The Income Statement and the Statement of Cash Flows C hapter 5 COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai

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<ul><li> Slide 1 </li> <li> The Income Statement and the Statement of Cash Flows C hapter 5 COPYRIGHT 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai Bazley Jones An electronic presentation By Norman Sunderman and Kenneth Buchanan Angelo State University </li> <li> Slide 2 </li> <li> 2 Capital Maintenance Concept Under this concept, corporate income for a period of time is the amount that may be paid to stockholders during that period and still enable the corporation to be as well off at the end of the period as it was at the beginning. Concepts of Income </li> <li> Slide 3 </li> <li> 3 Transactional Approach Under this concept, a company records its net assets at their historical cost, and it does not record changes in the assets and liabilities unless a transaction, event, or circumstance has occurred that provides reliable evidence of a change in value. The transactional approach to income measurement is used in accounting today. Concepts of Income </li> <li> Slide 4 </li> <li> 4 Transactional Approach A corporations net income for an accounting period currently is measured as follows: Net income = Revenues Expenses + Gains Losses Concepts of Income </li> <li> Slide 5 </li> <li> 5 Purposes of the Income Statement 1.To help evaluate management's past performance. 2.To help predict the companys future income and cash flows. 3.To help assess the companys creditworthiness. 4.To help in comparisons with other companies. </li> <li> Slide 6 </li> <li> 6 General Conceptual Reporting Guidelines 1.Providing information about its operating performance separately from other aspects of performance. 2.Presenting the results of significant activities or events that predict the amounts, timing, and uncertainty of its future income and cash flows. ContinuedContinued The FASB suggests that a companys income statement can be improved by: </li> <li> Slide 7 </li> <li> 7 3.Providing information useful for assessing the return on investment. 4.Providing feedback that enables users to assess their previous predictions of income and its components. 5.Providing information to help assess the cost of maintaining its operating capability. 6.Presenting information about how effectively management has discharged its stewardship responsibilities regarding the companys resources. General Conceptual Reporting Guidelines </li> <li> Slide 8 </li> <li> 8 1.Those items that are judged to be unusual in amount based on past experience should be reported separately. 2.Revenues, expenses, gains, and losses that are affected in different ways by changes in economic conditions should be distinguished from one another. ContinuedContinued Specific Conceptual Reporting Guidelines More specific guidelines may aid in decisions about how to report revenues, expenses, gains, and losses: </li> <li> Slide 9 </li> <li> 9 3.Sufficient detail should be given to help understand the primary relationships among revenues, expenses, gains, and losses. 4.When the measurements of revenues, expenses, gains, or losses are subject to different levels of reliability, they should be reported separately. 5.Items whose amounts must be known for the calculation of summary indicators (e.g., rate of return) should be reported separately. Specific Conceptual Reporting Guidelines </li> <li> Slide 10 </li> <li> 10 The comprehensive income would be separated into at least three categories: business activities, financing activities, and other gains and losses Extraordinary items (net of taxes) would be included in each of the categories to which they relate Income taxes would be presented as a separate classification after the categories A subtotal called net income (loss) from continuing operations would be presented after the income taxes section FASB Proposed Statement of Comprehensive Income </li> <li> Slide 11 </li> <li> 11 The effects of discontinued operations (net of taxes) would be presented as a separate category below the net income (loss) from continuing operations Items of other comprehensive income (if any) would be included in a category below discontinued operations FASB Proposed Statement of Comprehensive Income The FASB and the IASB have made a tentative decision that a single statement of comprehensive income would be required, including a subtotal for net income. </li> <li> Slide 12 </li> <li> 12 Revenues are inflows of (increases in) assets of a company or settlement of its liabilities during a period Revenues </li> <li> Slide 13 </li> <li> 13 from delivering or producing goods, rendering services, or other activities that are the companys ongoing major or central operations. Revenues </li> <li> Slide 14 </li> <li> 14 Recognition is the process of formally recording and reporting an item in a companys financial statements when they are earned. Revenue Recognition </li> <li> Slide 15 </li> <li> 15 A company usually recognizes revenue at the time goods are sold or services are rendered. Revenue Recognition </li> <li> Slide 16 </li> <li> 16 Expenses are outflows of (decreases in) assets of a company or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that are the companys ongoing major or central operations. Expenses </li> <li> Slide 17 </li> <li> 17 Expense Recognition 1.Association of Cause and Effect (cost of products sold and sales commissions) 2.Systematic and Rational Allocation (depreciation) 3.Immediate Recognition (period costs) The FASB has identified three expense recognition principles to properly match expenses against revenues: </li> <li> Slide 18 </li> <li> 18 Cost: Asset or Expense Transaction Cost ContinuedContinued If a cost results in an economic resource providing future benefits, record it as an... AssetAsset </li> <li> Slide 19 </li> <li> 19 If a cost is a result of providing goods or services in a time period, record it as an... ExpenseExpense Transaction Cost Cost: Asset or Expense </li> <li> Slide 20 </li> <li> 20 If the benefits have been used up, the asset is charged off to an expense. Cost: Asset or Expense </li> <li> Slide 21 </li> <li> 21 Gains and Losses Gains and losses relate to peripheral or incidental activities or to the effects of other events and circumstances. They are reported net (not net of tax) in contrast to revenues and expenses, which are reported gross. </li> <li> Slide 22 </li> <li> 22 1.Income from continuing operations a.Sales revenue (net) b.Cost of goods sold c.Gross profit d.Operating expenses e.Income from operations f.Other items g.Income from continuing operations before tax h.Income tax expense related to continued operations i.Income from continuing operations Income Statement Content </li> <li> Slide 23 </li> <li> 23 2.Results from discontinued operations a.Income (loss) from operations of discontinued components (net of income taxes) b.Gain (loss) from disposals of discontinued components (net of income taxes. a.Income (loss) from operations of discontinued components (net of income taxes) b.Gain (loss) from disposals of discontinued components (net of income taxes. Income Statement Content </li> <li> Slide 24 </li> <li> 24 3.Extraordinary items (net of income taxes) 4.Net income 5.Earnings per share Income Statement Content Thats it! </li> <li> Slide 25 </li> <li> 25 Operating Expenses Operating expenses are those primary recurring costs (other than cost of goods sold) incurred to generate sales revenue. </li> <li> Slide 26 </li> <li> 26 Other Items Other items includes those significant recurring items of revenue and expense that are not directly related to the primary operations of the company. </li> <li> Slide 27 </li> <li> 27 Interperiod Tax Allocation Interperiod tax allocation involves allocating a corporations income tax obligation as an expense to various accounting periods because of temporary (timing) differences between its taxable income and pretax financial income. </li> <li> Slide 28 </li> <li> 28 Intraperiod tax allocation involves allocating a corporations total income tax expense for a period to the various components of its net income, retained earnings, and other comprehensive income (if any). Intraperiod Tax Allocation </li> <li> Slide 29 </li> <li> 29 1.Income from continuing operations 2.Income (loss) from the operations of a discontinued component 3.Gain (loss) from the disposal of a discontinued component 4.Extraordinary items 5.Any items of other comprehensive income 6.Any prior adjustments Income tax expense is matched against: Intraperiod Tax Allocation </li> <li> Slide 30 </li> <li> 30 Discontinued Operations A company may decide to discontinue some of its operations and sell a component of these operations. What is a component? </li> <li> Slide 31 </li> <li> 31 Discontinued Operations A component of a company involves operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. A component may be a subsidiary, an operating segment, or an asset group. </li> <li> Slide 32 </li> <li> 32 Note that discontinued operations are reported on the income statement after the continuing operations, but before extraordinary items. Income Statement: Results from Discontinued Operations </li> <li> Slide 33 </li> <li> 33 Sale of a component. The company decides to exit the beauty care business and sells the product group. This is a sale of a component. Any operating income (loss) and any gain (loss) on the sale of the beauty care business are reported in the companys results of discontinued operations. What Is a Component? Not a sale of a component. The company decides to stay in the beauty care business but to sell the brands that are generating operating losses. This is not a sale of a component because the brands are only part of a product group. Any operating income (loss) and any gain (loss) on the sale of the brands are reported in the companys income from continuing operations. </li> <li> Slide 34 </li> <li> 34 Sale of a component. The company sells the company-owned restaurants in that region to another company. This is a sale of a component. Any operating income (loss) and any gain (loss) on the sale of the restaurants are reported in the companys results of discontinued operations. What Is a Component? Not a sale of a component. The company decides to sell the company-owned restaurants in that region to an existing franchisee. This is not a sale of a component because the company will receive franchise fees and have significant continuing involvement in the operations of the restaurants. Any operating income (loss) and any gain (loss) on the sale of the company-owned restaurants are reported in its income from continuing operations. </li> <li> Slide 35 </li> <li> 35 Sale of a component. The company decides to exit the bicycle business and sells the division. This is a sale of a component. Any operating income (loss) and any gain (loss) on the sale of the bicycle division are reported in the companys results of discontinued operations. What Is a Component? Not a sale of a component. The company decides to remain in the bicycle business but outsources the manufacturing operations and sells the related manufacturing facility. This is not a sale of a component because the manufacturing facility is only part of the bicycle division. Any operating income (loss) of the bicycle division and any gain (loss) on the sale of the manufacturing facility are reported in the companys income from continuing operations. </li> <li> Slide 36 </li> <li> 36 1.Management has committed to a plan to sell the component 2.The component is available for immediate sale in its present condition 3.Management has begun an active program to locate a buyer Held for Sale Sale in a Later Accounting Period GAAP requires that all of the following criteria be met to qualify for held for sale: </li> <li> Slide 37 </li> <li> 37 4.The sale is probable within one year 5.The component is being offered for sale at a price that is reasonable in relation to components fair market value 6.It is unlikely that management will make significant changes to the plan Held for Sale Sale in a Later Accounting Period GAAP requires that all of the following criteria be met to qualify for held for sale: </li> <li> Slide 38 </li> <li> 38 When a company classifies a component as held for sale, it records and reports the component at the lower of (1) its book value (book value of assets minus book value of liabilities) or (2) its fair value (the amount at which the assets and liabilities as a whole could be sold in a current single transaction) less any cost to sell. Sale in a Later Accounting Period </li> <li> Slide 39 </li> <li> 39 Disclosures Required by GAAP A description of the facts and circumstances leading up to the sale, and, if held for sale, the expected manner and timing of the sale The revenues and pretax income (loss) of the component included in its operating income (loss) reported in the results from discontinued operations section of the companys income statement ContinuedContinued Disclosures </li> <li> Slide 40 </li> <li> 40 If not separately reported on its income statement, the gain (loss) on the sale and the caption on the income statement that includes the gain (loss) If not separately reported on its balance sheet, the book value of the major classes of assets and liabilities Disclosures Required by GAAP Disclosures </li> <li> Slide 41 </li> <li> 41 Extraordinary Items Unusual nature the underlying event or transaction possesses a high degree of abnormality and is of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company. An extraordinary item is an event or transaction that is both unusual in nature and infrequent in occurrence. </li> <li> Slide 42 </li> <li> 42 Extraordinary Items Infrequency of occurrence the underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future. An extraordinary item is an event or transaction that is both unusual in nature and infrequent in occurrence. </li> <li> Slide 43 </li> <li> 43 Extraordinary Items An extraordinary item is an event or transaction that is both unusual in nature and infrequent in occurrence. Unusual nature the unusual nature criterion depends upon the environment in which a company operates. An event may be unusual in nature for one company but not another. </li> <li> Slide 44 </li> <li> 44 One other item is required to be reported as an extraordinary item. As prescribed by GAAP, when a company purchases another company and pays less than the fair value of the net assets of the other company, it reports the difference as an extraordinary gain. Extraordinary Items </li> <li> Slide 45 </li> <li> 45 1.The write-down or write-off of receivables, inventories, equipment leased to others, or intangible assets 2.Gains or losses from exchanges or translation of foreign currencies 3.Gains or losses from the dispos...</li></ul>