Chapter 4

1. Chapter 4 The Income Statement and Related Information

2. 1. Big Picture • Quality of earnings • Ability of reported earnings to predict future earnings • permanent earnings • transitory earnings • Management of earnings • shifting income between periods • manipulating I/S classifications (e.g., restructuring charges) • reserves • pro forma reporting • All revenue and expense transactions include a change in an asset or liability account • How should those transactions be reported on I/S to best reflect the quality of earnings information users need?

3. 1a. Big Picture • Two I/S approaches • Current operating approach • income should only reflect normal, current operations • non-current operating revenues, expenses, gains, and losses should go directly to RE • All inclusive approach • income should include all non-owner changes in net assets • What is GAAP?

4. 1b. Big Picture • Comprehensive income • all changes in equity of an entity from transactions and other events from non-owner sources • includes net income and other items • How reported?

5. 2. Income Statement Basics • Form of income statement • single-step • multi-step • Income from continuing operations • Special items

6. { Proper Heading Revenues & Gains { { Expenses & Losses Income Statement (Single-Step)

7. { Proper Heading { Gross Profit { Operating Expenses { Non- operating Items Income Statement (Multiple-Step)

8. 3. Continuing Operations • Purpose • Items included • operating income • includes: revenue, cost of good sold, operating expenses (selling & general and administrative expenses) • other income (expense) • sometimes called nonoperating section • includes: other revenue, gains, other expenses (interest expense), losses • income tax expense

9. Income Statement (Lower portion)

10. 4. Intraperiod Tax Allocation • Each section of the I/S m/b shown net of tax • Could be tax expense or tax benefit • Interperiod tax allocation complex topic • Examples

11. 5. Discontinued Operations • Disposal of a component of an entity • Location on IS • Must disclose separately • income or loss from operating component from beginning of period • gain or loss on disposal of component’s assets • Sold v. Held for Sale • Items reported net of tax

12. 6. Extraordinary Items • Material unusual and infrequent gains and losses • most meet both criteria • unusual in nature • infrequent in occurrence • if only meets one – goes in regular section • Location on I/S • Reported net of tax • Fairly rare items • Consider in particular circumstances • BE 4-5

13. 7. Accounting Changes • Change in accounting principle • change from one GAAP to another GAAP • examples • accounting • Change in accounting estimate • revision of an estimate used in implementing an accounting principle • examples • accounting

14. 7a. Accounting Changes • Change in reporting entity • current accounting entity differs from accounting entity in previous reporting period • Change in depreciation or depletion method • Change from unacceptable GAAP to acceptable GAAP

15. 8. Prior Period Adjustments • Correction of a material mistake in net income in a prior year not discovered until current year • Only item that qualifies • correction of an error • Reported as an adjustment to the beginning balance of RE

16. 9. EPS • Shown for each section of I/S • Complex topic • Basic formula NI - PS DivEPS = ——————— WAS