Inc. stat - 1 Income Statement & Related Issues

Inc. stat - 2 INCOME STATEMENT “Single-Step”  Two broad sections –Revenues and Gains –Expenses and Losses  Net income  Earnings per share  Only one major step involved in computing “Income from Continuing Operations”

Inc. stat - 3 Income Statement (Single-Step) Expenses & Losses { Revenues & Gains { Proper Heading {

Inc. stat - 4 INCOME STATEMENT “Multiple-Step”  Operations section –Gross margin (Sales - Cost of goods sold) –Operating expenses  Other items (nonoperating) = Income from continuing operaions  “Special items”  Net income - “the bottom line”  Earnings per share

Inc. stat - 5 Income Statement (Multiple-Step) Operations Other Special items

Inc. stat - 6 INCOME STATEMENT “Multiple-Step”  Items governed by specific accounting standards –Within “Income from continuing operations” Unusual OR infrequent gains and losses –Below “Income from continuing operations” Discontinued Operations Extraordinary items Cumulative effect of “Changes in Accounting Principles”

Inc. stat - 7 but not both  Some events are unusual or infrequent, but not both. –For example: restructuring charges. gain or loss from the sale of assets. I wonder how I should report these items. Reporting Unusual OR Infrequent Items

Inc. stat - 8 I wonder how I should report these items. Reporting Unusual OR Infrequent Items Psst! Why don’t you try reporting them in Income from Operations? NOT reported net of tax!

Inc. stat - 9 Extraordinary Items APB Opinion No. 30  Material in amount. unusual in nature infrequent in occurrence  Gains or losses that are both unusual in nature and infrequent in occurrence. –Considering the “environment”

Inc. stat - 10 Extraordinary gains and losses, discontinued operations and cumulative effect of changes in accounting principle are... v Reported separately on the income statement. net of any related taxes v Shown net of any related taxes. APB OPINION NO. 30

Inc. stat - 11  Specific extraordinary items identified in the pronouncement –The direct result of a major casualty (such as an earthquake). –An expropriation. –A prohibition under a newly enacted law or regulation that clearly meets both criteria. Extraordinary Items

Inc. stat - 12 During 19X8, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income from continuing operations of $128,387. All gains and losses are subject to a 30% tax rate. How would this item appear on the 19X8 income statement? Extraordinary Items Example

Inc. stat - 13 Income Statement Presentation: Extraordinary Items Example

Inc. stat - 14 Reporting Accounting Changes  Change in estimates  Change in accounting principle  Change in reporting entity

Inc. stat - 15 Change in Estimates  Revision of a previous accounting estimate.  The new estimate should be used in the current and future periods.  The prior accounting results should not be disturbed - per APB Opinion No. 20.

Inc. stat - 16 Record depreciation expense of $4,200 for 19X8 and subsequent years. Change in Estimates Example

Inc. stat - 17 Change in Accounting Principle  Occurs when changing from one GAAP method to another GAAP method –For example, a change from LIFO to FIFO  Voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ comparative financial statements.  Changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in accounting estimate.

Inc. stat - 18 Let’s move on to a few final topics.

Inc. stat - 19 Other Topics  Earnings Per Share.  Statement of Retained Earnings.  Prior Period Adjustments.

Inc. stat - 20 Earnings Per Share APB Opinion No. 15 Generally computed as follows: Report per share data on: Income before extraordinary items Net income

Inc. stat - 21  Corrections of errors from a previous period. Statement of Retained Earnings  Appear on the Statement of Retained Earnings as an adjustment to beginning retained earnings. net of income taxes  Must show the adjustment net of income taxes. Prior Period Adjustments

Inc. stat - 22 Prior Period Adjustments Example While reviewing the depreciation entries for 19X5-19X8, the controller found that in 19X7 depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. Net income for 19X8 was $128,387 and dividends were $50,000. All items are taxed at 30%. The 1/1/X8 balance in retained earning was $575,000. Prepare the necessary journal entry in 19X8 to correct this prior period error.

Inc. stat - 23 To correct this entry, can we just reverse it? Why or why not? To correct this entry, can we just reverse it? Why or why not? Prior Period Adjustments Example

Inc. stat - 24 We can debit Accumulated Depreciation since it is a permanent account. Prior Period Adjustments Example

Inc. stat - 25 We can’t credit Depreciation Expense since it was closed to Income Summary and then to Retained Earnings. We can’t credit Depreciation Expense since it was closed to Income Summary and then to Retained Earnings. Prior Period Adjustments Example

Inc. stat - 26 Remember to consider the tax effects: $25,000 × 30% = $7,500 taxes payable Prior Period Adjustments Example

Inc. stat - 27 Retained Earnings Statement Example

Inc. stat - 28 YOURS... OH NO! Whose Idea was this?

Inc. stat - 29 DISCONTINUED OPERATIONS  SFAS No. 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets”  Long-Lived Assets to Be Disposed Of by Sale –Criteria for recognition –Measurement –Reporting –Disclosures

Inc. stat - 30 LONG-LIVED ASSETS TO BE DISPOSED OF BY SALE  “Component” of an entity –Operations and cash flows clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity –Reportable segment, operating segment, reporting unit, subsidiary, or an asset group

Inc. stat - 31 LONG-LIVED ASSETS TO BE DISPOSED OF BY SALE Period of Recognition  Management commits to sell  Assets are available for immediate sale in present condition  Active program to locate buyer  Sale is probable within one year  Assets being marketed at reasonable price  Unlikely significant changes to selling plan will be made, or plan withdrawn

Inc. stat - 32 LONG-LIVED ASSETS TO BE DISPOSED OF BY SALE Measurement of Assets  Assets (or group) valued at lower of carrying amount or (FMV – Costs to sell) –Loss - recognized in current period –Gains - recognized in subsequent period (only to extent of previous losses – until realized)  Long-Lived assets no longer depreciated or amortized

Inc. stat - 33 DISCONTINUED OPERATIONS Reporting Requirements  Results of operations for component reported as “Discontinued Operations” if: –Operations and cash flows have been eliminated from ongoing operations –Entity will not have significant continuing involvement after disposal transaction  Discontinued Operations includes: –Results of operations (Component) in current period –Gain or loss on disposal of segment based on valuation of component  In subsequent periods, adjustments to previously recorded amounts