chapter 4 income statement

Chapter 4-1

Chapter 4

Income Statement

Chapter 4-2

Evaluate past performance.

Predicting future performance.

Help assess the risk or uncertainty of achieving future cash flows.

Income StatementIncome StatementIncome StatementIncome Statement

Usefulness of the Income Statement

LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.

Chapter 4-3

Companies omit items that cannot be measured reliably.

Income is affected by the accounting methods employed.

Income measurement involves judgment.

Income StatementIncome StatementIncome StatementIncome Statement

Limitations of the Income Statement


Chapter 4-4

Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement


Revenues – Inflows or other enhancements of assets or – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s settlements of its liabilities that constitute the entity’s ongoing major or central operations.ongoing major or central operations.

SalesSales

Fee revenueFee revenue

Interest revenueInterest revenue

Dividend revenueDividend revenue

Rent revenueRent revenue

Examples of Revenue Accounts

Elements of the Income Statement

Chapter 4-5



Expenses – Outflows or other using-up of assets or – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s incurrences of liabilities that constitute the entity’s ongoing major or central operations.ongoing major or central operations.

Cost of goods soldCost of goods sold

Depreciation expenseDepreciation expense

Interest expenseInterest expense

Rent expenseRent expense

Salary expenseSalary expense

Examples of Expense Accounts


Chapter 4-6



Gains – Increases in equity (net assets) from – Increases in equity (net assets) from peripheral or incidental transactions.peripheral or incidental transactions.

Losses - Decreases in equity (net assets) from - Decreases in equity (net assets) from peripheral or incidental transactions.peripheral or incidental transactions.

Gains and losses can result fromGains and losses can result from

sale of investments or plant assets, sale of investments or plant assets,

settlement of liabilities, settlement of liabilities,

write-offs of assets.write-offs of assets.


Chapter 4-7

Single-Step Income StatementSingle-Step Income StatementSingle-Step Income StatementSingle-Step Income Statement

LO 2 Prepare a single-step income statement.LO 2 Prepare a single-step income statement.

The single-step The single-step statement consists of statement consists of just two groupings:just two groupings:

I ncome Statement (in thousands)

Revenues:

Sales 285,000$ I nterest revenue 17,000

Total revenue 302,000 Expenses:

Cost of goods sold 149,000 Advertising expense 10,000 Depreciation expense 43,000 I nterest expense 21,000 I ncome tax expense 24,000

Total expenses 247,000 Net income 55,000$

Earnings per share 0.75$

RevenuesRevenues

ExpensesExpenses

Net IncomeNet Income

Single- Single- StepStep

Single- Single- StepStep

No distinction between No distinction between OperatingOperating and and Non-Non-operatingoperating categories. categories.

Chapter 4-8

Multi-Step Income Statement

Chapter 4-9

Separates operating transactions from nonoperating transactions.

Matches costs and expenses with related revenues.

Highlights certain intermediate components [or subtotals] of income that analysts use.

LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.

Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement

Background

Chapter 4-10



The presentation The presentation divides information divides information into major into major sections. sections.

The presentation The presentation divides information divides information into major into major sections. sections.


Sales 285,000$

Cost of goods sold 149,000 Gross profi t 136,000

Operating expenses:

Advertising expense 10,000 Depreciation expense 43,000

Total operating expense 53,000 I ncome from operations 83,000

Other revenue (expense):

I nterest revenue 17,000 I nterest expense (21,000)

Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 Net income 55,000$

Earnings per share 0.75$

1. Operating 1. Operating Section Section

1. Operating 1. Operating Section Section

2. Nonoperating 2. Nonoperating Section Section

2. Nonoperating 2. Nonoperating Section Section

3. Income tax 3. Income tax 3. Income tax 3. Income tax

Chapter 4-11

Sales– Cost of goods sold= Gross profit Operating expenses:– Selling expenses– General and

administrative expenses= Income from operations+/– Other revenues and expenses= Income before taxes– Income tax expense= Net income

Fourimportantsubtotals

Multi-Step Income Statement

Chapter 4-12

JC Penney, Inc. JC Penney, Inc. Statement of OperationsStatement of Operations

In MillionsIn Millions



For the Years Ended January 30, 2016 2015

Net Sales 12,547 12,625 Less: Cost of Goods Sold 8,071 8,074 Gross Profit 4,476 4,551

Less: Selling, General, and Administrative Expenses 4,081 4,640 Operating Income/(Loss) 395 (89)

Less: Interest Expense 363 405 Less: Loss on Extinguishment of Debt 30 10 Income/(Loss) before Income Taxes 2 (504)

Less: Income Tax Expense/ (Benefit) 1 9 Income/(Loss) from Continuing Operations 1 (513)

Discontinued Operations (Net of Tax) --- ---Net Income/(Loss) 1 (513)

Chapter 4-13

Multiple-Step Multiple-Step FormatFormat

Multiple-Step Multiple-Step FormatFormat

Administrative expense: Sales 96,500$

Offi cers' salaries 4,900$ Cost of goods sold 63,750

Depreciation 3,960 Gross profit 32,750

Cost of goods sold 63,750 Operating Expenses:

Rental revenue 17,230 Selling expense 17,150

Selling expense: Administrative exense 8,860

Transportation-out 2,690 Total operating expenses 26,010

Sales commissions 7,980 Income from operations 6,740

Depreciation 6,480 Other revenue (expense):

Sales 96,500 Rental revenue 17,230

Income tax expense 7,580 Interest expense (1,860)

Interest expense 1,860 Total other 15,370

Income before tax 22,110

Income tax expense 7,580

Net income 14,530$

Income Statement

For the year ended Dec. 31, 2016

Illustration (E4-4): Prepare an income statement from the data below.

Solution on notes page

Chapter 4-14

ReviewReviewA separation of operating and non operating activities A separation of operating and non operating activities of a company exists inof a company exists in

a. a. both a multiple-step and single-step income both a multiple-step and single-step income statement.statement.

b. b. a multiple-step but not a single-step income a multiple-step but not a single-step income statementstatement..

c. c. a single-step but not a multiple-step income a single-step but not a multiple-step income statementstatement..

d. d. neither a single-step nor a multiple-step neither a single-step nor a multiple-step income income statementstatement..



Chapter 4-15

Discontinued Operations

Chapter 4-16

Discontinued Operations

Shown Below

Income After Taxes

Before

Net Income

on the Income Statement

Chapter 4-17

Discontinued Operations occurs when,

(a) company eliminates the

results of operations and

cash flows of a component.

(b) there is no significant continuing involvement in that component.

Amount reported “net of tax.”

Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items

LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.

Chapter 4-18

Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations

I nterest revenue 17,000 I nterest expense (21,000) Total other (4,000)

I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000

Discontinued operations:

Gain - Net of Tax 504

Net income 55,504$

Income Statement (in thousands)

Sales 285,000$

Cost of goods sold 149,000 Discontinued Discontinued

Operations are Operations are reported reported

afterafter

““Income from Income from continuing continuing

operations.”operations.”

Net of TaxNet of Tax


Chapter 4-19

Financial Ratios to Remember

*Gross Profit Margin %

*Profit Margin %

Chapter 4-20

Analysis of ProfitabilityAnalysis of ProfitabilityAnalysis of ProfitabilityAnalysis of Profitability

Gross

Profit %Profit

Margin %

Of particular

interest to current and

potentialinvestors

Chapter 4-21





For the Years Ended January 30, 2016 2015

Net Sales 12,547 12,625 Less: Cost of Goods Sold 8,071 8,074 Gross Profit 4,476 4,551

Less: Selling, General, and Administrative Expenses 4,081 4,640 Operating Income/(Loss) 395 (89)

Less: Interest Expense 363 405 Less: Loss on Extinguishment of Debt 30 10 Income/(Loss) before Income Taxes 2 (504)

Less: Income Tax Expense/ (Benefit) 1 9 Income/(Loss) from Continuing Operations 1 (513)

Discontinued Operations (Net of Tax) --- ---Net Income/(Loss) 1 (513)

Chapter 4-22

Gross Profit (Margin) % = Gross Profit (Margin) % = Gross Profit Gross Profit SalesSales

(How many cents on every $ of sales are left over after covering the cost of the product)

JC Penney, Inc. - Profitability

(in Millions) 2016 2015 2014

Net sales $12,547 $12,625 $12,257Cost of sales 8,071 8,074 7,996Gross profit $ 4,476 $ 4,551 $ 4,261

Gross profit % = 36% 36% 35%

Chapter 4-23

Profit Margin % = Profit Margin % = Net IncomeNet Income SalesSales

(How many cents on every $ of sales are left over after covering all expenses)

(in Millions) 2016 2015 2014

Net sales $ 12,547 $12,625 $12,257

Net income $ 1 $ (513) $ (717)

Profit margin % = .008% - 4.1% -5.9%

JC Penney, Inc. - Profitability

Chapter 4-24

Earnings Per Share

Chapter 4-25

An important business indicator.

Measures the dollars earned by each share of common stock.

Must be disclosed on the the income statement.

Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share

LO 6 Identify where to report earnings per share information.LO 6 Identify where to report earnings per share information.

Net income - Preferred dividends

Weighted average number of shares outstanding

Calculation

Chapter 4-26

Brief Exercise 4-8 In 2017, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2017, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2017 earnings per share.

Brief Exercise 4-8 In 2017, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2017, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2017 earnings per share.


- $250,000$1,200,000 190,000

= $5.00 per share

LO 6 Identify where to report earnings per share information.LO 6 Identify where to report earnings per share information.

Net income - Preferred dividends

Weighted average number of shares outstanding

Chapter 4-27

Craig Rusch Corporation reports the following information:

Net income $500,000Dividends on common stock 140,000Dividends on preferred stock 60,000Weighted average common shares

outstanding 100,000

Rusch should report earnings per share ofa. $3.00.b. $3.60c. $4.40.d. $5.00.


Chapter 4-28

Statement of Retained Earnings

And

Prior Period Adjustments

Chapter 4-29

Prior Period Adjustments

Adjustments to the Beginning Balance of Retained Earnings to correct accumulated earnings reported from prior years.

Prior Period Adjustments may be reported to adjust for

1. Changes in Accounting Principle

2. Corrections of Errors


Chapter 4-30

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2017

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

Before issuing the report for the year ended December 31, 2017, you discover a $50,000 error (net of tax) that caused the 2016 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2016). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2017?

Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement

LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.

Chapter 4-31

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2017

Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$


LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.

Chapter 4-32


XMax Corporation reports the following information:XMax Corporation reports the following information:

Overstatement of Depreciation ExpenseOverstatement of Depreciation Expensein prior years, net of taxin prior years, net of tax $ $

260,000260,000 Dividends declaredDividends declared 300,000 300,000 Net incomeNet income 1,500,000 1,500,000 Retained earnings, 1/1/16, as reportedRetained earnings, 1/1/16, as reported 2,400,000 2,400,000

XMax should report beginning retained earnings, XMax should report beginning retained earnings, 1/1/16, as adjusted at1/1/16, as adjusted at

a.a. $2,140,000.$2,140,000.b.b. $2,400,000.$2,400,000.c.c. $3,860,000.$3,860,000.d.d. $2,660,000.$2,660,000.

Chapter 4-33

Comprehensive Income

Chapter 4-34

All changes in equity during a period except those All changes in equity during a period except those resulting from investments by owners and resulting from investments by owners and distributions to owners.distributions to owners.

Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income


Sales 285,000$

Cost of goods sold 149,000 Gross profi t 136,000

Operating expenses:

Advertising expense 10,000 Depreciation expense 43,000

Total operating expense 53,000 I ncome from operations 83,000

Other revenue (expense):

I nterest revenue 17,000 I nterest expense (21,000)

Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 Net income 55,000$

Other Comprehensive Other Comprehensive IncomeIncome

Unrealized gains and losses on available-for-sale securities.

Translation gains and losses on foreign currency.

Minimum Pension Liability Adjustments.

+

Reported in Stockholders’ Equity

LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.

Chapter 4-35

ReviewReview

Gains and losses that bypass net income but affect Gains and losses that bypass net income but affect stockholders' equity are referred to as stockholders' equity are referred to as

a. a. comprehensive income.comprehensive income.

b. b. other comprehensive incomeother comprehensive income..

c. c. prior period incomeprior period income..

d. d. unusual gains and lossesunusual gains and losses..

Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income

LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.

Chapter 4-36

Companies must display the components of other

comprehensive income in one of two ways:

1. A single continuous statement (one statement

approach) or

2. two separate, but consecutive statements of net income

and other comprehensive income (two statement

approach).

Comprehensive IncomeComprehensive Income

LO 7

Chapter 4-37

One Statement Approach


Advantage – does

not require the

creation of a new

financial statement.

Disadvantage - net

income buried as a

subtotal on the

statement.ILLUSTRATION 4-20

One Statement Format: Comprehensive Income

LO 7

Chapter 4-38

ILLUSTRATION 4-19Two Statement

Approach


ILLUSTRATION 4-21Two Statement Format: Comprehensive Income

Chapter 4-39

Reports the changes in each stockholders’ equity

account and total equity for the period.

Following items are disclosed in the statement:

► Contributions (issuances of shares) and distributions

(dividends) to owners.

► Reconciliation of the carrying amount of each

component of stockholders’ equity from the beginning

to the end of the period.

Statement of Stockholders’ Equity


LO 7

Chapter 4-40

Statement of Stockholders’ EquityStatement of Stockholders’ Equity

ILLUSTRATION 4-22Presentation of Comprehensive Income

in Stockholders’ Equity Statement

LO 7

Chapter 4-41

Both GAAP and IFRS require companies to indicate the amount of net income attributable to noncontrolling interest.

With the recent FASB Accounting Standards Update, under both IFRS and GAAP, unusual and infrequent income items are reported in Income

before income taxes (i.e., not an extraordinary item treatment).

Both GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard-setters have indicated a willingness to develop a similar definition to be used in the joint project on financial

statement presentation.

LO 8 Compare the accounting for income reporting under GAAP and IFRS.

RELEVANT FACTS - Similarities

Chapter 4-42

Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. Both GAAP and

IFRS allow a one statement or two statement approach to preparing the statement of comprehensive income.

RELEVANT FACTS - Similarities

Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step

or multiple-step approach.

Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the SEC requires a

functional presentation.

RELEVANT FACTS - Differences

LO 8

Chapter 4-43

IFRS identifies certain minimum items that should be presented on the income statement. GAAP has no minimum information requirements.

However, the SEC rules have more rigorous presentation requirements.

IFRS does not define key measures like income from operations. SEC regulations define many key measures and provide requirements and

limitations on companies reporting non-GAAP/ IFRS information.

Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted, with gains reported as other

comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.

RELEVANT FACTS - Differences

LO 8

Chapter 4-44

The IASB and FASB are working on a project that would rework the structure of

financial statements. One stage of this project will address the issue of how to

classify various items in the income statement. A main goal of this new

approach is to provide information that better represents how businesses are

run. The FASB and IASB have issued a proposal to require comprehensive

income be reported in a combined statement of comprehensive income. This

approach draws attention away from just one number—net income.

ON THE HORIZON

LO 8

chapter 4 income statement

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