Chapter 4: CONTINUED INCOME STATEMENT AND RELATED INFORMATION Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial Accounting.

Discussion Question Q4-12 What is the basis for distinguishing between operating and nonoperating items?

Discussion Question Q4-30 On January 30, 2013, a suit was filed against Frazier Corp. under the EPA. On August 6, 2014, Fraizer agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2014 financial statements?

Reporting Irregular Items Changes in Accounting Principles Changes in Estimate Corrections of Errors

Earnings Per Share Disclosure One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis. Basic EPS Diluted EPS Net income less preferred dividends Weighted-average number of common shares outstanding for the period Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised. Part I One of the most widely used ratios is earnings per share, which shows the amount of income earned by a company expressed on a per share basis. Companies report both basic and diluted earnings per share. Part II Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Part III Diluted earnings per share reflects the potential for dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised

P&G’s Income Statement

Special Reporting Issues Earnings Per Share (BE4-8): In 2014, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2014, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2014 earnings per share. Net income - Preferred dividends Weighted average number of shares outstanding $1,000,000 - $250,000 = $3.95 per share 190,000

Special Reporting Issues Illustration 4-19 Divide by weighted-average shares outstanding EPS

Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. Loss on inventory write-down. Loss from strike.

Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. Bad debt expense. Loss on disposal of a component of the business. Gain on sale of machinery.

Discussion Question Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown. Interest revenue. Depreciation Expense. Material write-offs of notes receivable.

Special Reporting Issues Retained Earnings Statement Increase Decrease Net income Change in accounting principle Error corrections Net loss Dividends Change in accounting principles Error corrections

Special Reporting Issues Restrictions on Retained Earnings Disclosed In notes to the financial statements. As Appropriated Retained Earnings.

Understanding Equity Beginning equity + Received from owners – Distributed to owners (other than dividends) – Dividends declared + Net income (or – net loss) + Other comprehensive income = Ending equity Contributed capital Comprehensive income Retained earnings On Income Statement Accum OCI Not on Income Statement If OCI = 0, earnings are “clean surplus” else they are “dirty surplus”.

Comprehensive Income Weird stuff An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements. Net unrealized holding gains (losses) from investments (net of tax). Gains and losses due to reviewing assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan. When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction. Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity. Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Comprehensive income includes net income as well as other gains and losses that change shareholders’ equity but are not included in traditional net income.

+ Comprehensive Income Other Comprehensive Income Unrealized gains and losses on available-for-sale securities. Translation gains and losses on foreign currency. Plus others + Reported in Stockholders’ Equity

Accumulated Other Comprehensive Income In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity. In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity. In this example, Jabil Circuits Inc. reports Accumulated Other Comprehensive Income of $171 million and $110 million for years 2007 and 2006, respectively.

Special Reporting Issues Companies must display the components of other comprehensive income in one of three ways: A second separate income statement; A combined income statement of comprehensive income; or As part of the statement of stockholders’ equity

Special Reporting Issues Comprehensive Income Illustration 4-19 Second income statement LO 8

P&G’s Statement of Comprehensive Income

Special Reporting Issues Comprehensive Income Combined statement LO 8

Special Reporting Issues Comprehensive Income – Statement of Stockholder’s Equity Illustration 4-26

Special Reporting Issues Comprehensive Income – Balance Sheet Presentation Illustration 4-27 Presentation of Accumulated Other Comprehensive Income in the Balance Sheet Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.

Example 1 Bryant Co. reports the following information for 2012: Sales revenue $750,000 Cost of goods sold $500,000 Operating expenses $ 80,000 Unrealized holding loss on available-for-sale securities $ 50,000 Bryant declared and paid a cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012. Prepare a statement of stockholders’ equity.

Example 1

IFRS Insights RELEVANT FACTS 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. Extraordinary items are prohibited under IFRS. Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the U.S. SEC requires a functional presentation. 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 Insights RELEVANT FACTS 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. Both GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest. 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.

IFRS Insights RELEVANT FACTS Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. GAAP provides three possible formats for presenting this information: single income statement, combined statement of comprehensive income, in the statement of stockholders’ equity. Most companies that follow GAAP present this information in the statement of stockholders’ equity. IFRS allows a separate statement of comprehensive income or a combined statement. Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is 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.

E4-17B The following information was taken from the records of Cantu Inc. for the year 2014. Income tax applicable to income from continuing operations $261,800; income tax applicable to loss on discontinued operations $35,700; income tax applicable to extraordinary gain $45,220; income tax applicable to extraordinary loss $28,560; and unrealized holding gain on available-for-sale securities $21,000. Extraordinary gain $133,000 Loss on disc ops 105,000 Admin expenses 336,000 Rent revenue 56,000 Extraordinary loss 84,000 Shares outstanding during 2014 were 100,000. (a) Prepare a multiple-step income statement for 2014, (b) prepare a retained earnings statement for 2014 and (c) show how comprehensive income is reported using the one statement format. Cash dividends declared $210,000 Ret earnings, 1/1/2014 840,000 Cost of goods sold 1,190,000 Selling expenses 420,000 Sales 2,660,000

E4-17B

E4-17B