chapter 4
DESCRIPTION
CHAPTER 4. Income Statement and Related Information. ……..…………………………………………………………. Income and expenses for a given period of time. Usefulness of the Income Statement. evaluate past performance predict future performance assess uncertainty of future cash flows. $. E. D LL. LIFO. FIFO. - PowerPoint PPT PresentationTRANSCRIPT
CHAPTER 4Income Statementand Related Information……..…………………………………………………………...
Usefulness of the Income Statement
Income and expenses for a given period of time.
evaluate past performance
predict future performance
assess uncertainty of future cash flows
Limitations of the Income Statement
Not every relevant item is
included.
Reliable measures not
always available.
Numbers not always
comparable.
Differences in methods are
allowed.
Numbers not completely
reliable.
Judgment is frequently involved.
LIFO
FIFO
D LLE
$
Transaction approach
Income calculated based on summary
information of revenue, expense, gain, and
loss transactions
Ledger AccountsIncome Statement
Salesxxx
Cost of Goods Sld
Beg Inv xxx
Purchxxx
FORMAT OF THE INCOME STATEMENT
ElementsIncrease in Net Assets
Decrease in Net Assets
From ongoing, major operations
From peripheral transactions
Single-Step Income Statement
Revenues
Net Income
- Expenses
List and totalall revenuesand gains
List and totalall expensesand losses
Sales Revenues
+ Other Rev. & Gains
Income before income tax
Net Income
- Cost of Goods Sold
- Other Exp. & Losses
Multiple-Step Income Statement
Shows both gross and net
sales.
Breakdown of purchases and merchandise
inventory.
REPORTING IRREGULAR ITEMS
ALL-INCLUSIVE APPROACH
most items are recorded in current period income
CURRENT OPERATING APPROACH
income from regular and recurrent items is reported
MODIFIED ALL-INCLUSIVE APPROACH
irregular items are highlighted
Discontinued Operations
Assets
Operating Results
Activities
of the segment
Clearly
distinguishable
Not “discontinued operations”
disposal of a part of a business line
shifting production locations
phasing out a product line
Income from continuing operations $20,000,000
Discontinued operations
Loss from operation of discontinued
division (net of tax) $300,000
Loss from disposal of division
(net of tax) 500,000 800,000
Net Income $19,200,000
Extraordinary Items
Unusual (unrelated to ordinary activities)
Infrequent
Not “extraordinary”
write-down of receivables, inventories, etc.
gains or losses from sale of PP&E
effects of a strike
Question 27, p. 151
$450,000 gain on forced condemnation sale of facility.
Unusual Gains and Losses
unusual or infrequent but not both
report in “Other Gains and Losses”
before income tax
Changes in Accounting Principle
e.g. change in inventory or depreciation method
report the retroactive impact as of the beginning
of the year
report as an adjustment to beginning R/E; not on
the income statement
Brief Exercise 4-7, p. 153
Change in estimate of bad debt expense.
Changes in Estimates e.g. change in estimate of the useful life of an
asset or bad debts expense
do not handle retroactively
include in ordinary income
Prior Period Adjustments
record as an adjustment to the beginning
balance of retained earnings
does not affect net income
SPECIAL REPORTING ISSUES
Earnings per Shareperhaps the most widely followed number in all
of the financial statements
break-down EPS for extraordinary items
Basic EPS =Net Income – Preferred dividends
Weighted average common shares outstanding