chapthe income statement and the statement of cash flowster 5.docx

8/20/2019 ChapThe Income Statement and the Statement of Cash Flowster 5.docx

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Chapter 5, The Income Statement and the Statement of Cash Flows

1. What are the Purposes of the Income Statement?a. To inform investors, lenders, creditors, and other staeholders a!out a

compan"#s $nancial performance so that the" can%i. &valuate the pro$ta!ilit" and assess the return on investment in

the compan"ii. 'ssess the compan"#s operatin( capa!ilit" and $nancial

performance for the current period and over timeiii. &valuate mana(ement#s performanceiv. Predict the compan"#s future income and cash )owsv. *nderstand the components of income

vi. 'ssess the compan"#s risvii. Compare performance a(ainst other companiesviii. 'ssess the impact of economic factors on the compan"

!. What is Income?i. Capital Maintenance Concept+ a corporation#s net income for

a period of time is the amount that it could distri!ute to

shareholders without depletin( the capital the shareholdershave invested

1. &amplea. &ndin( -et 'ssets /0,000!. ess% 2e(. -et 'ssets 35,000c. -et Chan(e in 'ssets 45,000d. ess% 'dditional Investments 10,000e. Plus% Capital ist. In ividends 6,500f. Total Income for the 7ear% 68,500

ii. Comprehensive Income and -et Income1. Comprehensive Income+ the chan(e in e9uit" of a

compan" durin( a period from transactions, other events,

and circumstances relatin( to non+owner sources. It

includes all chan(es in e9uit" durin( a period ecept

those resultin( from investments !" owners and

distri!utions to owners6. -et Income : ;evenues < &penses = >ains < osses

6. What are the &lements of the Income Statement?a. Revenues+ increases in assets or settlements of lia!ilities from

deliverin( or producin( (oods, renderin( services, or other activities

that are the compan"#s on(oin( maor or central operationsi. Revenue Recognition+ process of formall" measurin( and

reportin( revenue in a compan"#s $nance statements.

1. ;evenues cannot !e reco(ni@ed until !oth%a. It has !een earned!. Collection has occurred or is reasona!l" certain to

occur6. Realization+ process of convertin( noncash resources

into cash or ri(hts to cash



ii. Timin( of ;evenues versus Cash Flows1. 'ccrued ;evenues reco(ni@ed !efore cash )ows received

a. 'ssets% 'ccounts receiva!le6. ;evenues reco(ni@ed simultaneousl" with cash )ows

receiveda. 'ssets% Cash and Cash e9uivalents

4. eferred ;evenues reco(ni@ed after cash )ows receiveda. ia!ilit"% eferred or *nearned ;evenues

!. Expenses+ arise form out)ows or usin( up assets or incurrin( lia!ilities

from deliverin( or producin( (oods, renderin( services, or carr"in( out

other activities that are the compan"#s maor or central operationsi. &pense ;eco(nition

1. Aeasured and reco(ni@ed in the period in which resources

are used up, the out)ows of assets occur, or the lia!ilities

are incurred, even thou(h cash out)ows ma" occur in a

diBerent period6. Principles of &pense ;eco(nition

a. 'ssociation of Cause and &Bect+ some costs arereco(ni@ed as epenses on the !asis of a direct

association with speci$c revenues, such as sales

commissions!. S"stematic and ;ational 'llocation+ some costs are

reco(ni@ed as epenses in a particular accountin(

period !ased on a s"stematic and rational

allocation amon( the periods in which !ene$ts are

provided, such as prepaid costs or depreciationc. Immediate ;eco(nition+ some costs are reco(ni@ed

as epenses in the current accountin( period

!ecause the costs incurred durin( the period

provide no pro!a!le future !ene$ts, such as sellin(

and administrative costsc. >ains and osses

i. Gains+ increases in the e9uit" of a compan" durin( peripheral or

incidental transactions and other events and circumstances

durin( a period, ecept those that result from revenues or

investments !" ownersii. Losses+ are decreases in the e9uit" of a compan" from

peripheral or incidental transactions and other events and

circumstances durin( a period, ecept those that result from

epenses or distri!utions to owners

iii. Can !e classi$ed into three cate(ories as !ein( derived from%1. &chan(e transactions in which an asset is sold or a

lia!ilit" settled for an amount that diBers from the

carr"in( value on the !alance sheet6. The holdin( of resources or o!li(ations while their values

chan(e4. -onreciprocal transfers !etween a compan" and non+

owners



d. Costs of Purchasese. ess Purchase Itemsf. -et Purchases(. Cost of >oods 'vaila!le for Saleh. ess% Inventor"i. Cost of >oods Sold

iv. Dperatin( &penses1. Sellin( &penses6. >eneral and 'dministrative &penses4. epreciation &penses

v. Dther Dperatin( Income Items% (ains and losses from% asset

sales, inventor" write+downs, impairment char(es, restructurin(

char(es, or other t"pes of (ains and losses that are a

conse9uence of normal operatin( activitiesvi. Items resultin( from $nancin( and investin( activities%

si(ni$cant recurrin( items of income and epense, as well as(ains and losses, which are not directl" related to the primar"

operations !ut result from the $nancin( and investin( activities

of the compan"vii. *nusual and -onrecurrin( (ains and losses% nonetraordinar"

!ut not unusual in nature or infre9uent in occurrenceviii. Preta Income from Continuin( Dperations% operatin( income

=E+ interest epense, interest and dividend income, other (ains

and losses, and an" unusual or nonrecurrin( (ains and lossesi. Income Ta &pense ;elated to Continuin( Dperations

1. Interperio" #ax $llocation+ involvin( assi(nin( a

corporation#s ta o!li(ation as an epense across various

accountin( periods !ecause of temporar" timin(G

diBerences !etween its taa!le income and preta

$nancial incomea. 'nnual income ta epense for $nancial reportin(

!e !ased on preta $nancial income!. Current income ta o!li(ation !e !ased on taa!le

incomec. 'n" temporar" diBerences !etween them (ave rise

to a deferred ta lia!ilit" or deferred ta assetG6. Intraperio" #ax $llocation+ involves apportionin( a

corporation#s total income ta epense for a period to the

various components of its net income and othercomprehensive income itemsH that is, a portion of the

income ta epense is allocated to%a. Income from continuin( operations!. Income lossG from the operations of a discontinued

componentc. >ain lossG from the disposal of a discontinued

component



d. &traordinar" itemse. 'n" items of other comprehensive income

5. ow do Income Statements ;eport ;esults from iscontinued Dperationsa. ;eportin( ;esults of iscontinued Dperations

i. ' compan" reports results from discontinued operations when%1. Dperations and cash )ows of the component have !een

eliminated6. Compan" will have no si(ni$cant continuin( involvement

in the operations of the component after the disposalii. Income Statement components

1. Income lossG from operations of the discontinued

component6. >ain lossG from the sale of component

!. eterminin( a Component of a Compan"i. Components can include% su!sidiaries, divisions, or asset (roupsii. If !usiness still have involvement in overarchin( activities, not a

component

c. Dperatin( Income of a iscontinued Dperationi. Dperatin( income or loss of a discontinued operation is reported

under iscontinued Dperationsii. From !e(innin( of "ear until date of sale

d. >ain or oss on Salei. 2oo value < sellin( price < additional costs : preta (ainii. &ample%

1. -et cash received% 100,0006. 2oo value of net assets%

a. 'ssets 150,000!. ia!ilities /0,000G

c. -et !oo value 80,000Gd. Preta (ain 40,000e. Income taes 40G J,000Gf. 'fter+ta (ain 61,000

K. ow do we ;eport &traordinar" Items on the Income Statement?a. Criteria

i. 2oth of the followin( criteria must !e met for a compan" to

classif" an event or a transaction as etraordinar"%1. *nusual in nature6. Infre9uent in occurrence, tain( into account the

environment in which the compan" operatesii. &vents and transactions that are not etraordinar" items

1. Write+down or write+oB of receiva!les, inventories, etc.6. >ains or losses from echan(es or translation of forei(n

currencies4. >ains or losses from the disposal of !usiness components3. Dther (ains or losses from the sale or a!andonment of

propert", plant, or e9uipment5. &Bects of a strieK. 'dustment of accruals on lon(+term contracts8. &Bects of a terrorist attac

chapthe income statement and the statement of cash flowster 5.docx

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