ch 04 income statement

7/16/2019 Ch 04 Income Statement

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DAN DEINES COMPANY(Multi-Step) INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012 Sales Revenue

Sales $3,053,081Less: Sales discounts $ 24,241

Sales returns & allowances 56,427 80,668Net Sales Revenue 2,972,413

Cost of Goods Sold 1,982,541

Gross Profit 989,872Operating ExpensesSelling expenses

Sales salaries & commissions $202,644Sales office salaries 59,200Travel & entertainment 48,940Advertising expense 38,315Freight & transportation-out 41,209Shipping supplies & expense 24,712Postage & stationery 16,788Telephone & Internet expense 12,215

Depreciation of sales equipment 9,005 453,028Administrative ExpensesOfficers’ salaries 186,000Office salaries 61,200Legal & professional services 23,721Utilities expense 23,275Insurance expense 17,029Depreciation of building 18,059Depreciation of office equipment 16,000Stationery, supplies, & postage 2,875Miscellaneous office expenses 2,612 350,771 803,799

Income from operations 186,073Other Revenues and Gains

Dividend revenue 98,500Rent revenue 72,910 171,410

357,483Other Expenses & Losses

Interest on bonds & notes 126,060Income before income tax 231,423

Income tax 66,934Net income for the year $ 164,489Earnings per common share $1.74

A. A separation of operating and non-operating activities of the company.B. A classification of expenses by functions, such as merchandising (cost of goods sold), selling, & admin.1. OPERATING SECTION. A report of the revenues and expenses of the company’s principal operations.

(a) Sales or Revenue Section. A subsection presenting sales, discounts, allowances, returns, and otherrelated information. Its purpose is to arrive at the net amount of sales revenue. (b) Cost of Goods SoldSection. A subsection that shows the cost of goods that were sold to produce sales.(c) Selling Expenses. A subsection that lists expenses resulting from the company’s efforts to make sales. (d) Administrative or General Expenses. A subsection reporting expenses of general administration.2. NONOPERATING SECTION. A report of revenues & expenses resulting from secondary or auxiliaryactivities of the company. In addition, special gains & losses that are infrequent or unusual, but not both,are normally reported in this section. Generally these items break down into two main subsections:



(a) Other Revenues and Gains. A list of the revenues earned or gains incurred, generally net of relatedexpenses, from non-operating transactions.(b) Other Expenses and Losses. A list of the expenses or losses incurred, generally net of any relatedincomes, from non-operating transactions.3. INCOME TAX. A short section reporting federal and state taxes levied on income from continuingoperations.4. DISCONTINUED OPERATIONS. Material gains or losses resulting from the disposition of a segment of the business.5. EXTRAORDINARY ITEMS. Unusual and infrequent material gains and losses.

6. EARNINGS PER SHARE. Net income minus preferred dividends (income available to common stock-holders), divided by the weighted average of common shares outstanding. Companies must discloseearnings per share on the face of the income statement. A company that reports a discontinued operationor an extraordinary item must report per share amounts for these line items either on the face of theincome statement or in the notes to the financial statements.

The single-step statement consists of just 2 groupings: revenues & expenses. Expenses are deducted fromrevenues to arrive at net income or loss, hence “single-step.” Frequently companies report income tax

separately as the last item before net income to indicate its relationship to income before income tax.DAN DEINES COMPANY

(Single-Step) INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2012

RevenuesNet sales $2,972,413Dividend Revenue 98,500Rent Revenue 72,910

Total Revenue 3,143,823Expenses

Cost of Goods Sold 1,982,541

Selling Expenses 453,028Advertising expenses 350,771Interest expenses 126,060Income tax expenses 66,934

Total expenses 2,979,334Net income $ 164,489Earnings per share $1.74REVENUES. Inflows or other enhancements of assets of an entity or settlements of its liabilities during aperiod from delivering or producing goods, rendering services, or other activities that constitute theentity’s ongoing major or central operat ions.EXPENSES. Outflows or other using-up of assets or incurrences of liabilities during a period from

delivering or producing goods, rendering services, or carrying out other activities that constitute theentity’s ongoing major or central operations. GAINS. Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.LOSSES. Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.Condensed Income Statements

In some cases, a single income statement cannot possibly present all the desired expense detail. To solvethis problem, a company includes only the totals of expense groups in the statement of income. It thenalso prepares supplementary schedules to support the totals. This format may thus reduce the incomestatement itself to a few lines on a single sheet. For this reason, readers who wish to study all the

reported data on operations must give their attention to the supporting schedules.



Summary of Irregular Items in the Income Statement

FASB developed specific guidelines in two important areas: what to include in income and how to

report certain unusual or irregular items.

Type of Situation

Criteria Examples Placement on IncomeStatement

DiscontinuedOperations

Disposal of acomponent of a

business for which thecompany can clearlydistinguish operationsand cash flows from therest of the company’s

operations.

Sale by diversified company of major division that represents only

activities in electronics industry.Food distributor that sellswholesale to supermarket chainsand through fast-food restaurantsdecides to discontinue the divisionthat sells to one of two classes of customers.

Show in separatesection after continuing

operations but beforeextraordinary items.(Shown net of tax.)

ExtraordinaryItems

Material, and bothunusual and infrequent (nonrecurring).

Gains or losses resulting fromcasualties, an expropriation, or aprohibition under a new law.

Show in separatesection entitled“Extraordinary items.”

(Shown net of tax.)

Unusual gainsor losses, not considered

extraordinary

Material; charactertypical of thecustomary businessactivities; unusual orinfrequent but not both.

Write-downs of receivables,inventories; adjustments of accruedcontract prices; gains or losses fromfluctuations of foreign exchange;gains or losses from sales of assetsused in business.

Show in separatesection above incomebefore extraordinaryitems. Often reported in“Other revenues and

gains” or “Other

expenses and losses”

section. (Not shown net of tax.)

Changes inprinciple

Change from onegenerally acceptedaccounting principle toanother.

Change in the basis of inventorypricing from FIFO to average cost.

Recast prior years’

income statements onthe same basis as thenewly adoptedprinciple. (Shown net of tax.)

Changes inestimates

Normal, recurringcorrections and

adjustments.

Changes in the realizability of receivables and inventories;

changes in estimated lives of equipment, intangible assets;changes in estimated liability forwarranty costs, income taxes, andsalary payments.

Show change only in theaffected accounts. (Not

shown net of tax.)

Corrections of errors

Mistake, misuse of facts.

Error in reporting revenue. Restate prior years’

income statements tocorrect for error.(Shown net of tax.)



Intraperiod tax allocation - Allocation w/in a period. It relates the income tax expense (sometimesreferred to as the income tax provision) of the fiscal period to the specific items that give rise to theamount of the tax provision. Companies use Intraperiod tax allocation on the income statement for thefollowing items: (1) income from continuing operations, (2) discontinued operations, and (3)extraordinary items. The general concept is “let the tax follow the income.”



DAN DEINES COMPANY(Multi-Step) INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012 Sales Revenue

Sales $1,500,668Less: Sales discounts $ 24,241

Sales returns & allowances 56,427 80,668

Net Sales Revenue 1,420,000Cost of Goods Sold 600,000Gross Profit 820,000

Operating ExpensesSelling expenses

Sales salaries & commissions $ 70,000Sales office salaries 50,000Travel & entertainment 10,000Advertising expense 20,000Freight & transportation-out 10,000Shipping supplies & expense 10,000

Postage & stationery 5,000Telephone & Internet expense 7,000Depreciation of sales equipment 28,000 210,000

Administrative ExpensesOfficers’ salaries 60,000Office salaries 10,000Legal & professional services 10,000Utilities expense 9,000Insurance expense 11,000Depreciation of building 1,000Depreciation of office equipment 5,000

Stationery, supplies, & postage 2,000Miscellaneous office expenses 2,000 110,000 320,000

Income from operations 500,000Other Revenues and Gains

Dividend revenue 5,000Rent revenue 5,000 10,000

Other Expenses & LossesInterest on bonds & notes 5,000Loss on disposal of part of TextileDivision 5,000Unusual charge – loss on sale of

investments 40,000 50,000Income from continuing operations

before income tax 460,000Income tax 184,000Income from continuing operations 276,000Discontinued operations

Income from operations of PizzaDivision, less applicable tax of $24, 800 54,000Loss on disposal of Pizza Division,less applicable income tax of

$41,000 90,000 36,000



Income before extraordinary item 240,000Extraordinary item-loss from

earthquake, less applicable incometax of $23,000 45,000

Net income $195,000Per share of common stock Income from continuing operations $2.76Income from operations of discontinued division, net of tax 0.54

Loss on disposal of discontinuedoperation, net of tax 0.90Income from before extraordinaryitem 2.40Extraordinary loss, net of tax 0.45Net income $ 1.95

Earnings per common share

Brokaw Corp.RETAINED EARNINGS STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012

Retained earnings, January 1, as reported $980,000Correction for overstatement of net income inprior period – depreciation error (net of tax$13,600) 26,400Retained earnings, January 1, as adjusted 953,600Add: Net income 134,640

1,088,240Less: Cash dividends 45,000Retained earnings, December 31 1,043,240Depreciation expense omitted by accident in 2011**Retained earnings at December 31, 2011** 980,000

Effective tax rate of 34% on all items

Brokaw Corp.RETAINED EARNINGS STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012 Retained earnings, January 1, as reported $1,050,000Correction for understatement of net income inprior period – inventory error (net of tax) 50,000Retained earnings, January 1, as adjusted 1,100,000Add: Net income 360,000

1,460,000

Less: Cash dividends $100,000Stock dividends 200,000 300,000Retained earnings, December 31 $1,160,000

ch 04 income statement

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