1. Chapter 4
The Income Statement, Comprehensive Income, and the Statement of Cash Flows
ACCT-3030

2. 1. Big Picture Quality of earnings Management of earnings
the ability of reported earnings to predict future earnings
permanent earnings
transitory earnings
Management of earnings
shifting income between periods
manipulating I/S classifications (e.g., restructuring charges)
reserves; big bath
motivations for managing earnings
All revenue and expense transactions include a change in an asset or liability account
How should those transactions be reported on I/S to best reflect the quality of earnings information users need?
ACCT-3030

3. 1a. Big Picture Two I/S approaches Current operating approach
income should only reflect normal, current operations
non-current operating revenues, expenses, gains, and losses should go directly to RE
All inclusive approach
income should include all non-owner changes in net assets
What is GAAP?
ACCT-3030

4. 1b. Big Picture Comprehensive income
all changes in equity of an entity from transactions and other events from non-owner sources
includes net income and other items
Accumulated other comprehensive income
How reported?
ACCT-3030

5. 2. Income Statement Basics
Form of income statement
single-step
multi-step
Operating income
Income from continuing operations
Discontinued operations
ACCT-3030

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

7. Income Statement (Multiple-Step){
Proper Heading {
Gross Profit
Operating Expenses { {
Non- operating Items
The multiple-step income statement format includes a number of intermediate subtotals before arriving at income from operations. However, notice that the net income is the same no matter which format is used.
A primary advantage of the multiple-step format is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. Similarly, the classification of expenses by function also provides useful information.

8. 3. Continuing Operations
Purpose
Items included
operating income
includes: revenue, cost of good sold, operating expenses (selling & general and administrative expenses)
other income (expense)
sometimes called nonoperating section
includes: other revenue, gains, other expenses (interest expense), losses
income tax expense
ACCT-3030

9. 4. Intraperiod Tax Allocation
Each section of the I/S m/b shown net of tax
continuing operations
discontinued operations
Could be tax expense or tax benefit
Interperiod tax allocation complex topic
Examples
ACCT-3030

10. 5. Discontinued Operations
Disposal of a component of an entity
Location on IS
Must disclose separately
income or loss from operating component from beginning of period
gain or loss on disposal of component’s assets
Sold v. Held for Sale
Items reported net of tax
ACCT-3030

11. Income Statement (Lower portion)

12. 6. No Longer Report Extraordinary Items
Material unusual and infrequent gains and losses
must meet both criteria
unusual in nature
infrequent in occurrence
if only meets one – goes in regular section
Location on I/S – nonoperating section
Reported net of tax
Fairly rare items
Consider in particular circumstances
ACCT-3030

13. 7. Accounting Changes Change in accounting principle
change from one GAAP to another GAAP
examples
accounting
Change in accounting estimate
revision of an estimate used in implementing an accounting principle
ACCT-3030

14. 7a. Accounting Changes Change in reporting entity
current accounting entity differs from accounting entity in previous reporting period
Change in depreciation or depletion method
considered to be a change in estimate that is achieved by a change in principle
Change from unacceptable GAAP to acceptable GAAP
ACCT-3030

15. 8. Prior Period Adjustments
Correction of a material mistake in net income in a prior year not discovered until current year
Only item that qualifies
correction of an error
Reported as an adjustment to the beginning balance of RE
ACCT-3030

16. 9. Cash Flow Statement Only basics now - More in 3040
Required statement
Classifications on statement
operating activities
direct method
indirect method
investing activities
financing activities
ACCT-3030

17. 9. Cash Flow Statement
ACCT-3030

18. 10. EPS Shown for each section of I/S Complex topic
Basic formula NI - PS Div EPS = ———————
WAS
ACCT-3030