Chapter 4 The Income Statement, Comprehensive Income, and the Statement of Cash Flows ACCT-3030

1. Big Picture Quality of earnings Management of earnings the 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; big bath motivations for managing earnings 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? ACCT-3030

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? ACCT-3030

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 Accumulated other comprehensive income How reported? ACCT-3030

2. Income Statement Basics Form of income statement single-step multi-step Operating income Income from continuing operations Discontinued operations ACCT-3030

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

Income Statement (Multiple-Step) { Proper Heading { Gross Profit Operating Expenses { { Non- operating Items The multiple-step income statement format includes a number of intermediate subtotals before arriving at income from operations. However, notice that the net income is the same no matter which format is used. A primary advantage of the multiple-step format is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. Similarly, the classification of expenses by function also provides useful information.

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 ACCT-3030

4. Intraperiod Tax Allocation Each section of the I/S m/b shown net of tax continuing operations discontinued operations Could be tax expense or tax benefit Interperiod tax allocation complex topic Examples ACCT-3030

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 ACCT-3030

Income Statement (Lower portion)

6. No Longer Report Extraordinary Items Material unusual and infrequent gains and losses must meet both criteria unusual in nature infrequent in occurrence if only meets one – goes in regular section Location on I/S – nonoperating section Reported net of tax Fairly rare items Consider in particular circumstances ACCT-3030

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 ACCT-3030

7a. Accounting Changes Change in reporting entity current accounting entity differs from accounting entity in previous reporting period Change in depreciation or depletion method considered to be a change in estimate that is achieved by a change in principle Change from unacceptable GAAP to acceptable GAAP ACCT-3030

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 ACCT-3030

9. Cash Flow Statement Only basics now - More in 3040 Required statement Classifications on statement operating activities direct method indirect method investing activities financing activities ACCT-3030

9. Cash Flow Statement ACCT-3030

10. EPS Shown for each section of I/S Complex topic Basic formula NI - PS Div EPS = ——————— WAS ACCT-3030