4-1 4 Income Statement and Related Information

4-2 Format 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.  Sales  Fee revenue  Interest revenue Examples of Revenue Accounts Elements of the Income Statement  Dividend revenue  Rent revenue

4-3 Format 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 Elements of the Income Statement  Cost of goods sold  Depreciation expense  Interest expense  Rent expense  Salary expense

4-4 Format of the Income Statement Gains and losses can result from  sale of investments or plant assets,  settlement of liabilities,  write-offs of assets. 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.

4-5 Evaluate past performance. Income Statement Help assess the risk or uncertainty of achieving future cash flows. Predicting future performance. Usefulness

4-6 Companies omit items that cannot be measured reliably. Income Statement Limitations Income measurement involves judgment. Income is affected by the accounting methods employed.

4-7 Single-Step Format Revenues Expenses Net Income Single- Step No distinction between Operating and Non-operating categories. Single-Step Income Statement

4-8  Separates operating transactions from non-operating transactions.  Highlights certain intermediate components of income that analysts use. Multiple-Step Income Statement Format of the Income Statement

4-9 1.Operating section 2.Non-operating section 3.Income tax Multiple-Step Format Intermediate Components of the Income Statement

4-10 Multiple-Step Format The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax

4-11 Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company. Reporting Irregular Items Irregular items fall into six categories: 1.Discontinued operations. 2.Extraordinary items. 3.Unusual gains and losses. 4.Changes in accounting principle. 5.Changes in estimates. 6.Corrections of errors.

4-12 Occurs when, (a)company eliminates the  results of operations and  cash flows of a component. (b)there is no significant continuing involvement in that component. Amount reported “net of tax.” Reporting Irregular Items Discontinued Operations

4-13 Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities. Extraordinary Item must be both of an  Unusual Nature and  Occur Infrequently Examples: gain or losses from casualties or resulting from a new law/prohibition of an existing law Amount reported “net of tax.” Reporting Irregular Items

4-14 Reporting when both Discontinued Operations and Extraordinary Items are present. Discontinued Operations Extraordinary Items Reporting Irregular Items

4-15 Material items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.” Not shown net of tax. Examples can include:  Write-downs of inventories  Foreign exchange transaction gains and losses Reporting Irregular Items Unusual Gains and Losses

4-16  Recast prior years’ income statements on the same basis as the newly adopted principle.  Approach preserves comparability.  Examples include: ► change from FIFO to average cost. Reporting Irregular Items Changes in Accounting Principles

4-17  Accounted for in the period of change and future periods.  Show change only in the affected accounts.  Not shown net of tax  Examples include: ► Useful lives and salvage values of depreciable assets. ► Allowance for uncollectible receivables. ► Inventory obsolescence. Reporting Irregular Items Changes in Estimate

4-18  Result from: ► mathematical mistakes. ► mistakes in application of accounting principles. ► oversight or misuse of facts.  Restate prior years’ income statements to correct for error. Reporting Irregular Items Corrections of Errors

4-19 Relates the income tax expense to the specific items that give rise to the amount of the tax expense. Income tax is allocated to the following items: (1)Income from continuing operations before tax. (2) Discontinued operations. (3) Extraordinary items. Special Reporting Issues Intraperiod Tax Allocation

4-20 Increase  Net income  Change in accounting principle  Error corrections Decrease  Net loss  Dividends  Change in accounting principles  Error corrections Retained Earnings Statement Special Reporting Issues