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Chapter 4-1 Chapter 4 Income Statement. Chapter 4-2 Evaluate past performance. Predicting future performance. Help assess the risk or uncertainty of achieving.

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Presentation on theme: "Chapter 4-1 Chapter 4 Income Statement. Chapter 4-2 Evaluate past performance. Predicting future performance. Help assess the risk or uncertainty of achieving."— Presentation transcript:

1 Chapter 4-1 Chapter 4 Income Statement

2 Chapter 4-2 Evaluate past performance. Predicting future performance. Help assess the risk or uncertainty of achieving future cash flows. Income Statement Usefulness of the Income Statement LO 1 Understand the uses and limitations of an income statement.

3 Chapter 4-3 Companies omit items that cannot be measured reliably. Income is affected by the accounting methods employed. Income measurement involves judgment. Income Statement Limitations of the Income Statement LO 1 Understand the uses and limitations of an income statement.

4 Chapter 4-4 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Sales Fee revenue Interest revenue Dividend revenue Rent revenue Examples of Revenue Accounts Elements of the Income Statement

5 Chapter 4-5 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Cost of goods sold Depreciation expense Interest expense Rent expense Salary expense Examples of Expense Accounts Elements of the Income Statement

6 Chapter 4-6 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Increases in equity (net assets) from peripheral or incidental transactions. Gains – Increases in equity (net assets) from peripheral or incidental transactions. - Decreases 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 Gains and losses can result from sale of investments or plant assets, settlement of liabilities, write-offs of assets. Elements of the Income Statement

7 Chapter 4-7 Single-Step Income Statement LO 2 Prepare a single-step income statement. The single-step statement consists of just two groupings: RevenuesExpenses Net Income Single- Step No distinction between Operating and Non-operating categories.

8 Chapter 4-8 Multi-Step Income Statement

9 Chapter 4-9 Separates operating transactions from nonoperating transactions. Matches costs and expenses with related revenues. Highlights certain intermediate components [or subtotals] of income that analysts use. LO 3 Prepare a multiple-step income statement. Multiple-Step Income Statement Background

10 Chapter 4-10 Multiple-Step Income Statement LO 3 Prepare a multiple-step income statement. The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax

11 Chapter 4-11 Sales – Cost of goods sold = Gross profit Operating expenses: – Selling expenses – General and administrative expenses = Income from operations +/–Other revenues and expenses = Income before taxes – Income tax expense = Net income Four important subtotals Multi-Step Income Statement

12 Chapter 4-12 JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30,

13 Chapter 4-13 Multiple-Step Format Illustration (E4-4): Prepare an income statement from the data below. Solution on notes page

14 Chapter 4-14 Review A separation of operating and non operating activities of a company exists in a. both a multiple-step and single-step income statement. a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement. d. neither a single-step nor a multiple-step income statement. Multiple-Step Income Statement LO 3 Prepare a multiple-step income statement.

15 Chapter 4-15 Discontinued Operations

16 Chapter 4-16 Discontinued Operations Shown Below Income After Taxes Before Net Income on the Income Statement

17 Chapter 4-17 Discontinued Operations occurs when, (a) company eliminates the results of operations and cash flows of a component. (b) there is no significant continuing involvement in that component. Amount reported “net of tax.” Reporting Irregular Items LO 4 Explain how to report irregular items.

18 Chapter 4-18 Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.” Net of Tax LO 4 Explain how to report irregular items.

19 Chapter 4-19 Financial Ratios to Remember *Gross Profit Margin % *Profit Margin %

20 Chapter 4-20 Analysis of Profitability Gross Profit % Profit Margin % Of particular interest to current and potential investors

21 Chapter 4-21 JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30,

22 Chapter 4-22 Gross Profit (Margin) % = Gross Profit Sales Sales (How many cents on every $ of sales are left over after covering the cost of the product) JC Penney, Inc. - Profitability (in Millions) Net sales $11,859 $12,985 $17,260 Cost of sales 8,367 8,919 11,042 Gross profit $ 3,492 $ 4,006 $ 6,218 Gross profit % = 29% 31% 36%

23 Chapter 4-23 Profit Margin % = Net Income Sales Sales (How many cents on every $ of sales are left over after covering all expenses) (in Millions) Net sales $ 11,859 $12,985 $17,260 Net income $ (1,388) $ (985) $ (152) Profit margin % = % - 7.6% -0.9% JC Penney, Inc. - Profitability

24 Chapter 4-24 Earnings Per Share

25 Chapter 4-25 An important business indicator. Measures the dollars earned by each share of common stock. Must be disclosed on the the income statement. Earnings Per Share LO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstanding Calculation

26 Chapter 4-26 Brief Exercise 4-8 In 2014, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2014, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2014 earnings per share. Earnings Per Share - $250,000$1,200, ,000 = $5.00 per share LO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstanding

27 Chapter 4-27 Craig Rusch Corporation reports the following information: Net income$500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 100,000 Rusch should report earnings per share of a.$3.00. b.$3.60 c.$4.40. d.$5.00. Earnings Per Share

28 Chapter 4-28 Statement of Retained Earnings And Prior Period Adjustments

29 Chapter 4-29 Prior Period Adjustments Adjustments to the Beginning Balance of Retained Earnings to correct accumulated earnings reported from prior years. Prior Period Adjustments may be reported to adjust for 1. Changes in Accounting Principle 2. Corrections of Errors LO 4 Explain how to report irregular items.

30 Chapter 4-30 Before issuing the report for the year ended December 31, 2014, you discover a $50,000 error (net of tax) that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014? Retained Earnings Statement LO 7 Prepare a retained earnings statement.

31 Chapter 4-31 Retained Earnings Statement LO 7 Prepare a retained earnings statement.

32 Chapter 4-32 Retained Earnings Statement XMax Corporation reports the following information: Overstatement of Depreciation Expense Overstatement of Depreciation Expense in prior years, net of tax$ 260,000 Dividends declared 300,000 Dividends declared 300,000 Net income 1,500,000 Net income 1,500,000 Retained earnings, 1/1/14, as reported 2,400,000 Retained earnings, 1/1/14, as reported 2,400,000 XMax should report beginning retained earnings, 1/1/14, as adjusted at a.$2,140,000. b.$2,400,000. c.$3,860,000. d.$2,660,000.

33 Chapter 4-33 Comprehensive Income

34 Chapter 4-34 All changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive Income Other Comprehensive Income Unrealized gains and losses on available-for- sale securities. Translation gains and losses on foreign currency. Minimum Pension Liability Adjustments. + Reported in Stockholders’ Equity LO 8 Explain how to report other comprehensive income.

35 Chapter 4-35 Review Gains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income. a. comprehensive income. b. other comprehensive income. b. other comprehensive income. c. prior period income. c. prior period income. d. unusual gains and losses. d. unusual gains and losses. Comprehensive Income LO 8 Explain how to report other comprehensive income.

36 Chapter 4-36 Three approaches to reporting Comprehensive Income (SFAS No. 130, June 1997): 1.A second separate income statement; 2.A combined income statement of comprehensive income; or 3.As part of the statement of stockholders’ equity Comprehensive Income LO 8 Explain how to report other comprehensive income.

37 Chapter 4-37 Two-Statement Format for Comprehensive Income Comprehensive Income LO 8 Explain how to report other comprehensive income. Illustration 4-19

38 Chapter 4-38 Combined Income Statement Comprehensive Income LO 8 Explain how to report other comprehensive income.

39 Chapter 4-39 Comprehensive Income LO 8 Explain how to report other comprehensive income. Statement of Stockholders’ Equity (most common) Illustration 4-20

40 Chapter 4-40 Comprehensive Income LO 8 Explain how to report other comprehensive income. Balance Sheet Presentation Illustration 4-21 Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.

41 Chapter 4-41  Under iGAAP, companies must classify expenses by either nature or function. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements.  Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. iGAAP does not mention a single-step or multiple-step approach. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under iGAAP.

42 Chapter 4-42  Under iGAAP, companies are required to prepare as a primary financial statement either a statement of stockholders’ equity similar to the one prepared under U.S. GAAP or a statement of recognized income and expense (called a SoRIE ).  Both iGAAP and U.S. GAAP have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information. iGAAP allows either the statement of stockholders’ equity approach or the SoRIE format.  Under iGAAP revaluation of land, buildings, and intangible assets is permitted.


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