1. Chapter 4: Income Statement and Related Information
Intermediate Accounting, 10th Edition
Kieso, Weygandt, and Warfield
Chapter 4: Income Statement and Related Information
Prepared by
Krishnan Ranganathan, Angelo State University,
San Angelo, Texas 2

2. Approaches to Measurement in Income Statement
Generally, income measurement follows the all-inclusive approach, recording even irregular items in income.
Advocates of a current operating performance approach emphasize regular and recurring items only.
The profession’s modified all-inclusive approach requires irregular items to be highlighted in the presentation.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

3. The Single Step Income Statement
This statement presents information in broad categories.
Major sections are Revenues, Expenses and Income Tax Expense.
The Earnings per Share amount is shown at the bottom of the statement.
There is no distinction between operating and non-operating activities.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

4. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Single Step Statement
Revenues
Sales
Other Revenues -
Expenses
Cost of Goods Sold
Selling & Admn Expenses
Interest Expense
Income Tax Expense =
NET INCOME
Earnings per
Share
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

5. The Multiple Step Income Statement
The presentation divides information into major sections on the statement.
The statements distinguishes operating from non-operating activities.
Continuing operations are shown separately from irregular items.
The income tax effects are shown separately as well.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

6. Multiple Step Income Statement
Operating
Section
Sales Revenue
less: Cost of Goods Sold
less: Selling Expenses
less: Administrative Expenses 1
Non-Operating
Section
Add: Other Revenues and Gains
Less: Other Expenses and Losses 2
Income Tax 3
Irregular
Items
Discontinued Operations (net of tax)
Extraordinary Items (net of tax)
Cumulative Effect of a Change in
Accounting Principle (net of tax) 4
Earnings per Share 5
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

7. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Discontinued
Operations:
Presentation
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

8. Criteria for Discontinued Operations
Discontinued operations refer to the disposal of a segment.
To qualify:
The segment must be a distinct line of business
Its assets and operations must be distinguishable from other assets and operations.
A distinction is made between:
the segment’s results of operations and
the disposal of the segment’s assets
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

9. Reporting Discontinued Operations
There are two important dates in reporting discontinued operations: the measurement date and the disposal date
The measurement date is when management commits itself to a plan of segment’s disposal.
The disposal date is the date of sale of segment.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

10. Reporting Discontinued Operations
The Appendix discusses three reporting cases.
Case 1: Measurement date and disposal date are the same (and are within fiscal year.)
Case 2: Disposal date falls after the measurement date (but both are within fiscal year)
Case 3: Disposal date falls after the measurement date as well as end of the fiscal year.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

11. Discontinued Operations: Case 1
Measurement date: October 1, 2000
Disposal date: October 1, 2000
Facts: Fiscal year: Jan 1 - Dec 31, 2000 Discontinued Operations: Loss from operations: ($150,000) (through Oct 1, 2000) Gain on disposal (Oct 1): $400,000
Tax Rate: %
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

12. Discontinued Operations: Case 1
Measurement
Date and
Disposal
Date
Gain on disposal,
$400,000.
Loss from operations of Discontinued
segment (through Oct 1): ($150,000)
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

13. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Case 1: Reporting
Income from Continuing Operations (before tax): $XXXX
Income Taxes: ($XXXX)
Income from Continuing Operations (after tax): $XXXX
Discontinued Operations:
Loss from operations (less income tax of $45,000): $(105,000)
Gain on disposal (less income tax of $120,000) : $280,000
Net Income : $XXXX
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

14. Discontinued Operations: Case 2
Measurement date: October 1, 2000
Disposal date: December 1, 2000
Fiscal year: Jan 1 - Dec 31, 2000 Discontinued Operations: Loss from operations: ($150,000) (through Oct 1, 2000) Loss (Oct 1 - Dec 1) ($50,000) Gain on disposal (Dec 1): $350,000
Tax Rate: %
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

15. Discontinued Operations
Year end
Measurement
Date
Disposal
Gain on
disposal:
$350,000
Phase out
Period
Loss from operations
Jan 1 - Oct 1: ($150,000)
Loss from operations:
($50,000)
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

16. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Case 2: Reporting
Income from Continuing Operations (before tax): $XXXX
Income Taxes: ($XXXX)
Income from Continuing Operations (after tax): $XXXX
Discontinued Operations:
Loss from operations (less income tax of $45,000): $(105,000)
Gain on disposal:
Loss of $50,000 and Gain of $350,000
(less income tax of $90,000) : $210,000
Net Income : $XXXX
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

17. Discontinued Operations: Case 3
Measurement date: October 1, 2000
Fiscal year ends: December 31, 2000
Disposal Date: May 1, 2001
Discontinued Operations: Loss from operations (Jan 1 - Sept 30) ($150,000) Loss (Oct 1 - Dec 31) ($400,000) Loss (Jan 1 - May 1, 2001) ($200,000) Gain on disposal (May 1, 2001): $350,000
Tax Rate: %
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

18. Discontinued Operations
Year end
May 1,.01
Oct 1, 00
Dec 31, 00
Disposal
Date:
Gain, $350,000
Measurement
Date
Extended
Phase out
Period
Loss - operations:
($200,000):
Jan 1 - May 1.
Loss - operations
through Sept 30: ($150,000)
Loss - operations:
($400,000):
Oct 1 - Dec 31.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

19. Gain / Loss Recognition Rules
Gain or loss
When recognized
If a loss on disposal is expected
If a gain on disposal is expected
If realized gains on disposal exceed estimated realized and unrealized losses
Recognize estimated loss at measurement date
Recognize estimated gain at disposal date
Recognize net realized gains at measurement date
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

20. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Case 3: Reporting
Income from Continuing Operations (before tax): $XXXX
Income Taxes: ($XXXX)
Income from Continuing Operations (after tax): $XXXX
Discontinued Operations:
Loss from operations (less income tax of $45,000): $(105,000)
Net Loss on disposal:
Realized loss (Oct 1 - Dec 31) : ($400,000)
Expected loss (Jan 1 - May 1) : ($200,000)
Expected gain on sale of assets: $350,000
less: income tax of $75, $(175,000)
Net Income : $XXXX
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

21. Discontinued Operations: Extended Phase-out - Examples (4)
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

22. Extended Phase Out Example (1)
Oct 1 - Jan 1, 01 Expected Year when
Dec 31 May 1 (Loss) Gain recognized
Realized Estimated on sale of
(Loss) Gain (Loss) Gain assets:
May 1
$400,000 $300,000 $250, : $400,000
2001: $550,000
Realized gain is recognized at measurement date.
Expected gain is recognized at disposal date.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

23. Extended Phase Out Example (2)
Oct 1 - Jan 1, 01 Expected When recognized
Dec 31 May 1 (Loss) Gain
Realized Estimated on sale of
(Loss) Gain (Loss) Gain assets:
May 1
$400,000 ($300,000) $350, : $400,000
2001: $ 50,000
Realized gain is recognized at measurement date.
Estimated gain is recognized at disposal date.
Note: the realized gain and estimated gain and loss
are not added together.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

24. Extended Phase Out Example (3)
Oct 1 - Jan 1, 01 Expected When recognized
Dec 31 May 1 (Loss) Gain
Realized Estimated on sale of
(Loss) Gain (Loss) Gain assets:
May 1
($500,000) ($300,000) $900,000 year: 2001:
$100,000
Gain of $100,000 on disposal is expected.
Recognize gain at disposal date (May 1, 2001).
Note: no part of the gain is realized in 2000.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

25. Extended Phase Out Example (4)
Oct 1 - Jan 1, 01 Expected When recognized
Dec 31 May 1 (Loss) Gain
Realized Estimated on sale of
(Loss) Gain (Loss) Gain assets:
May 1
($400,000) ($200,000) $350,000 year 2000:
($250,000).
Loss of $250,000 is expected on disposal of segment.
Recognize at measurement date (Oct 1, 2000)
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

26. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Irregular Items:
Extraordinary Items
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

27. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Extraordinary Items
Extraordinary items are:
nonrecurring material items that
differ significantly from typical activities
Extraordinary items must meet two tests:
they must be unusual and
they must be infrequent
The environment in which the business operates is of primary importance
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

28. Extraordinary Items: what they are not
Losses from write-down of receivables
Gains and losses from exchange or translation of foreign currency
Gains and losses from the abandonment of property used in business
Effects of strike
Adjustments or accruals on long term contracts.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

29. Extraordinary Items: Exceptions
Certain events, though not extraordinary, need special treatment.
Gains and losses from discontinued operations (discussed earlier)
Material gains and losses from extinguishment of debt (to be reported as extraordinary item)
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30. Cumulative Effect of a Change in Accounting Principle
Irregular Items:
Cumulative Effect of a Change
in Accounting Principle
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

31. Change in Accounting Principle
An accounting change results when:
a new principle, different from the one in use, is adopted.
A change from FIFO to LIFO method in inventory costing is an example.
The effect of the change is to be disclosed after extraordinary items.
A change in principle is to be distinguished from a change in estimates.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

32. Change in Accounting Principle
Gilbert company buys and places in service an asset
on The cost is $100,000. Estimated useful
life is 4 years. Ignore salvage value. Tax rate is 30%.
The company uses the double-declining method of
depreciation in 2000 and It changes to the
straight-line method in 2002 ( )
Present the effect of the change in accounting principle.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

33. Change in Accounting Principle
Year Double-declining Straight line Difference
balance depreciation depreciation
2000 $50,000 $25,000 $25,000
2001 $25,000 $25,000 $ -0-
Net difference $25,000
Increases net income
Extraordinary Item $XXXX
Cumulative Effect on prior years of
retroactive application of new depreciation
method (net of tax, $7,500) $17,500
Presentation
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

34. Changes in Accounting Estimates
Changes in accounting estimates are effected in future periods.
Such changes do not affect prior periods.
See example next slide.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

35. Changes in Accounting Estimates: Example
On , Gilbert company (see preceding example
for accounting principle change) revises the useful life
of the asset to be 3 more years (2002, 2003 and 2004).
The salvage value is estimated to be $5,000.
This change involves a revision of initial estimates.
The depreciation method remains straight-line.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

36. Changes in Accounting Estimates: Example
Book value ( ): $50,000
Less: Salvage value ($5,000)
Revised depreciable cost: $45,000
Revised depreciable cost: $45,000
Remaining useful life: 3 years
Annual straight-line depreciation: $15,000
(years 2002, 2003 and 2004)
Note: The changes in useful life and salvage value
do not affect prior periods
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

37. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
Earnings per Share
Earnings per share is probably the most important business indicator figure.
It is computed as: Net Income less Preferred Dividends Weighted Average of Common Shares Outstanding
Earnings per share is required to be disclosed on the income statement for all the major sections.
Earnings per share is subject to dilution (reduction), if issue of additional shares is possible in the future.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

38. Retained Earnings Statement
Retained earnings are increased by net income and decreased by net loss and dividends for the year.
Corrections of errors in prior period financial statements are shown as prior period adjustments to the beginning balance in retained earnings.
Any part of retained earnings, appropriated for a specific purpose, is shown as restricted earnings.
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)

39. Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)
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Intermediate Accounting, 10th Edition, Ch.4 (Kieso et al.)