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