The Income Statement and Comprehensive Income Intermediate Accounting I Chapter 4 This presentation is under development.

INCOME STATEMENT   The income statement displays a company’s operating performance during a particular reporting period. Single-step – lists all revenues and gains grouped together and all expenses and losses grouped together. The advantage of the single-step income statement is simplicity of preparation  Multiple-step – includes a series of intermediate subtotals An advantage of the multiple-step income statement is that it separates operating and nonoperating items and allows for better analysis of income and expense items.

Single-step Income Statement MAXWELL GEAR CORPORATION Income Statement For the Year Ended December 31, 2013 Revenues and gains:   Sales $573,522 Interest and dividends 26,400 Gain on sale of investments 5,500 Total revenues and gains 605,422 Expenses and losses: Cost of goods sold $302,371 Office salaries 47,341 Depreciation 24,888 Miscellaneous 16,300 Interest 14,522 Total expenses and losses 405,422 Income before income taxes 200,000 Income tax expense 80,000 Net income $120,000

Multiple-step Income Statement MAXWELL GEAR CORPORATION Income Statement For the Year Ended December 31, 2013 Sales revenue   $573,522 Cost of goods sold 302,371 Gross profit 271,151 Operating expenses: Selling Expenses $47,341 General and Administrative Expenses 24,888 Restructuring Costs 16,300 Total operating expenses 88,529 Operating income 182,622 Other income (expense): Interest and dividend revenue 26,400 Gain on sale of investments 5,500 Interest expense (14,522) Total other income, net 17,378 Income before income taxes 200,000 Income tax expense 80,000 Net income $120,000

The Income Statement: Income from Continuing Operations    Includes revenues, expenses, gains, and losses that will probably continue in future periods. Gross profit is Sales less Cost of Goods Sold. Income tax expense is shown as a separate expense. A distinction is often made between operating and nonoperating income. Revenue – inflows of resources resulting from providing goods or services to customers Expenses – outflows of resources incurred in generating revenue Gain – increase in equity from peripheral or incidental transactions Loss – decrease in equity from peripheral or incidental transactions

Operating vs. Nonoperating Income Includes revenues and expenses directly related to the primary revenue-generating activities of the company. Sales revenue Services income Gains and losses from selling operating assets Nonoperating Income (Other Income) Relates to peripheral or incidental activities of the company Gains and losses from selling investments Interest Revenue and Expense Brief Exercise 4-2

EARNINGS QUALITY   The ability of reported earnings to predict a company’s future earnings. To enhance predictive value, analysts try to separate a company’s permanent earnings effects from its transitory earnings (result from transactions or events that are not likely to occur again in the foreseeable future.) Not all items included in operating income should be considered indicative of a company’s permanent earnings. Restructuring costs include costs associated with shutdown or relocation of facilities or downsizing of operations. GAAP requires these costs to be expensed in the period(s) incurred. Asset impairment losses, inventory write-down charges, losses from natural disasters such as earthquakes and floods, and gains and losses from litigation settlements are other operating expenses that call into question the issue of earnings quality.

Restructuring Costs Costs associated with   Costs associated with Reorganizing operations for greater efficiency Shutdown or relocation of facilities Downsizing of operations Reported as a separate line item in operating income Recognized only in the period incurred Disclosure notes should describe the situation Exercise 4-5

Discontinued Operations   Involves the disposal or planned disposal of a component of an entity. A component is any part of the company, such as an operating segment or subsidiary, that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.

Reporting Discontinued Operations   Reported separately below income from continuing operations Income tax expense or benefit is shown on a separate line When the component has been sold, the income effects of a discontinued operation includes (1) the operating income or loss of the component from the beginning of the reporting period to the disposal date, and (2) the gain or loss on disposal. When the component is considered held for sale, the income effects of a discontinued operation includes (1) operating income or loss of the component from the beginning of the reporting period to the end of the reporting period, and (2) any impairment loss (ignore anticipated gains). Impairment Loss: Fair Value of Assets less Cost to Sell < Book Value of Assets ADDITIONAL NOTE: The assets and liabilities of a component considered held for sale are reported separately in the balance sheet at the lower of their book value or fair value minus cost to sell.

Discontinued Operations - Sample Problem A The Duluth Holding Company has several operating divisions. In October 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles. The division was sold on December 18, 2016 for a net selling price of $14,000,000. On that date, the assets of the division had a book value of $12,000,000. For the period January 1 through disposal, the division reported a pre-tax loss from operations of $4,200,000. The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations. Income from continuing operations $22,350,000 Discontinued operations:   Loss from operations of discontinued component (2,200,000) Income tax benefit 880,000 Loss on discontinued operations (1,320,000_ Net income $21,030,000

Discontinued Operations - Sample Problem B The Duluth Holding Company has several operating divisions. In October of 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles. On December 31, 2016, the end of the company’s fiscal year, the division had not yet been sold. On that date, the assets of the division had a book value of $12,000,000 and a fair value, minus anticipated costs to sell, of $9,000,000. For the year, the division reported a pre-tax loss from operations of $4,200,000. The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations. Income from continuing operations $22,350,000 Discontinued operations:   Loss from operations of discontinued component (7,200,000) Income tax benefit 2,880,000 Loss on discontinued operations (4,320,000) Net income $18,030,000 Discontinued Segment Operating Loss $4,200,000 Impairment Loss Fair Value $9,000,000 Book Value 12,000,000 (3,000,000) Loss from operations of Discontinued Component ($7,200,000) Brief Exercise 4-7 Brief Exercise 4-8 Brief Exercise 4-9

Earnings per Share Disclosure   Earnings per share should be disclosed on the face of the income statement Calculate EPS for income from continuing operations discontinued operations net income Calculated by dividing each earnings figure by the outstanding common stock shares Brief Exercise 4-5

Comprehensive Income    Comprehensive income is the total change in equity for a reporting period other than from transactions with owners.  Comprehensive income includes net income.  Other comprehensive income includes certain items that are not part of net income.  The information in the income statement and other comprehensive income items can be presented either (1) in a single, continuous statement of comprehensive income or (2) in two separate, but consecutive statements, an income statement and a statement of comprehensive income. Examples of other comprehensive income include: Unrealized gains/losses on available-for-sale investments Unrealized gains/losses on hedge/derivative financial instruments Foreign currency translation adjustments Unrealized gains/losses on postretirement benefit plans

Other Comprehensive Income   Other comprehensive income includes certain items that are not part of net income. Items in other comprehensive income are generally unrealized gains/losses. Examples include: Unrealized gains/losses on available-for-sale investments Unrealized gains/losses on hedge/derivative financial instruments Foreign currency translation adjustments Unrealized gains/losses on postretirement benefit plans Net income $4,452 Other comprehensive income (loss) Unrealized gains from investments, net of tax 259 Loss from foreign currency translation, net of tax (203) 56 Comprehensive income $4,508 Brief Exercise 4-9 Exercise 4-4

The Income Statement and Comprehensive Income Intermediate Accounting I – Chapter 4 End of presentation