balance Sheet Current Liabilities Illustration 5-13 Balance Sheet Presentation of Current Liabilities LO 2 Identify the major classifications of the balance sheet.

24. Balance Sheet – “Owner’s Equity” Owners’ Equity LO 2 Identify the major classifications of the balance sheet.

25. Balance Sheet Format Account Form Illustration 5-16 LO 3 Prepare a classified balance sheet using the report and account formats.

26. Balance Sheet Format Report Form Illustration 5-16 LO 3

27. Statement of Cash Flows Content and Format • Three different activities: • Operating, • Investing, • Financing Illustration 5-17 Basic Format of Cash Flow Statement LO 5 Identify the content of the statement of cash flows.

28. Statement of Cash Flows Content and Format Operating Financing Investing Cash inflows and outflows that enter into the determination of net income. Cash inflows and outflows from non-current liabilities and equity. Cash inflows and outflows from non-current assets. The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility. LO 5 Identify the content of the statement of cash flows.

29. Statement of Cash Flows Illustration 5-18 LO 5 Identify the content of the statement of cash flows.

30. Preparation of the Statement of Cash Flows Sources of Information Information obtained from several sources: (1) comparative balance sheets, (2) the current income statement, and (3) selected transaction data. LO 6 Prepare a basic statement of cash flows.

31. Statement of Cash Flows Statement of Cash Flows:On January 1, 2012, in its first year of operations, Telemarketing Inc. issued 50,000 shares of $1 par value common stock for $50,000 cash. The company rented its office space, furniture, and telecommunications equipment and performed marketing services throughout the first year. In June 2012 the company purchased land for $15,000. Illustration 5-19 shows the company’s comparative balance sheets at the beginning and end of 2012. LO 6 Prepare a basic statement of cash flows.

32. Statement of Cash Flows Illustration 5-19 Illustration 5-20 LO 6

33. Statement of Cash Flows Preparing the Statement of Cash Flows • Determine: • Cash provided by (or used in) operating activities. • Cash provided by or used in investing and financing activities. • Determine the change (increase or decrease) in cash during the period. • Reconcile the change in cash with the beginning and the ending cash balances. LO 6 Prepare a basic statement of cash flows.

34. Statement of Cash Flows Illustration 5-19 Illustration 5-20 Cash provided by operating activities Illustration 5-21 LO 6 Prepare a basic statement of cash flows.

35. Illustration 5-19 Statement of Cash Flows Illustration 5-20 Next, the company determines its investing and financing activities. Illustration 5-21

36. Statement of Cash Flows Statement of Cash Flows (BE 5-12):Keyser Beverage Company reported the following items in the most recent year. Activity Net income $40,000 Dividends paid 5,000 Increase in accounts receivable 10,000 Increase in accounts payable 7,000 Purchase of equipment 8,000 Depreciation expense 4,000 Issue of notes payable 20,000 Operating Financing Operating Operating Investing Operating Financing Required:Compute net cash provided by operating activities. LO 6 Prepare a basic statement of cash flows.

37. Statement of Cash Flows Statement of Cash Flows (BE 5-12) Noncash credit to revenues. Noncash charge to expenses. LO 6 Prepare a basic statement of cash flows.