2Income Statement Usefulness of the Income Statement Evaluate past performance.Predicting future performance.Help assess the risk or uncertainty of achieving future cash flows.LO 1 Understand the uses and limitations of an income statement.
3Income Statement Limitations of the Income Statement Companies omit items that cannot be measured reliably.Income is affected by the accounting methods employed.Income measurement involves judgment.LO 1 Understand the uses and limitations of an income statement.
4Format of the Income Statement Elements of the Income StatementRevenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.Examples of Revenue AccountsSalesFee revenueInterest revenueDividend revenueRent revenueLO 1 Understand the uses and limitations of an income statement.
5Format of the Income Statement Elements of the Income StatementExpenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations.Examples of Expense AccountsCost of goods soldDepreciation expenseInterest expenseRent expenseSalary expenseLO 1 Understand the uses and limitations of an income statement.
6Format of the Income Statement Elements of the Income StatementGains – Increases 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 fromsale of investments or plant assets,settlement of liabilities,write-offs of assets.LO 1 Understand the uses and limitations of an income statement.
7Single-Step Income Statement The single-step statement consists of just two groupings:RevenuesExpensesNet IncomeSingle- StepNo distinction between Operating and Non-operating categories.LO 2 Prepare a single-step income statement.
9Multiple-Step Income Statement BackgroundSeparates 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.
10Multiple-Step Income Statement The presentation divides information into major sections.1. Operating Section2. Nonoperating Section3. Income taxLO 3 Prepare a multiple-step income statement.
11Multi-Step Income Statement Sales– Cost of goods sold= Gross profitOperating expenses:– Selling expenses– General andadministrative expenses= Income from operations+/– Other revenues and expenses= Income before taxes– Income tax expense= Net incomeFourimportantsubtotals61313
12JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30,
13Multiple-Step FormatIllustration (E4-4): Prepare an income statement from the data below.Solution on notes page
14Multiple-Step Income Statement ReviewA separation of operating and non operating activities of a company exists ina. both a multiple-step and 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.d. neither a single-step nor a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
16Discontinued Operations Shown BelowIncome After TaxesBeforeNet Incomeon the Income Statement
17Reporting Irregular Items Discontinued Operations occurs when,(a) company eliminates theresults of operations andcash flows of a component.there is no significant continuing involvement in that component.Amount reported “net of tax.”LO 4 Explain how to report irregular items.
18Reporting Discontinued Operations Discontinued Operations are reportedafter“Income from continuing operations.”Net of TaxLO 4 Explain how to report irregular items.
19Financial Ratios to Remember *Gross Profit Margin %*Profit Margin %
20Analysis of Profitability particularinterestto current andpotentialinvestorsGrossProfit %ProfitMargin %1414
21JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30,
22JC Penney, Inc. - Profitability (in Millions)Net sales $11, $12, $17,260Cost of sales , , ,042Gross profit $ 3, $ 4, $ 6,218Gross profit % = % % %Gross Profit (Margin) % = Gross ProfitSales(How many cents on every $ of sales are left overafter covering the cost of the product)1515
23JC Penney, Inc. - Profitability (in Millions)Net sales $ 11, $12, $17,260Net income $ (1,388) $ (985) $ (152)Profit margin % = % % %Profit Margin % = Net IncomeSales(How many cents on every $ of sales are leftover after covering all expenses)1616
25Earnings Per Share Calculation Net income - Preferred dividends Weighted average number of shares outstandingAn important business indicator.Measures the dollars earned by each share of common stock.Must be disclosed on the the income statement.LO 6 Identify where to report earnings per share information.
26Earnings Per Share Net income - Preferred dividends 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.Net income - Preferred dividendsWeighted average number of shares outstanding$1,200,000- $250,000=$5.00 per share190,000LO 6 Identify where to report earnings per share information.
27Earnings Per ShareCraig Rusch Corporation reports the following information:Net income $500,000Dividends on common stock 140,000Dividends on preferred stock ,000Weighted average common shares outstanding ,000Rusch should report earnings per share ofa. $3.00.b. $3.60c. $4.40.d. $5.00.
28Prior Period Adjustments Statement of Retained EarningsAndPrior Period Adjustments
29Prior 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 forChanges in Accounting PrincipleCorrections of ErrorsLO 4 Explain how to report irregular items.
30Retained Earnings Statement 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?LO 7 Prepare a retained earnings statement.
31Retained Earnings Statement LO 7 Prepare a retained earnings statement.
32Retained Earnings Statement XMax Corporation reports the following information:Overstatement of Depreciation Expensein prior years, net of tax $ 260,000Dividends declared ,000Net income ,500,000Retained earnings, 1/1/14, as reported 2,400,000XMax should report beginning retained earnings, 1/1/14, as adjusted ata. $2,140,000.b. $2,400,000.c. $3,860,000.d. $2,660,000.
34+ Comprehensive Income All changes in equity during a period except those resulting from investments by owners and distributions to owners.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’ EquityLO 8 Explain how to report other comprehensive income.
35Review Comprehensive Income Gains and losses that bypass net income but affect stockholders' equity are referred to asa. comprehensive income.b. other comprehensive income.c. prior period income.d. unusual gains and losses.LO 8 Explain how to report other comprehensive income.
36Comprehensive IncomeThree approaches to reporting Comprehensive Income (SFAS No. 130, June 1997):A second separate income statement;A combined income statement of comprehensive income; orAs part of the statement of stockholders’ equityLO 8 Explain how to report other comprehensive income.
37Comprehensive Income Two-Statement Format for Comprehensive Income Illustration 4-19Two-Statement Format for Comprehensive IncomeLO 8 Explain how to report other comprehensive income.
38Comprehensive Income Combined Income Statement LO 8 Explain how to report other comprehensive income.
39Comprehensive Income Statement of Stockholders’ Equity (most common) Illustration 4-20LO 8 Explain how to report other comprehensive income.
40Comprehensive Income Balance Sheet Presentation Illustration 4-21Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.LO 8 Explain how to report other comprehensive income.
41Under 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.
42Under 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.