1. The Income Statement
Purpose, Characteristics, components of revenue and expense, formats -multiple versus single step, discontinued operations, extraordinary items, earnings per share, comprehensive income, IFRS versus US GAAP

2. Purpose of Income Statement
Report various levels of profit to assess current period, predict future performance
Data provided for analysis – ability to generate profit from assets, return to stockholders, comparison to other companies, etc.
Recognizes all revenues that the company generates
Shows ability to control expenses
Shows earnings per one share of common stock (EPS)

3. Income categories
Income statement subtotals --Gross income, income from operations, net income (multiple step)
Comprehensive income (CI) = net income + Other comprehensive income (OCI) (shown at very end of income statement, or following page after statement)
Other comprehensive income (OCI)= this accounting period’s unrealized gain/loss on holding investment in securities, gain/loss on pension adjustments, foreign currency exchange transactions, etc..
Accumulated Other Comprehensive Income (AOCI) = Beginning balance AOCI + OCI = ending balance AOCI (Statement of Changes in Stockholder’s Equity, Balance Sheet -- Stockholder’s Equity)

4. US GAAP allows both methods
Multiple-step
Single-step
Main source of revenue - Sales
Less: cost of goods sold
Equals: gross profit
Less: operating expenses
Equals: operating income
Less/plus: other revenue/expense
Income from continuing operations
Less: Tax expense
Income from continuing operations after tax
Plus/minus: profit/loss from discontinued operations gain (net of tax)
Plus/minus: extraordinary gain/loss (net of tax)
Net Income
Sales revenue
Other revenue
Total revenues
Less: Expenses
Income from continuing operations
Less: Tax expense
Income from continuing operations after tax
Plus/minus: profit/loss from discontinued operations gain (net of tax)
Plus/minus: extraordinary gain/loss (net of tax)
Net Income

5. Getting rid of a part of the business with Gain/loss
Discontinued Operations
Continuing Operations
Eliminate business segment or component
Unique aspect of business is eliminated, such as entire wholesaling operations, one of a kind business, one entire line of business
Adjusted for taxes
Separately shown on the income statement
Separate earnings per share
Show gain/loss on sale of assets plus net profit/loss for current period from the time the plans were made to eliminate the segment
Eliminate one aspect of continuing operations, such as a store in Charlottesville, a few items in a product line, one department in one store
Other revenue and expense for gains/losses
Taxes on entire continuing operations
No separate earnings per share

6. Differences between US GAAP and IFRS
International
Uses extraordinary category
Requires single-step or multiple-step
Uses title of “Revenue”
Expense can be organized in any way
Depreciation based on historical cost
Discontinued –separate line of business or geographical area and more --things like a portion of separate line of business
Does not use extraordinary
No prescribed income statement format- could use EBITDA
Uses “turnover” title instead of revenue
Expenses required by nature or function
Depreciation can be based on current value of long-term assets
Discontinued –separate line of business or geographical area

7. Earnings per Share (EPS)
Basic EPS = (net income – preferred stock dividends)/ weighted average # of common stock shares
Shown for continuing operations, discontinued operations, extraordinary items, net income on income statement or schedule
Helps common stockholders see how well their investments are doing
Also a diluted version presented if convertible securities, stock option plans, etc.

8. Comparing extraordinary items with other revenue and expense
Unusual and infrequent
Not common to business operations
Examples –gain/loss sale of only security holding, only land investment
Acts of nature –losses from hurricane, earthquake, hailstorm, tornado, frost damage in an unusual area
Material amount
Adjusted for taxes separately (net of tax)
Only unusual or only infrequent or neither
Examples – write-down of AR, inventory, intangibles, moving costs, labor strikes,
Gain/loss from disposal of one store such as closing Charlottesville store not a segment
Gain/loss on sale of PPE
Losses from terrorist attacks
Not adjusted for taxes separately (taxes come out of continuing operations)

9. Income statement Analysis
Ratio analysis
Vertical/horizontal analysis
Gross profit margin = gross profit/total sales
Operating profit margin=operating income/total sales
Net profit margin = net income/total sales
Asset turnover = totals sales/average total assets
Equity multiplier = average total assets/average common equity
#3 times #4 times #5 = return on common equity or use formula of net income/average common equity
Earnings-based interest coverage (times interest earned) operating income/interest expense
Common-size statements (vertical analysis) each line item $ amount/net Sales Revenue
Rate of change (horizontal analysis) each line item $ amount this year is compared to last year, then divided by last year’s $ amount.

10. Revenue Recognition –measuring and reporting revenues
Measures effects of operations in making/selling goods or services
Usually also increases assets (cash, receivable, etc.) or settles liabilities (like unearned revenue, etc.)
Recorded in the accounting system when earned and measurable
Have to have a reasonable assurance that will collect in the future, or have already collected, before it is recorded
Realization means the actual collection of cash

11. Expense Recognition and measurement
Expenses recorded when resources are used up (deferred expenses), when assets leave the business, or when liabilities have happened
Cause and effect –when revenue is earned, triggers some expenses right away like sales commission and cost of goods sold
Systematic and rational allocation –when can’t easily determine, then use a method, like straight-line depreciation for PPE or FIFO inventory to determine cost of goods sold expense
Immediate recognition- show right away if no probable future benefits (selling and administrative expenses). R&D is expensed here as well even though there may be future benefits, but it is so uncertain that practicality says to go ahead and expense right away).
Timing of expense recognition goes with revenues earned (matching)