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ACTG 3110

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  1. ACTG 3110 Chapter 4 The Income Statement and Related Information

  2. What is an Income Statement? • Information covered • Time period covered • Usefulness of the income statement • Evaluate past performance • Provide basis for predicting future performance • Help assess risk of future cash flows • Limitations • The items that cannot be measured reliably are not included • Numbers affected by accounting methods employed • Income measurement involves judgment. • Quality of Earnings – earnings management

  3. Elements of the Income Statement • Income Measurement • Net Assets approach • Transactions approach • Revenues • Expenses • Gains • Losses

  4. Income From Continuing Operations • All items must be expected to continue in the future • Often lists income tax expense separately • Operating income • Nonoperating income

  5. Single-step Format • All income sources grouped together • All expense sources grouped together • No separate cost of goods sold section • No gross margin • No separation of other income and expenses


  6. Multiple-Step Format • Separate cost of goods sold section • Gross margin subtotal • Separate other income and expenses from operating income and expenses • Separate income tax expense • Both single step and multiple step format agree with GAAP • Formats are the same below the income from continuing operations

  7. Irregular Information on the Income Statement • Discontinued operations (net of tax) • Extraordinary items (net of tax) • Earnings per share • Intraperiod Tax Allocation • Taxes for operating items • Taxes for irregular information separate

  8. Discontinued Operations SFAS 144 • Disposal of a separate component of the entity which has operations and cash flows that can be clearly distinguished • Two components to report: • Operating results of the discontinued segment from beginning of year to the disposal date • Gain/loss on disposal • Gain/loss on sale of net assets • Reported net of tax • Can be combined or reported separately • In comparative statements, the income from the discontinued component must be separated from income from continuing operations

  9. Extraordinary Items • MATERIAL IN AMOUNT AND BOTH INFREQUENT AND UNUSUAL • Requires judgment in that this event is not likely to occur again • Reported net of tax • Unusual or infrequent items are NOT extraordinary items and cannot be reported net of tax • Restructuring charges are not extraordinary items • International Practices

  10. Accounting Changes • Change in accounting principle • Accounted for retrospectively, meaning past financial statements must be restated • Examples include changing from FIFO to LIFO • Change in estimates – prospective adjustments (do not have to restate) • Changes in depreciation methods • Changes in useful lives • Changes in bad debt estimates • Change in reporting entity (mergers and acquisitions) • Restate financial statements as if the new entity existed in the past years if possible

  11. Prior Period Adjustments • Material errors discovered in subsequent years • Adjust beginning retained earnings and correct other accounts • Restate past financial statements • Disclose nature of error in footnotes

  12. Earnings Per Share • Ratio of income available to common shareholders • Presented for income from continuing operations, income from discontinuing operations, extraordinary items and net income (Net income – preferred dividends) weighted average number of common shares outstanding • Basic EPS and Diluted EPS reported

  13. Retained Earnings Statement • Beginning balance • Prior period adjustments • Adjusted beginning balance • Add net income or subtract net loss • Subtract dividends declared • Ending balance • Some retained earnings is restricted (must classify as such)

  14. Comprehensive Income • Statement No. 130 • Change in equity due to everything except investments by owners and distributions to owners. • Presentation • One statement (continue on with net income) • Two statement (separate comprehensive income statement) • Part of stockholders’ equity statement • Shows foreign currency translation gains/losses, unrealized gains/losses on investments in debt and equity securities available for sale, and minimum liabilities of pension obligations, and many other adjustments • Accumulated balance is reported in stockholders’ equity