1. The Income Statement and Comprehensive Income
Intermediate Accounting I
Chapter 4
This presentation is under development.

2. INCOME STATEMENT
The income statement displays a company’s operating performance during a particular reporting period.
Single-step – lists all revenues and gains grouped together and all expenses and losses grouped together.
The advantage of the single-step income statement is simplicity of preparation 
Multiple-step – includes a series of intermediate subtotals
An advantage of the multiple-step income statement is that it separates operating and nonoperating items and allows for better analysis of income and expense items.

3. Single-step Income Statement
MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Revenues and gains:
Sales
$573,522
Interest and dividends
26,400
Gain on sale of investments
5,500
Total revenues and gains
605,422
Expenses and losses:
Cost of goods sold
$302,371
Office salaries
47,341
Depreciation
24,888
Miscellaneous
16,300
Interest
14,522
Total expenses and losses
405,422
Income before income taxes
200,000
Income tax expense
80,000
Net income
$120,000

4. Multiple-step Income Statement
MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue
$573,522
Cost of goods sold
302,371
Gross profit
271,151
Operating expenses:
Selling Expenses
$47,341
General and Administrative Expenses
24,888
Restructuring Costs
16,300
Total operating expenses
88,529
Operating income
182,622
Other income (expense):
Interest and dividend revenue
26,400
Gain on sale of investments
5,500
Interest expense
(14,522)
Total other income, net
17,378
Income before income taxes
200,000
Income tax expense
80,000
Net income
$120,000

5. The Income Statement: Income from Continuing Operations
 Includes revenues, expenses, gains, and losses that will probably continue in future periods.
Gross profit is Sales less Cost of Goods Sold.
Income tax expense is shown as a separate expense.
A distinction is often made between operating and nonoperating income.
Revenue – inflows of resources resulting from providing goods or services to customers
Expenses – outflows of resources incurred in generating revenue
Gain – increase in equity from peripheral or incidental transactions
Loss – decrease in equity from peripheral or incidental transactions

6. Operating vs. Nonoperating Income
Includes revenues and expenses directly related to the primary revenue-generating activities of the company.
Sales revenue
Services income
Gains and losses from selling operating assets
Nonoperating Income (Other Income)
Relates to peripheral or incidental activities of the company
Gains and losses from selling investments
Interest Revenue and Expense
Brief Exercise 4-2

7. EARNINGS QUALITY
The ability of reported earnings to predict a company’s future earnings.
To enhance predictive value, analysts try to separate a company’s permanent earnings effects from its transitory earnings (result from transactions or events that are not likely to occur again in the foreseeable future.)
Not all items included in operating income should be considered indicative of a company’s permanent earnings.
Restructuring costs include costs associated with shutdown or relocation of facilities or downsizing of operations. GAAP requires these costs to be expensed in the period(s) incurred.
Asset impairment losses, inventory write-down charges, losses from natural disasters such as earthquakes and floods, and gains and losses from litigation settlements are other operating expenses that call into question the issue of earnings quality.

8. Restructuring Costs Costs associated with
Costs associated with
Reorganizing operations for greater efficiency
Shutdown or relocation of facilities
Downsizing of operations
Reported as a separate line item in operating income
Recognized only in the period incurred
Disclosure notes should describe the situation
Exercise 4-5

9. Discontinued Operations
Involves the disposal or planned disposal of a component of an entity. A component is any part of the company, such as an operating segment or subsidiary, that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.

10. Reporting Discontinued Operations
Reported separately below income from continuing operations
Income tax expense or benefit is shown on a separate line
When the component has been sold, the income effects of a discontinued operation includes (1) the operating income or loss of the component from the beginning of the reporting period to the disposal date, and (2) the gain or loss on disposal.
When the component is considered held for sale, the income effects of a discontinued operation includes (1) operating income or loss of the component from the beginning of the reporting period to the end of the reporting period, and (2) any impairment loss (ignore anticipated gains).
Impairment Loss: Fair Value of Assets less Cost to Sell < Book Value of Assets
ADDITIONAL NOTE: The assets and liabilities of a component considered held for sale are reported separately in the balance sheet at the lower of their book value or fair value minus cost to sell.

11. Discontinued Operations - Sample Problem A
The Duluth Holding Company has several operating divisions. In October 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles. The division was sold on December 18, 2016 for a net selling price of $14,000,000. On that date, the assets of the division had a book value of $12,000,000. For the period January 1 through disposal, the division reported a pre-tax loss from operations of $4,200,000. The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations.
Income from continuing operations
$22,350,000
Discontinued operations:
Loss from operations of discontinued component
(2,200,000)
Income tax benefit
880,000
Loss on discontinued operations
(1,320,000_
Net income
$21,030,000

12. Discontinued Operations - Sample Problem B
The Duluth Holding Company has several operating divisions. In October of 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles. On December 31, 2016, the end of the company’s fiscal year, the division had not yet been sold. On that date, the assets of the division had a book value of $12,000,000 and a fair value, minus anticipated costs to sell, of $9,000,000. For the year, the division reported a pre-tax loss from operations of $4,200,000. The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations.
Income from continuing operations
$22,350,000
Discontinued operations:
Loss from operations of discontinued component
(7,200,000)
Income tax benefit
2,880,000
Loss on discontinued operations
(4,320,000)
Net income
$18,030,000
Discontinued Segment Operating Loss $4,200,000 Impairment Loss Fair Value $9,000,000 Book Value 12,000,000 (3,000,000) Loss from operations of Discontinued Component ($7,200,000)
Brief Exercise 4-7 Brief Exercise 4-8
Brief Exercise 4-9

13. Earnings per Share Disclosure
Earnings per share should be disclosed on the face of the income statement
Calculate EPS for
income from continuing operations
discontinued operations
net income
Calculated by dividing each earnings figure by the outstanding common stock shares
Brief Exercise 4-5

14. Comprehensive Income
 Comprehensive income is the total change in equity for a reporting period other than from transactions with owners.
 Comprehensive income includes net income.
 Other comprehensive income includes certain items that are not part of net income.
 The information in the income statement and other comprehensive income items can be presented either (1) in a single, continuous statement of comprehensive income or (2) in two separate, but consecutive statements, an income statement and a statement of comprehensive income.
Examples of other comprehensive income include:
Unrealized gains/losses on available-for-sale investments
Unrealized gains/losses on hedge/derivative financial instruments
Foreign currency translation adjustments
Unrealized gains/losses on postretirement benefit plans

15. Other Comprehensive Income
Other comprehensive income includes certain items that are not part of net income.
Items in other comprehensive income are generally unrealized gains/losses.
Examples include:
Unrealized gains/losses on available-for-sale investments
Unrealized gains/losses on hedge/derivative financial instruments
Foreign currency translation adjustments
Unrealized gains/losses on postretirement benefit plans
Net income
$4,452
Other comprehensive income (loss)
Unrealized gains from investments, net of tax
259
Loss from foreign currency translation, net of tax
(203) 56
Comprehensive income
$4,508
Brief Exercise 4-9 Exercise 4-4

16. The Income Statement and Comprehensive Income
Intermediate Accounting I – Chapter 4
End of presentation