Chapter 13 – Corporate Income Statement and the Statement of Stockholders ’ Equity

Comprehensive Income All-inclusive All-inclusive Change in a company’s equity from sources other than owners during a period. It includes the following: Change in a company’s equity from sources other than owners during a period. It includes the following: Net income Net income Changes in unrealized investment gains/losses Changes in unrealized investment gains/losses Foreign currency translation adjustments Foreign currency translation adjustments How is it shown (based on 600 large co’s) How is it shown (based on 600 large co’s) On the statement on the statement of stockholders’ equity (81%) On the statement on the statement of stockholders’ equity (81%) Separate statement (13%) Separate statement (13%) On the income statement (6%) On the income statement (6%)

Net Income Includes all revenues, expenses, gains, and losses over the period reported Includes all revenues, expenses, gains, and losses over the period reported Sections Sections Operating (recurring items) Operating (recurring items) Income taxes (recurring items) Income taxes (recurring items) Nonoperating (not recurring in some instances) Nonoperating (not recurring in some instances) Discontinued operations Discontinued operations Extraordinary gains/losses Extraordinary gains/losses Effects of accounting changes Effects of accounting changes

Quality of earnings The quality of net income or the substance of earnings and is this number useful for future predictions? For example 2 companies in the same industry may have comparable earnings quantity, but not comparable earnings quality based on the methods or estimates each one uses since GAAP may allow several methods to be used The existence of alternatives or different methods can cause problems in comparability between firms Behind the financial statements are the notes that may explain the methods used

Accounting Estimates Considerable latitude or choice on which estimate management decides to use may have an impact on operating income Examples: % of uncollectable accounts % of uncollectable accounts Inventory method (LIFO vs FIFO) Inventory method (LIFO vs FIFO) Useful life for depreciation Useful life for depreciation Salvage value Salvage value Amortization period Amortization period

Consistency Requires that the same accounting procedures be used from year to year and if a change is made the nature of the change and the monetary change must be explained in a note to the financial statements

Gains and losses Results from sales or disposes of assets or marketable securities Results from sales or disposes of assets or marketable securities Appear in the operating portion Appear in the operating portion Usually one-time events Usually one-time events Are not sustainable Are not sustainable Not ongoing Not ongoing Management has choice of timing Management has choice of timing Should not be considered operating income Should not be considered operating income

Write-downs of assets (impairments) If the value of an asset declines or impaired If the value of an asset declines or impaired Write-down the value Write-down the value Restructuring of a facility or branch Restructuring of a facility or branch Recording estimated costs associated with a change in a company’s operations Recording estimated costs associated with a change in a company’s operations Closing the facility Closing the facility Laying off personnel Laying off personnel Write-downs or restructuring reduce current income by increasing expense and increases future income Write-downs or restructuring reduce current income by increasing expense and increases future income

Income Taxes Expense Taxable income (per IRS) Taxable income (per IRS) IRS determines what business expenses maybe deducted and may differ per GAAP IRS determines what business expenses maybe deducted and may differ per GAAP 2 sets of accounting records may occur if IRS and GAAP conflict on expenses and revenues that can be reported 2 sets of accounting records may occur if IRS and GAAP conflict on expenses and revenues that can be reported Purpose of accounting is to determine net income in accordance with GAAP Purpose of accounting is to determine net income in accordance with GAAP Differences between tax payable and tax expense result in timing differences Differences between tax payable and tax expense result in timing differences

Differences between GAAP and IRS GAAP IRS Expense accrual/deferral date paid Accts Rec Allowance direct chargeoff Inventories Average-cost FIFO Depreciation straight-linemodified ACRS

Income Tax Allocation Accounting method used to accrue income taxes expense Accounting method used to accrue income taxes expense Deferred income taxes Deferred income taxes Account used to record the differences between the income tax expense and the income tax payable Account used to record the differences between the income tax expense and the income tax payableExample: Income tax expense (GAAP) 144,500 Income tax payable (IRS) 92,000 Income tax payable (IRS) 92,000 Deferred income tax (diff) 52,500 Deferred income tax (diff) 52,500

Net of taxes Phase used on the income statement to notate that the figure shown is net of taxes Phase used on the income statement to notate that the figure shown is net of taxes Example: Example: Extraordinary gain (net of taxes, 30,000) Extraordinary gain (net of taxes, 30,000)

Discontinued Operations Segments of a business that no longer part of the ongoing operations Segments of a business that no longer part of the ongoing operations Gains/losses from these operations are shown separately on the income statement Gains/losses from these operations are shown separately on the income statement Present the income from the segment Present the income from the segment Present the gain/loss from the disposal of the segment Present the gain/loss from the disposal of the segment

Extraordinary items Events or transactions that are distinguished by their unusual nature and by the infrequency of their occurrence Events or transactions that are distinguished by their unusual nature and by the infrequency of their occurrence Examples: Examples: Uninsured loss from flood Uninsured loss from flood Earthquake Earthquake New law New law Property taken by a foreign government Property taken by a foreign government

Accounting Changes A company is allowed to make accounting changes if current procedures are incorrect or inappropriate A company is allowed to make accounting changes if current procedures are incorrect or inappropriate Cumulative effect of an accounting change is the effect the new principle would have on the net income in prior periods Cumulative effect of an accounting change is the effect the new principle would have on the net income in prior periods Relevant information is shown in the notes to the financial statements Relevant information is shown in the notes to the financial statements

Statement of Comprehensive Income Income Statement For Year Ended Dec. 31, 20xx Revenues xxx Expenses xxx Other gains and losses xxx Income before tax xxx Income tax expense xxx Net income xxx Statement of Comprehensive Income For Year Ended Dec. 31, 20xx Net incomexxx Foreign currency translation adjustmentxxx Unrealized holding gains/lossesxxx Minimum pension liability adjustmentxxx Other comprehensive incomexxx Comprehensive incomexxx Comprehensive income – the total change in net assets from all sources except investments by or distributions to the owners