Financial Statement Analysis K R Subramanyam John J Wild

Income Statement 6 CHAPTER

Income Statement To list sources of revenues and expenses incurred in a period. Main components: Revenues (gains) Expenses (losses) Net income

Revenue recognition To be the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increase in equity, other than increases relating to contributions from equity participants. To be recognized when earned and payment is assured.

Expenses recognition To be the gross outflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those outflows result in decrease in equity, other than decreases relating to withdraws from equity participants. To be recognized matching with revenue generated.

Revenues vs. Gains Revenues Gains To be earned inflows or prospective inflows of cash from operations. To be expected to recur. To be recognized inflows or prospective inflows of cash from non-operations. To be non-recurring.

Expenses vs. Losses Expenses Losses To be incurred outflows, prospective outflows, or allocations of past outflows of cash from operations. To be decreases in a company’s net assets arising from non-operations. Expenses and losses are resources consumed, spent, or lost in pursuing revenues and gains .

Components of Net Income Operating income Continued operations Discontinued operations Non-operating income Accounting changes Extra-ordinary items Restructuring charges Special items What is recurring? What is non-recurring?

During the September 11, 2001 terrorist attacks, two of the four airplanes hijacked and crashed by al-Qaeda members were United Airlines aircraft. After attempts to secure additional capital failed, UAL Corporation filed for Chapter 11 bankruptcy protection in December 2002 .

Alternatives Income Measures • Net income—widely regarded as “bottom line” measure of income • Comprehensive income--includes most changes to equity that result from non-owner sources • Continuing income--excludes extraordinary items, cumulative effects of accounting changes, and the effects of discontinued operations from net income • Core income--excludes all non-recurring items from net income Other comprehensive income:; it is actually the bottom line measure of income; is the accountant’s proxy for economic income +/- Unrealized holding gain or loss on marketable securities +/- Foreign currency translation adjustment +/- Postretirement benefits adjustment +/- Unrealized holding gain or loss on derivative instruments 2 2