Chapter 4 Income Statement

Income Statement Usefulness of the Income Statement Evaluate past performance. Predicting future performance. Help assess the risk or uncertainty of achieving future cash flows. LO 1 Understand the uses and limitations of an income statement.

Income Statement Limitations of the Income Statement Companies omit items that cannot be measured reliably. Income is affected by the accounting methods employed. Income measurement involves judgment. LO 1 Understand the uses and limitations of an income statement.

Format of the Income Statement Elements of the Income Statement Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Examples of Revenue Accounts Sales Fee revenue Interest revenue Dividend revenue Rent revenue LO 1 Understand the uses and limitations of an income statement.

Format of the Income Statement Elements of the Income Statement Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Examples of Expense Accounts Cost of goods sold Depreciation expense Interest expense Rent expense Salary expense LO 1 Understand the uses and limitations of an income statement.

Format of the Income Statement Elements of the Income Statement Gains – Increases in equity (net assets) from peripheral or incidental transactions. Losses - Decreases in equity (net assets) from peripheral or incidental transactions. Gains and losses can result from sale of investments or plant assets, settlement of liabilities, write-offs of assets. LO 1 Understand the uses and limitations of an income statement.

Single-Step Income Statement The single-step statement consists of just two groupings: Revenues Expenses Net Income Single- Step No distinction between Operating and Non-operating categories. LO 2 Prepare a single-step income statement.

Multi-Step Income Statement

Multiple-Step Income Statement Background Separates operating transactions from nonoperating transactions. Matches costs and expenses with related revenues. Highlights certain intermediate components [or subtotals] of income that analysts use. LO 3 Prepare a multiple-step income statement.

Multiple-Step Income Statement The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax LO 3 Prepare a multiple-step income statement.

Multi-Step Income Statement Sales – Cost of goods sold = Gross profit Operating expenses: – Selling expenses – General and administrative expenses = Income from operations +/– Other revenues and expenses = Income before taxes – Income tax expense = Net income Four important subtotals 6 13 13

JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30, 2013 2012

Multiple-Step Format Illustration (E4-4): Prepare an income statement from the data below. Solution on notes page

Multiple-Step Income Statement Review A separation of operating and non operating activities of a company exists in a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement. LO 3 Prepare a multiple-step income statement.

Discontinued Operations

Discontinued Operations Shown Below Income After Taxes Before Net Income on the Income Statement

Reporting Irregular Items Discontinued Operations occurs when, (a) company eliminates the results of operations and cash flows of a component. there is no significant continuing involvement in that component. Amount reported “net of tax.” LO 4 Explain how to report irregular items.

Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.” Net of Tax LO 4 Explain how to report irregular items.

Financial Ratios to Remember *Gross Profit Margin % *Profit Margin %

Analysis of Profitability particular interest to current and potential investors Gross Profit % Profit Margin % 14 14

JC Penney, Inc. Statement of Operations In Millions For the Years Ended January 30, 2013 2012

JC Penney, Inc. - Profitability (in Millions) 2013 2012 2011 Net sales $11,859 $12,985 $17,260 Cost of sales 8,367 8,919 11,042 Gross profit $ 3,492 $ 4,006 $ 6,218 Gross profit % = 29% 31% 36% Gross Profit (Margin) % = Gross Profit Sales (How many cents on every $ of sales are left over after covering the cost of the product) 15 15

JC Penney, Inc. - Profitability (in Millions) 2013 2012 2011 Net sales $ 11,859 $12,985 $17,260 Net income $ (1,388) $ (985) $ (152) Profit margin % = - 11.7% - 7.6% -0.9% Profit Margin % = Net Income Sales (How many cents on every $ of sales are left over after covering all expenses) 16 16

Earnings Per Share

Earnings Per Share Calculation Net income - Preferred dividends Weighted average number of shares outstanding An important business indicator. Measures the dollars earned by each share of common stock. Must be disclosed on the the income statement. LO 6 Identify where to report earnings per share information.

Earnings Per Share Net income - Preferred dividends Brief Exercise 4-8 In 2014, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2014, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2014 earnings per share. Net income - Preferred dividends Weighted average number of shares outstanding $1,200,000 - $250,000 = $5.00 per share 190,000 LO 6 Identify where to report earnings per share information.

Earnings Per Share Craig Rusch Corporation reports the following information: Net income $500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 100,000 Rusch should report earnings per share of a. $3.00. b. $3.60 c. $4.40. d. $5.00.

Prior Period Adjustments Statement of Retained Earnings And Prior Period Adjustments

Prior Period Adjustments Adjustments to the Beginning Balance of Retained Earnings to correct accumulated earnings reported from prior years. Prior Period Adjustments may be reported to adjust for Changes in Accounting Principle Corrections of Errors LO 4 Explain how to report irregular items.

Retained Earnings Statement Before issuing the report for the year ended December 31, 2014, you discover a $50,000 error (net of tax) that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014? LO 7 Prepare a retained earnings statement.

Retained Earnings Statement LO 7 Prepare a retained earnings statement.

Retained Earnings Statement XMax Corporation reports the following information: Overstatement of Depreciation Expense in prior years, net of tax $ 260,000 Dividends declared 300,000 Net income 1,500,000 Retained earnings, 1/1/14, as reported 2,400,000 XMax should report beginning retained earnings, 1/1/14, as adjusted at a. $2,140,000. b. $2,400,000. c. $3,860,000. d. $2,660,000.

Comprehensive Income

+ Comprehensive Income All changes in equity during a period except those resulting from investments by owners and distributions to owners. Other Comprehensive Income + Unrealized gains and losses on available-for-sale securities. Translation gains and losses on foreign currency. Minimum Pension Liability Adjustments. Reported in Stockholders’ Equity LO 8 Explain how to report other comprehensive income.

Review Comprehensive Income Gains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income. b. other comprehensive income. c. prior period income. d. unusual gains and losses. LO 8 Explain how to report other comprehensive income.

Comprehensive Income Three approaches to reporting Comprehensive Income (SFAS No. 130, June 1997): A second separate income statement; A combined income statement of comprehensive income; or As part of the statement of stockholders’ equity LO 8 Explain how to report other comprehensive income.

Comprehensive Income Two-Statement Format for Comprehensive Income Illustration 4-19 Two-Statement Format for Comprehensive Income LO 8 Explain how to report other comprehensive income.

Comprehensive Income Combined Income Statement LO 8 Explain how to report other comprehensive income.

Comprehensive Income Statement of Stockholders’ Equity (most common) Illustration 4-20 LO 8 Explain how to report other comprehensive income.

Comprehensive Income Balance Sheet Presentation Illustration 4-21 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. LO 8 Explain how to report other comprehensive income.

Under iGAAP, companies must classify expenses by either nature or function. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements. Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. iGAAP does not mention a single-step or multiple-step approach. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under iGAAP.

Under iGAAP, companies are required to prepare as a primary financial statement either a statement of stockholders’ equity similar to the one prepared under U.S. GAAP or a statement of recognized income and expense (called a SoRIE ). Both iGAAP and U.S. GAAP have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information. iGAAP allows either the statement of stockholders’ equity approach or the SoRIE format. Under iGAAP revaluation of land, buildings, and intangible assets is permitted.