The Income Statement in Detail. MIM 517 Fall 2010 Class 3. Learning Objectives. Exposure to real income statement complexity Overview of “more complex” line items Introduction to earnings management Understand definition of Other Comprehensive Income and distinguish from Net Income.
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- Cost of Goods Sold
= Gross Profit on Sales
- Selling General and Admin. Expenses
- Research & Development Expenses
- Restructuring Charges
= Operating Income (EBIT)
+ (-) Other income (expenses)
+ (-) Interest/dividend income (expense
+ (-) Unrealized gain (loss) on trading securities
+ Income in equity investees
= Income before taxes, disc op’s & extraordinary items
- Income tax
= Net income before disc op’s & extraordinary items
+ (-) Discontinued operations, net of tax
+ (-) Extraordinary gain (loss), net of tax
= Net income
SEC Chairman Arthur Levitt gave a speech entitled, The Numbers Game. One of the accounting gimmicks that the Chairman cited in his speech was the abuse of restructuring charge accounting. He stated:
‘Let me first deal with "Big Bath" restructuring charges. Companies remain competitive by regularly assessing the efficiency and profitability of their operations. Problems arise, however, when we see large charges associated with companies restructuring. These charges help companies "clean up" their balance sheet – giving them a so-called "big bath."
Why are companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on future earnings.
And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates change or future earnings fall short.
When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects. We need, of course, to ensure that financial reporting provides this information. But this should not lead to flushing all the associated costs – and maybe a little extra – through the financial statements.’
Asset = Expense