Presentation on theme: "INCOME STATEMENT AND RELATED INFORMATION"— Presentation transcript:
1 INCOME STATEMENT AND RELATED INFORMATION C H A P T E R 4INCOME STATEMENT AND RELATED INFORMATIONIntermediate Accounting13th EditionKieso, Weygandt, and Warfield
2 Income Statement and Related Information Format of the Income StatementReporting Irregular ItemsSpecial Reporting IssuesUsefulnessLimitationsQuality of EarningsElementsSingle-stepMultiple-stepCondensed income statementsDiscontinued operationsExtraordinary itemsUnusual gains and lossesChanges in accounting principlesChanges in estimatesCorrections of errorsIntraperiod tax allocationEarnings per shareRetained earnings statementComprehensive incomeService Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:difference between the actual return and the expected return on plan assets and,amortization of the unrecognized net gain or loss from previous periods
3 Income Statement Usefulness 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.
4 Income Statement Limitations 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.
5 Income Statement Quality of Earnings Companies have incentives to manage income to meet or beat Wall Street expectations, so thatmarket price of stock increases andvalue of stock options increase.Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.LO 1 Understand the uses and limitations of an income statement.
6 Format 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.
7 Format 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.
8 Format 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.
9 Single-Step FormatThe 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.
10 Multiple-Step Format Background Separates operating transactions from nonoperating transactions.Matches costs and expenses with related revenues.Highlights certain intermediate components of income that analysts use.LO 3 Prepare a multiple-step income statement.
11 Multiple-Step Format Income Statement Sections Operating section Nonoperating sectionIncome taxDiscontinued operationsExtraordinary itemsEarnings per shareLO 3 Prepare a multiple-step income statement.
12 Multiple-Step FormatThe presentation divides information into major sections.1. Operating Section2. Nonoperating Section3. Income taxLO 3 Prepare a multiple-step income statement.
13 Reporting Irregular Items Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.Illustration 4-5 Number of Irregular Items Reported in a Recent Year by 600 Large CompaniesLO 4 Explain how to report irregular items.
14 Reporting Irregular Items Irregular items fall into six categoriesDiscontinued operations.Extraordinary items.Unusual gains and losses.Changes in accounting principle.Changes in estimates.Corrections of errors.LO 4 Explain how to report irregular items.
15 Reporting 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.
16 Reporting Discontinued Operations Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 in During 2008, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in Assume a tax rate of 30%. Prepare a partial income statement for KC.Income from continuing operations $55,000,000Discontinued operations:Loss from operations, net of $135,000 tax 315,000Loss on disposal, net of $81,000 tax 189,000Total loss on discontinued operations 504,000Net income $54,496,000LO 4 Explain how to report irregular items.
17 Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.”Previously labeled as “Net Income”.Moved toLO 4 Explain how to report irregular items.
18 Reporting Irregular Items Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities.Extraordinary Item must be both of anUnusual Nature andOccur InfrequentlyCompany must consider the environment in which it operates.Amount reported “net of tax.”LO 4 Explain how to report irregular items.
19 Reporting Extraordinary Items Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 in In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for KC Corporation beginning with income from continuing operations.Income from continuing operations $55,000,000Extraordinary loss, net of $231,000 tax 539,000Net income $54,461,000($770,000 x 30% = $231,000 tax)LO 4 Explain how to report irregular items.
20 Reporting Extraordinary Items Extraordinary Items are reported after “Income from continuing operations.”Previously labeled as “Net Income”.Moved toLO 4 Explain how to report irregular items.
21 Reporting Irregular Items Reporting when both Discontinued Operations and Extraordinary Items are present.Discontinued OperationsExtraordinary ItemLO 4 Explain how to report irregular items.
22 Reporting Irregular Items Unusual Gains and LossesMaterial items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.”Examples can include:Write-downs of inventoriesForeign exchange transaction gains and lossesThe Board prohibits net-of-tax treatment for these items.LO 4 Explain how to report irregular items.
23 Reporting Irregular Items Unusual Gains and LossesIllustration 4-9Income Statement Presentation of Unusual ChargesLO 4 Explain how to report irregular items.
24 Reporting Irregular Items Changes in Accounting PrinciplesRetrospective adjustmentCumulative effect adjustment to beginning retained earningsApproach preserves comparabilityExamples include:change from FIFO to average costchange from the percentage-of-completion to the completed-contract methodLO 4 Explain how to report irregular items.
25 Reporting Irregular Items Change in Accounting Principle: Gaubert Inc. decided in March 2010 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2010, is $30,000.Illustration 4-10Calculation of a Change inAccounting PrinciplePretax Income DataIllustration 4-11Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Solution on notes pageLO 4 Explain how to report irregular items.
26 Reporting Irregular Items Changes in EstimateAccounted for in the period of change and future periodsNot handled retrospectivelyNot considered errors or extraordinary itemsExamples include:Useful lives and salvage values of depreciable assetsAllowance for uncollectible receivablesInventory obsolescenceLO 4 Explain how to report irregular items.
27 Change in Estimate Example Change in Estimate: Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2010 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Questions:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2010.No EntryRequiredLO 4 Explain how to report irregular items.
28 Change in Estimate Example After 7 yearsEquipment cost $510,000Salvage value ,000Depreciable base 500,000Useful life (original) yearsAnnual depreciation $ 50,000First, establish NBV at date of change in estimate.x 7 years = $350,000Balance Sheet (Dec. 31, 2009)Fixed Assets:Equipment$510,000Accumulated depreciation350,000Net book value (NBV)$160,000LO 4 Explain how to report irregular items.
29 Change in Estimate Example After 7 yearsNet book value $160,000Salvage value (new) ,000Depreciable base 155,000Useful life remaining yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2010.Journal entry for 2010Depreciation expense 19,375Accumulated depreciation 19,375LO 4 Explain how to report irregular items.
30 Reporting Irregular Items Corrections of ErrorsResult from:mathematical mistakesmistakes in application of accounting principlesoversight or misuse of factsCorrections treated as prior period adjustmentsAdjustment to the beginning balance of retained earningsLO 4 Explain how to report irregular items.
31 Reporting Irregular Items Corrections of Errors: To illustrate, in 2011, Hillsboro Co. determined that it incorrectly overstated its accountsreceivable and sales revenue by $100,000 in In 2011, Hillboro makes the following entry to correct for this error (ignore income taxes).Retained earnings 100,000Accounts receivable 100,000LO 4 Explain how to report irregular items.
32 Special Reporting Issues Intraperiod Tax AllocationRelates the income tax expense to the specific items that give rise to the amount of the tax expense.Income tax is allocated to the following items:(1) Income from continuing operations before tax(2) Discontinued operations(3) Extraordinary items(4) Changes in accounting principle(5) Correction of errorsLO 5 Explain intraperiod tax allocation.
33 Special Reporting Issues Intraperiod Tax AllocationExtraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation settlement received on one its properties. Assuming a 30 percent income tax rate.Illustration 4-13LO 5 Explain intraperiod tax allocation.
34 Special Reporting Issues Intraperiod Tax AllocationExtraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate.Illustration 4-14LO 5 Explain intraperiod tax allocation.
35 Example of Intraperiod Tax Allocation Note: losses reduce the total taxCalculation of Total Tax$24,000(135)(61)(231)$23,573LO 5 Explain intraperiod tax allocation.
36 Special Reporting Issues Earnings Per ShareNet income - Preferred dividendsWeighted 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.
37 Special Reporting Issues Earnings Per Share (BE4-8): In 2010, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2010, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2010 earnings per share.Net income - Preferred dividendsWeighted average number of shares outstanding$1,000,000- $250,000=$3.95 per share190,000LO 6 Identify where to report earnings per share information.
38 Special Reporting Issues Divide by weighted-average shares outstandingEPSLO 6
39 Special Reporting Issues Retained Earnings StatementIncreaseDecreaseNet incomeChange in accounting principleError correctionsNet lossDividendsChange in accounting principlesError correctionsLO 7 Prepare a retained earnings statement.
40 Special Reporting Issues Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?LO 7 Prepare a retained earnings statement.
41 Special Reporting Issues Solution on notes pageLO 7 Prepare a retained earnings statement.
42 Special Reporting Issues Restricted Retained EarningsDisclosedIn notes to the financial statementsAs Appropriated Retained EarningsLO 7 Prepare a retained earnings statement.
43 Special Reporting Issues Comprehensive IncomeAll changes in equity during a period except those resulting from investments by owners and distributions to owners.Includes:all revenues and gains, expenses and losses reported in net income, andall gains and losses that bypass net income but affect stockholders’ equity.LO 7 Prepare a retained earnings statement.
44 Special Reporting Issues Comprehensive IncomeOther Comprehensive Income+Unrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus othersReported in Stockholders’ EquityLO 8 Explain how to report other comprehensive income.
45 Special Reporting Issues Three 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.
46 Special Reporting Issues Comprehensive IncomeSecond income statementIllustration 4-19LO 8 Explain how to report other comprehensive income.
47 Special Reporting Issues Comprehensive IncomeCombined income statementLO 8 Explain how to report other comprehensive income.
48 Special Reporting Issues Comprehensive Income - Statement of Stockholder’s EquityIllustration 4-20LO 8 Explain how to report other comprehensive income.
49 Special Reporting Issues Comprehensive Income - Balance Sheet PresentationIllustration 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.
50 Under 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.
51 Under 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.