1. Prepared by: Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

2. C H A P T E R 4 Reporting Financial Performance

3. Learning Objectives 1. Identify the uses and limitations of an income statement. 2. Prepare a single-step income statement. 3. Prepare a multiple-step income statement. 4. Explain how irregular items are reported.

4. Learning Objectives 5. Explain intraperiod tax allocation. 6. Explain where earnings per share information is reported. 7. Measure and report gains and losses from discontinued operations.. 8. Prepare a retained earnings statement.

5. Income Statement and Related Information Income Statement Usefulness Limitations Quality of earnings Reporting Irregular Items Discontinued operations Extraordinary items Unusual gains and losses Format of the Income Statement Elements Single-step Multiple-step Intermediate components Condensed income statement Special Reporting Issues Intraperiod tax allocation Earnings per share Retained earnings statement

6. Uses and Limitations of the Income Statement Uses: Evaluate past performance Assist in predicting future performance Assess potential risk in achieving future cash flows Limitations: Items are excluded if they cannot be reliably measured Amounts reported are affected by accounting methods used Use of estimates

7. Quality of Earnings The reliability of the information presented is dependent of the quality of earnings Information presented (content) is of high quality (or more reliable) if it demonstrates the following attributes: –contains less judgement and less bias –can be correlated with cash flows from operations –has greater predictive and feedback value (i.e. represent ongoing operations) –represents economic reality (all significant events have been measured and appropriately reported) Recall the discussion from Chapter 2 on the qualitative characteristics of information

8. Displays only two groupings: –Revenues –Expenses Income tax expense may be reported as a separate deduction to arrive at net income Advantages: –Ease of preparation –Elimination of classification problems for various revenue and expense items Disadvantages: – Lack of additional information for users/decision making –Separation of operating from non-operating activities Single-Step Income Statement

9. - Revenues Sales Other Revenues Revenues Sales Other Revenues Expenses Cost of Goods Sold Selling & Admin. Expenses Interest Expense Income Tax Expense Expenses Cost of Goods Sold Selling & Admin. Expenses Interest Expense Income Tax Expense Expenses = NET INCOME Earnings per Share Earnings per Share Any Gains/Losses from Discontinued Operations or Extraordinary Items must be disclosed separately from Continuing Operations Any Gains/Losses from Discontinued Operations or Extraordinary Items must be disclosed separately from Continuing Operations

10. Multiple-Step Income Statement Operating and non-operating activities displayed as separate sections of the income statement Expenses classified by function (e.g. cost of goods sold) Income tax expense always shown as a separate item for, and within, each section of the statement Advantages of this method include: –provides greater insight into the performance of the enterprise –provides better opportunity for comparison within the industry –information provided seen as ‘higher’ quality due to greater predictive and feedback values

11. Multiple-Step Income Statement Sections Continuing Operations Operating Section Nonoperating Section Income Tax Goodwill Discontinued Operations Income/Loss from Operations Gain/Loss from Disposition Extraordinary Items Reported Net of Taxes Material Gains/Losses

12. Continuing Operations - Detail Operating Section Net Sales Cost of Goods Sold Selling Expenses Administrative or General Expenses Nonoperating Section Other Revenues and Gains Other Expenses and Losses Income Tax On Income from Continuing Operations only Goodwill Amortization charge (net of taxes)

13. Condensed Income Statements Expenses are reported on the income statement in group totals Details of the various expense groups are reported on separate schedules Provides the advantage of a concise income statement –All information is still available to statement users –Useful when inclusion of all expense detail on the income statement would make the statement ‘cluttered’

14. Reporting Irregular Items Include the following: –Discontinued operations –Extraordinary items –Unusual gains and losses These items are reported on the income statement Other items are recorded as adjustments to retained earnings (CICA Handbook, Section 1506) These ‘other items’ include the following: i.Errors from prior years ii.Retroactively applied changes in accounting policies iii.Foreign exchange gains and losses on self-sustaining foreign subsidiaries

15. Discontinued Operations Discontinued operations refer to the disposal of a segment. To qualify: ­the segment must be a significant and separate line of business ­its assets and operations must be distinguishable from other assets and operations A distinction is made between: ­the segment’s results of operations ­the disposal of the segment’s assets Each is reported net of tax

16. Reporting Discontinued Operations There are three important dates when reporting discontinued operations: ­The measurement date ­The year-end date ­The disposal date The measurement date is when management commits itself to a plan of segment’s disposal; gains/losses are accrued The year-end date is when the discontinued operation financial information is completed for reporting purposes The disposal date is the date of sale of the segment

17. Reporting Discontinued Operations There are three distinct reporting scenarios: 1. No Phase-Out Period: Measurement date and disposal date are the same (and are within the fiscal year) 2. Phase-Out Period: Disposal date falls after the measurement date (but both are within the fiscal year) 3. Extended Phase-Out Period: Disposal date falls after the measurement date (and after the end of the fiscal year)

18. No Phase-Out Period Jan. 1Oct. 1Dec. 31 Measurement Date and Disposal Date Fiscal Year End Date Operating Income for the Segment is calculated for this time period Gain or Loss on Disposal is Measured at this Date

19. No Phase-Out Period – Statement Presentation Income from continuing operations (net of tax) $xx,xxx Discontinued Operations: Income (Loss) from operations (net of tax) $xx,xxx Gain (Loss) on disposal (net of tax) xx,xxx xx,xxx Net Income $xx,xxx

20. Phase-Out Period Jan. 1Oct. 1Dec. 31 Measuremen t Date Fiscal Year End Operating Income for the Segment is calculated for this time period Dec. 1 Disposal Date Phase Out Period Gain or Loss on Disposal = Segment Operating Income during Phase Out Period + Disposal of Net Assets

21. Phase-Out Period – Statement Presentation Income from continuing operations (net of tax) $xx,xxx Discontinued Operations: Income (Loss) from operations (net of tax) $xx,xxx Gain (Loss) on disposal of $x and operating income (loss) of $x both (net of tax) xx,xxx xx,xxx Net Income $xx,xxx

22. Extended Phase-Out Period Jan. 1Oct. 1Dec. 31 Operating Income for the Segment is calculated for this time period Gain or Loss on Disposal If Loss estimated – report at Measurement Date If Gain estimated – recognize when realized May. 1 Measurement Date Fiscal Year End Disposal Date Extended Phase-Out Period

23. Extended Phase-Out Period – Statement Presentation Income from continuing operations (net of tax) $xx,xxx Discontinued Operations: Income (Loss) from operations (net of tax) $xx,xxx Loss on disposal of $x and operating income (loss) during extended phase-out period of $x both (net of tax) xx,xxx Net Loss on Disposal xx,xxx Net Income $xx,xxx Expected Loss on Disposal

24. Extended Phase-Out Period – Statement Presentation Income from continuing operations (net of tax) $xx,xxx Discontinued Operations: Income (Loss) from operations (net of tax) $xx,xxx Operating income during extended phase-out period of $x (net of tax) xx,xxx Net Gain xx,xxx Net Income $xx,xxx Expected Gain on Disposal – Current Year Income Statement

25. Extended Phase-Out Period – Statement Presentation Income from continuing operations (net of tax) $xx,xxx Discontinued Operations: Gain on disposal of net assets (net of tax) xx,xxx Net Income $xx,xxx Expected Gain on Disposal – Following Year Income Statement

26. Presented separately on the Income Statement (net of tax); generally following Discontinued Operations Characteristics: –Material amounts –Non-recurring events –Differ significantly from the typical business activities Extraordinary Items

27. Three qualifying criteria: –Infrequent –Atypical of normal business activities –Not primarily dependent on management or owners’ decisions All three of these must be met in order to qualify as an Extraordinary Item Extraordinary Items

28. CICA Handbook, Section 3480 lists the following as not qualifying as Extraordinary Items: 1)Losses, or loss provisions, from bad debts and inventories 2)Foreign exchange gains and losses 3)Contract price adjustments 4)Gains and losses from investment write downs 5)Income tax adjustments 6)Income tax rate or law changes

29. Unusual Gains and Losses Gains and losses that do not qualify as an Extraordinary Item, but are material in amount Disclosed separately on the income statement, immediately above Income (Loss) before Extraordinary Items Alternative presentation is to display a separate section – “Unusual Items”

30. Intraperiod Tax Allocation Refers to the reporting of amounts Net of Tax Specifically the allocation of Income Taxes within a fiscal period Income Tax expense (or benefit) is calculated separately for each of: –income from continuing operations –discontinued operations –extraordinary items

31. Earnings per Share Earnings per share (EPS) is probably the most important business indicator figure Indicates dollars earned per common share; it does not report the dollars paid (or to be paid) per common share Earnings per share is required to be disclosed on the income statement for all the major sections

32. Calculated as: Earnings per Share Preferred dividends are those dividends that have been declared (non-cumulative) or in arrears (cumulative) for one year only Earnings per share is subject to dilution (reduction), if issue of additional shares is possible in the future Net Income less Preferred Dividends Weighted Average of Common Shares Outstanding

33. Retained Earnings Statement Retained earnings are increased by net income and decreased by net loss and dividends for the year Corrections of errors in prior period financial statements are shown as prior period adjustments to the beginning balance in retained earnings Any part of retained earnings, appropriated (restricted) for a specific purpose, are shown as Appropriated Retained Earnings Earnings may appropriated by contractual obligation, corporate policy, or discretionary

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