The Income Statement and Statement of Cash Flows Sid Glandon, DBA, CPA Associate Professor of Accounting

Comprehensive Income Total change in equity EXCLUDING transactions with owners

Other Comprehensive Income Comprehensive Income –Change in equity as a result of non-owner transactions –Net income, plus (minus) –Other Comprehensive Income Unrealized gains/losses Foreign currency translations Presentation –Extension of income statement –Statement of comprehensive income –Statement of shareholders’ equity

Elements of the Income Statement Operating income –Revenues –Expenses Other income (expense) –Gains –Losses

Multiple-Step Income Statement Separation of –Operating activities –Nonoperating activities Classification of expenses by functions –matches costs and expenses with related revenues

Separately Reported Items Discontinued Operations (net of tax) Extraordinary Items (net of tax)

Format: Multi-Step Income Statement Operating section Nonoperating section Income tax Discontinued operations Extraordinary items Earnings per share

Operating Section

Nonoperating Section

Separately Reported Items Reported above the line - Income from continuing operations before income tax –Unusual gains and losses (if material) Reported below the line - Income before discontinue operations and extraordinary item –Discontinued operations (net of tax) –Extraordinary items (net of tax)

Separately Reported Items Reported Below the Line

Intra-Period Tax Allocation Income from operations Discontinued operations Extraordinary items

Earnings Per Share (EPS) Reported on the face of the income statement –Income before discontinued operations and extraordinary items –Separately reported items Discontinued operations (net of tax) Extraordinary items (net of tax) –Net income EPS calculation –[Net income less preferred dividends] ÷ [weighted average of common shares outstanding]

EPS

Accounting Changes Change in accounting principle Change in estimate Change in reporting entity

Change in Accounting Principle Accounted for retrospectively –Revise prior years’ financial statements Note: that a change in amortization, depreciation or depletion method is a change in accounting principle, but is reported as a change in accounting estimate.

Change in Accounting Estimate Accounted for prospectively –Adjust current and future years Estimates include: –Amortization –Depreciation –Depletion –Bad debt expense

Change in Reporting Entity Accounted for retrospectively –Revise prior years’ financial statements

Correction of Accounting Errors Required a prior period adjustment to retained earnings Made to the earliest period reported in the comparative financial statements

Retained Earnings Statement Beginning balance Prior period adjustment –correction of an error in the financial statements of a prior period Income or loss Dividends Ending balance

Statement of Cash Flows Operating activities Investing activities Financing activities Separately reported –Non-cash investing and/or financing activities

Methods of Presenting Cash Flows from Operating Activities Direct method Indirect method –Reconciliation of net income to cash flows

Indirect Method of Reporting Cash Flows from Operating Activities Net income –Plus: Non cash charges Increases in current liabilities Decreases in current assets –Less: Increases in current assets Decreases in current liabilities –Plus: losses from investing or financing activities –Less: gains from investing or financing activities –Net cash provided by (used by) operating activities