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CHAPTER 4

CHAPTER 4. Income Statement and Related Information. ……..…………………………………………………………. Income and expenses for a given period of time. Usefulness of the Income Statement. evaluate past performance predict future performance assess uncertainty of future cash flows. $. E. D LL. LIFO. FIFO.

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CHAPTER 4

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  1. CHAPTER 4 Income Statement and Related Information ……..…………………………………………………………... Income and expenses for a given period of time. Usefulness of the Income Statement • evaluate past performance • predict future performance • assess uncertainty of future cash flows

  2. $ E DLL LIFO FIFO Limitations of the Income Statement Reliable measures not always available. Not every relevant item is included. Numbers not always comparable. Differences in methods are allowed. Numbers not completely reliable. Judgment is frequently involved.

  3. Ledger Accounts Income Statement Sales xxx Cost of Goods Sld Beg Inv xxx Purch xxx Transaction approach • Income calculated based on summary information of revenue, expense, gain, and loss transactions

  4. FORMAT OF THE INCOME STATEMENT Increase in Net Assets Decrease in Net Assets From ongoing, major operations From peripheral transactions Elements

  5. List and total all revenues and gains - Expenses List and total all expenses and losses Single-Step Income Statement Revenues Net Income

  6. Shows both gross and net sales. - Cost of Goods Sold Breakdown of purchases and merchandise inventory. - Other Exp. & Losses Multiple-Step Income Statement Sales Revenues + Other Rev. & Gains Income before income tax Net Income

  7. REPORTING IRREGULAR ITEMS ALL-INCLUSIVE APPROACH most items are recorded in current period income CURRENT OPERATING APPROACH income from regular and recurrent items is reported MODIFIED ALL-INCLUSIVE APPROACH irregular items are highlighted

  8. Discontinued Operations Assets Operating Results Activities of the segment Clearly distinguishable • Not “discontinued operations” • disposal of a part of a business line • shifting production locations • phasing out a product line

  9. Income from continuing operations $20,000,000 Discontinued operations Loss from operation of discontinued division (net of tax) $300,000 Loss from disposal of division (net of tax) 500,000 800,000 Net Income $19,200,000

  10. Extraordinary Items • Unusual (unrelated to ordinary activities) • Infrequent • Not “extraordinary” • write-down of receivables, inventories, etc. • gains or losses from sale of PP&E • effects of a strike Question 27, p. 151 $450,000 gain on forced condemnation sale of facility.

  11. Unusual Gains and Losses • unusual or infrequent but not both • report in “Other Gains and Losses” • before income tax

  12. Changes in Accounting Principle • e.g. change in inventory or depreciation method • report the retroactive impact as of the beginning of the year • report as an adjustment to beginning R/E; not on the income statement Brief Exercise 4-7, p. 153 Change in estimate of bad debt expense.

  13. Changes in Estimates • e.g. change in estimate of the useful life of an asset or bad debts expense • do not handle retroactively • include in ordinary income Prior Period Adjustments • record as an adjustment to the beginning balance of retained earnings • does not affect net income

  14. SPECIAL REPORTING ISSUES Net Income – Preferred dividends Basic EPS = Weighted average common shares outstanding Earnings per Share perhaps the most widely followed number in all of the financial statements • break-down EPS for extraordinary items

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