1. Chapter 4
Income Statement

2. Income Statement Usefulness of the Income Statement
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving future cash flows.
LO 1 Understand the uses and limitations of an income statement.

3. Income Statement Limitations of the Income Statement
Companies omit items that cannot be measured reliably.
Income is affected by the accounting methods employed.
Income measurement involves judgment.
LO 1 Understand the uses and limitations of an income statement.

4. Format of the Income Statement
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
LO 1 Understand the uses and limitations of an income statement.

5. Format of the Income Statement
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.

6. Format of the 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.
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.

7. Single-Step Income Statement
The single-step statement consists of just two groupings:
Revenues
Expenses
Net Income
Single- Step
No distinction between Operating and Non-operating categories.
LO 2 Prepare a single-step income statement.

8. Multi-Step Income Statement

9. Multiple-Step Income Statement
Background
Separates operating transactions from nonoperating transactions.
Matches costs and expenses with related revenues.
Highlights certain intermediate components [or subtotals] of income that analysts use.
LO 3 Prepare a multiple-step income statement.

10. 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.

11. Multi-Step Income Statement
Sales
– Cost of goods sold
= Gross profit
Operating expenses:
– Selling expenses
– General and
administrative expenses
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income
Four
important
subtotals 6 13 13

12. JC Penney, Inc. Statement of Operations In Millions
For the Years Ended January 30,

13. Multiple-Step Format
Illustration (E4-4): Prepare an income statement from the data below.
Solution on notes page

14. 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.

15. Discontinued Operations

16. Discontinued Operations
Shown Below
Income After Taxes
Before
Net Income
on the Income Statement

17. 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.

18. Reporting Discontinued Operations
Discontinued Operations are reported
after
“Income from continuing operations.”
Net of Tax
LO 4 Explain how to report irregular items.

19. Financial Ratios to Remember
*Gross Profit Margin %
*Profit Margin %

20. Analysis of Profitability
particular
interest
to current and
potential
investors
Gross
Profit %
Profit
Margin % 14 14

21. JC Penney, Inc. Statement of Operations In Millions
For the Years Ended January 30,

22. JC Penney, Inc. - Profitability
(in Millions)
Net sales $11, $12, $17,260
Cost of sales , , ,042
Gross profit $ 3, $ 4, $ 6,218
Gross profit % = % % %
Gross Profit (Margin) % = Gross Profit
Sales
(How many cents on every $ of sales are left over
after covering the cost of the product) 15 15

23. JC Penney, Inc. - Profitability
(in Millions)
Net sales $ 11, $12, $17,260
Net income $ (1,388) $ (985) $ (152)
Profit margin % = % % %
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses) 16 16

24. Earnings Per Share

25. Earnings Per Share Calculation Net income - Preferred dividends
Weighted average number of shares outstanding
An important business indicator.
Measures the dollars earned by each share of common stock.
Must be disclosed on the the income statement.
LO 6 Identify where to report earnings per share information.

26. Earnings Per Share Net income - Preferred dividends
Brief Exercise 4-8 In 2014, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2014, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2014 earnings per share.
Net income - Preferred dividends
Weighted average number of shares outstanding
$1,200,000
- $250,000 =
$5.00 per share
190,000
LO 6 Identify where to report earnings per share information.

27. Earnings Per Share
Craig Rusch Corporation reports the following information:
Net income $500,000
Dividends on common stock 140,000
Dividends on preferred stock ,000
Weighted average common shares outstanding ,000
Rusch should report earnings per share of
a. $3.00.
b. $3.60
c. $4.40.
d. $5.00.

28. Prior Period Adjustments
Statement of Retained Earnings
And
Prior Period Adjustments

29. Prior Period Adjustments
Adjustments to the Beginning Balance of Retained Earnings to correct accumulated earnings reported from prior years.
Prior Period Adjustments may be reported to adjust for
Changes in Accounting Principle
Corrections of Errors
LO 4 Explain how to report irregular items.

30. Retained Earnings Statement
Before issuing the report for the year ended December 31, 2014, you discover a $50,000 error (net of tax) that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014?
LO 7 Prepare a retained earnings statement.

31. Retained Earnings Statement
LO 7 Prepare a retained earnings statement.

32. Retained Earnings Statement
XMax Corporation reports the following information:
Overstatement of Depreciation Expense
in prior years, net of tax $ 260,000
Dividends declared ,000
Net income ,500,000
Retained earnings, 1/1/14, as reported 2,400,000
XMax should report beginning retained earnings, 1/1/14, as adjusted at
a. $2,140,000.
b. $2,400,000.
c. $3,860,000.
d. $2,660,000.

33. Comprehensive Income

34. + Comprehensive Income
All changes in equity during a period except those resulting from investments by owners and distributions to owners.
Other Comprehensive Income +
Unrealized gains and losses on available-for-sale securities.
Translation gains and losses on foreign currency.
Minimum Pension Liability Adjustments.
Reported in Stockholders’ Equity
LO 8 Explain how to report other comprehensive income.

35. Review Comprehensive Income
Gains and losses that bypass net income but affect stockholders' equity are referred to as
a. comprehensive income.
b. other comprehensive income.
c. prior period income.
d. unusual gains and losses.
LO 8 Explain how to report other comprehensive income.

36. Comprehensive Income
Three approaches to reporting Comprehensive Income (SFAS No. 130, June 1997):
A second separate income statement;
A combined income statement of comprehensive income; or
As part of the statement of stockholders’ equity
LO 8 Explain how to report other comprehensive income.

37. Comprehensive Income Two-Statement Format for Comprehensive Income
Illustration 4-19
Two-Statement Format for Comprehensive Income
LO 8 Explain how to report other comprehensive income.

38. Comprehensive Income Combined Income Statement
LO 8 Explain how to report other comprehensive income.

39. Comprehensive Income Statement of Stockholders’ Equity (most common)
Illustration 4-20
LO 8 Explain how to report other comprehensive income.

40. Comprehensive Income Balance Sheet Presentation
Illustration 4-21
Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.
LO 8 Explain how to report other comprehensive income.

41. Under iGAAP, companies must classify expenses by either nature or function. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements.
Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. iGAAP does not mention a single-step or multiple-step approach. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under iGAAP.

42. Under iGAAP, companies are required to prepare as a primary financial statement either a statement of stockholders’ equity similar to the one prepared under U.S. GAAP or a statement of recognized income and expense (called a SoRIE ).
Both iGAAP and U.S. GAAP have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information. iGAAP allows either the statement of stockholders’ equity approach or the SoRIE format.
Under iGAAP revaluation of land, buildings, and intangible assets is permitted.