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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A.,

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Presentation on theme: "Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A.,"— Presentation transcript:

1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA The Income Statement, Comprehensive Income, and the Statement of Cash Flows Chapter 4

2 4-2 An income statement for a hypothetical manufacturing company that you can refer to as we proceed through the chapter.

3 4-3 Expenses Outflows of resources incurred in generating revenues. Revenues Inflows of resources resulting from providing goods or services to customers. Gains and Losses Increases or decreases in equity from peripheral or incidental transactions of an entity. Income from Continuing Operations Income Tax Expense Because of its importance and size, income tax expense is a separate item.

4 4-4 Operating Income Nonoperating Income Operating versus Nonoperating Income Includes revenues and expenses directly related to the principal revenue- generating activities of the company Includes certain gains and losses and revenues and expenses related to peripheral or incidental activities of the company

5 4-5 Earnings Quality Earnings quality refers to the ability of reported earnings to predict a companys future earnings. Transitory Earnings versus Permanent Earnings

6 4-6 Separately Reported Items Reported separately, net of taxes: Discontinued operations Extraordinary items

7 4-7 Intraperiod Income Tax Allocation Income Tax Expense must be associated with each component of income that causes it. Show Income Tax Expense related to Income from Continuing Operations. Report effects of Discontinued Operations and Extraordinary Items net of related income tax effect.

8 4-8 Reporting Discontinued Operations Reporting for Components Sold Income or loss from operations of the component from the beginning of the reporting period to the disposal date. Gain or loss on the disposal of the components assets. Reporting for Components Held For Sale Income or loss from operations of the component from the beginning of the reporting period to the end of the reporting period. An impairment loss if the carrying value of the assets of the component is more than the fair value minus cost to sell.

9 4-9 An extraordinary item is a material event or transaction that is both: 1. Unusual in nature, and 2. Infrequent in occurrence Extraordinary items are reported net of related taxes Extraordinary Items

10 4-10 Unusual or Infrequent Items Items that are material and are either unusual or infrequentbut not bothare included as separate items in continuing operations.

11 4-11 Accounting Changes

12 4-12 Correction of Accounting Errors Errors occur when transactions are either recorded incorrectly or not recorded at all. Errors Discovered in Same Year Reverse original erroneous journal entry and record the appropriate journal entry. Record a prior period adjustment to the beginning retained earnings balance in a statement of shareholders equity. Previous years financial statements that are incorrect as a result of the error are retrospectively restated to reflect the correction. Material Errors Discovered in Subsequent Year

13 4-13 Earnings Per Share Disclosure One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis. Basic EPS Net income less preferred dividends Weighted-average number of common shares outstanding for the period Diluted EPS Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised.

14 4-14 Earnings Per Share Disclosure Report EPS data separately for: 1.Income or Loss from Continuing Operations 2.Separately Reported Items a)discontinued operations b)extraordinary Items 3.Net Income or Loss

15 4-15 Comprehensive Income An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.

16 4-16 The Statement of Cash Flows Provides relevant information about a companys cash receipts and cash disbursements. Helps investors and creditors to assess future net cash flows liquidity long-term solvency. Required for each income statement period reported.

17 4-17 Operating Activities Cash Flows from Operating Activities Inflows from: sales to customers. interest and dividends received. Inflows from: sales to customers. interest and dividends received. + Outflows for: purchase of inventory. salaries, wages, and other operating expenses. interest on debt. income taxes. Outflows for: purchase of inventory. salaries, wages, and other operating expenses. interest on debt. income taxes. _

18 4-18 Direct and Indirect Methods of Reporting Two Formats for Reporting Operating Activities Reports the cash effects of each operating activity Direct Method Starts with accrual net income and converts to cash basis Indirect Method

19 4-19 Cash Flows from Investing Activities + Investing Activities Inflows from: sale of long-lived assets used in the business. sale of investment securities (stocks and bonds). collection of nontrade receivables. _ Outflows for: purchase of long-lived assets used in the business. purchase of investment securities (stocks and bonds). loans to other entities. Outflows for: purchase of long-lived assets used in the business. purchase of investment securities (stocks and bonds). loans to other entities.

20 4-20 Cash Flows from Financing Activities + _ Financing Activities Inflows from: sale of shares to owners. borrowing from creditors through notes, loans, mortgages, and bonds. Outflows for: owners in the form of dividends or other distributions. owners for the reacquisition of shares previously sold. creditors as repayment of the principal amounts of debt.

21 4-21 Noncash Investing and Financing Activities Significant investing and financing transactions not involving cash also are reported. Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).

22 4-22 End of Chapter 4


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