Income Statement and Related Information

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Presentation transcript:

Income Statement and Related Information Chapter 4 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara

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 Look page 129

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.

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. McDonald's example 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: Net Sales Revenues Expenses Net Income Single- Step No distinction between Operating and Non-operating categories. LO 2 Prepare a single-step income statement.

Single-Step Income Statement Review The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items more than it is emphasized in the multiple-step income statement. d. the various components of income from continuing operations. LO 2 Prepare a single-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 of income that analysts use. Look page 131, 132,133

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.

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.

Reporting Irregular Items Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company. Illustration 4-5 Number of Irregular Items Reported in a Recent Year by 600 Large Companies LO 4 Explain how to report irregular items.

Reporting Irregular Items Irregular items fall into six categories Discontinued operations. Extraordinary items. Unusual gains and losses. Changes in accounting principle. Changes in estimates. Corrections of errors. LO 4 Explain how to report irregular items.

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 Exercise: McCarthy Corporation had after tax income from continuing operations of $55,000,000 in 2007. During 2007, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in 2007. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Income from continuing operations $55,000,000 Discontinued operations: Loss from operations, net of $135,000 tax 315,000 Loss on disposal, net of $81,000 tax 189,000 Total loss on discontinued operations 504,000 Net income $54,496,000 Look another illustration (4-6) page 136

Reporting Discontinued Operations Discontinued Operations are reported after “Income from continuing operations.” Previously labeled as “Net Income”. Moved to LO 4 Explain how to report irregular items.