1. Wacky Warning Labels (from www.wackywarnings.com)
A label on a baby stroller warns: “Remove child before folding”
A brass fishing lure with a three-pronged hook on the end warns: “Harmful if swallowed”
A popular scooter for children warns: “This product moves when used”
A nine- by three-inch bag of air used as packing material cautions: “Do not use this product as a toy, pillow, or flotation device”
The label on an electric hand blender promoted for use in “blending, whipping, chopping and dicing,” warns: “Never remove food or other items from the blades while the product is operating”
A household iron warns users: “Never iron clothes while they are being worn”

2. Chapter 4: CONTINUED INCOME STATEMENT AND RELATED INFORMATION Sommers – ACCT 3311
Chapter 1: Environment and Theoretical Structure of Financial Accounting.

3. Reporting Irregular Items
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
Company must consider the environment in which it operates.
Amount reported “net of tax.”

4. Reporting Extraordinary Items
Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 during the year. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for KC Corporation beginning with income from continuing operations.
Income from continuing operations $55,000,000
Extraordinary loss, net of $231,000 tax 539,000
Net income $54,461,000
($770,000 x 30% = $231,000 tax)

5. Reporting Irregular Items
Reporting when both Discontinued Operations and Extraordinary Items are present.
Discontinued Operations
Extraordinary Items

6. Reporting Irregular Items
Unusual Gains and Losses
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.”
Examples can include:
Write-downs of inventories
Foreign exchange transaction gains and losses
The Board prohibits net-of-tax treatment for these items.

7. Reporting Irregular Items
Unusual Gains and Losses
Illustration 4-7
Income Statement Presentation of Unusual Charges

8. Special Reporting Issues
Intraperiod Tax Allocation
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.

9. Intraperiod Income Tax Allocation
Income Tax Expense must be associated with each component of income that causes it.
Show Income Tax Expense related to Income from Continuing Operations.
Report effects of Discontinued Operations and Extraordinary Items NET OF RELATED INCOME TAXES.
Intraperiod tax allocation associates (or allocates) income tax expense (or income tax benefits if there is a loss) with each major component of income that causes it. As a result, the two items reported separately below income from continuing operations are presented net of the related income tax effect.

10. Special Reporting Issues
Intraperiod Tax Allocation
Extraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation settlement received on one its properties. Assuming a 30 percent income tax rate.
Illustration 4-13

11. Special Reporting Issues
Intraperiod Tax Allocation
Extraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate.
Illustration 4-14

12. Example of Intraperiod Tax Allocation
Note: losses reduce the total tax
Calculation of Total Tax
$24,000
(135)
(61)
(231)
$23,573

13. E4-6B
The following balances were taken from the books of Schimank Corp. on December 31, Assume the total effective tax rate on all items is 34%. Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.
Interest revenue $ 120,400 Cash 71,400 Sales 1,932,000 Accounts receivable 210,000 Prepaid insurance 28,000 Sales returns & allowances 210,000 Allowance for bad debts 9,800 Sales discounts 63,000 Land 140,000 Equipment 280,000 Building 196,000 Cost of goods sold 869,400
Accum deprec—equipment $ 56,000 Accum deprec—building 39,200 Notes receivable 217,000 Selling expenses 271,600 Accounts payable 238,000 Bonds payable 140,000 Admin & general expenses 135,800 Accrued liabilities 44,800 Interest expense 84,000 Notes payable 140,000 Loss from earthquake damage (extraordinary item) 210,000 Common stock 700,000 Retained earnings 29,400

14. E4-6B

15. Discussion Question
Q4-12 What is the basis for distinguishing between operating and nonoperating items? Operating items are the expenses and revenues which relate directly to the principal activity of the concern; they are revenues realized from, or expenses which contribute to, the sale of goods or services for which the company was organized. The nonoperating items result from secondary activities of the company. They are not directly related to the principal activity of the company but arise from incidental activities.

16. Discussion Question
Q4-30 On January 30, 2013, a suit was filed against Frazier Corp. under the EPA. On August 6, 2014, Frazier agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2014 financial statements? The damages would probably be reported in Frazier Corporation’s financial statements in the other expenses or losses section. If the damages are unusual in nature, the damage settlement might be reported as an unusual item. The damages would not be reported as a correction of an error (prior period adjustment).

17. Reporting Irregular Items
Changes in Accounting Principles
Changes in Estimate
Corrections of Errors

18. Earnings Per Share Disclosure
One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis.
Basic EPS
Diluted EPS
Net income less preferred dividends
Weighted-average number of common shares outstanding for the period
Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised.
Part I
One of the most widely used ratios is earnings per share, which shows the amount of income earned by a company expressed on a per share basis. Companies report both basic and diluted earnings per share.
Part II
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding.
Part III
Diluted earnings per share reflects the potential for dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised

19. P&G’s Income Statement

20. Special Reporting Issues
Earnings Per Share (BE4-8): In 2014, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2014, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2014 earnings per share.
Net income - Preferred dividends
Weighted average number of shares outstanding
$1,000,000
- $250,000 =
$3.95 per share
190,000

21. Special Reporting Issues
Illustration 4-19
Divide by weighted-average shares outstanding
EPS

22. Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
Loss on inventory write-down.
Other expenses or losses section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.
Loss from strike.
Operating expense section or other expenses and losses section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

23. Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
Bad debt expense.
Operating expense section, as a selling expense, but sometimes reflected as an administrative expense.
Loss on disposal of a component of the business.
Separate section after income from continuing operations, entitled discontinued operations. 
Gain on sale of machinery.
Other revenues and gains section or in a separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

24. Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
Interest revenue.
Other revenues and gains section.
Depreciation Expense.
Operating expense section, normally administrative. If a manufacturing concern, may be included in cost of goods sold.
Material write-offs of notes receivable.
Other expenses or losses section or in separate section, appropriately labeled as an unusual item, if unusual or infrequent but not both.

25. Special Reporting Issues
Retained Earnings Statement
Increase
Decrease
Net income
Change in accounting principle
Error corrections
Net loss
Dividends
Change in accounting principles
Error corrections

26. Special Reporting Issues
Restrictions on Retained Earnings
Disclosed
In notes to the financial statements.
As Appropriated Retained Earnings.

27. Understanding Equity
Beginning equity + Received from owners – Distributed to owners (other than dividends) – Dividends declared + Net income (or – net loss) + Other comprehensive income = Ending equity
Contributed capital
Comprehensive income
Retained earnings
On Income Statement
Accum OCI
Not on Income Statement
If OCI = 0, earnings are “clean surplus” else they are “dirty surplus”.

28. Comprehensive Income
Weird stuff
An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.
Net unrealized holding gains (losses) from investments (net of tax).
Gains and losses due to reviewing assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan.
When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction.
Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity.
Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Comprehensive income includes net income as well as other gains and losses that change shareholders’ equity but are not included in traditional net income.

29. + Comprehensive Income Other Comprehensive Income
Unrealized gains and losses on available-for-sale securities.
Translation gains and losses on foreign currency.
Plus others +
Reported in Stockholders’ Equity

30. Accumulated Other Comprehensive Income
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity.
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity. In this example, Jabil Circuits Inc. reports Accumulated Other Comprehensive Income of $171 million and $110 million for years 2007 and 2006, respectively.

31. Special Reporting Issues
Companies must display the components of other comprehensive income in one of three ways:
A second separate income statement;
A combined income statement of comprehensive income; or
As part of the statement of stockholders’ equity

32. Special Reporting Issues
Comprehensive Income
Illustration 4-19
Second income statement
LO 8

33. P&G’s Statement of Comprehensive Income

34. Special Reporting Issues
Comprehensive Income
Combined statement
LO 8

35. Special Reporting Issues
Comprehensive Income – Statement of Stockholder’s Equity
Illustration 4-26

36. Special Reporting Issues
Comprehensive Income – Balance Sheet Presentation
Illustration 4-27
Presentation of
Accumulated Other
Comprehensive Income in the Balance Sheet
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.

37. Example 1 Bryant Co. reports the following information for 2012:
Sales revenue $750,000
Cost of goods sold $500,000
Operating expenses $ 80,000
Unrealized holding loss on
available-for-sale securities $ 50,000
Bryant declared and paid a cash dividend of $10,000 in Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012.
Prepare a statement of stockholders’ equity.

38. Example 1 BRYANT CO. Statement of Stockholders’ Equity
For the Year Ended December 31, 2012
Total
Compre-hensive Income
Retained Earnings
Accumulated Other Comprehensive Income
Common Stock
Beginning balance
$520,000
$ 90,000
$80,000
$350,000
Comprehensive income
Net income*
170,000
$170,000
Other comprehensive income
Unrealized holding loss
(50,000)
$120,000
Dividends
(10,000)
             
             
Ending balance
$630,000
$250,000
$30,000
*($750,000 – $500,000 – $80,000)

39. IFRS Insights RELEVANT FACTS
Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach. Extraordinary items are prohibited under IFRS.
Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the U.S. SEC requires a functional presentation.
IFRS identifies certain minimum items that should be presented on the income statement. GAAP has no minimum information requirements. However, the SEC rules have more rigorous presentation requirements.

40. IFRS Insights RELEVANT FACTS
IFRS does not define key measures like income from operations. SEC regulations define many key measures and provide requirements and limitations on companies reporting non-GAAP/IFRS information.
Both GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest.
GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard- setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation.

41. IFRS Insights RELEVANT FACTS
Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. GAAP provides three possible formats for presenting this information: single income statement, combined statement of comprehensive income, in the statement of stockholders’ equity. Most companies that follow GAAP present this information in the statement of stockholders’ equity. IFRS allows a separate statement of comprehensive income or a combined statement.
Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.

42. E4-17B
The following information was taken from the records of Cantu Inc. for the year Income tax applicable to income from continuing operations $261,800; income tax applicable to loss on discontinued operations $35,700; income tax applicable to extraordinary gain $45,220; income tax applicable to extraordinary loss $28,560; and unrealized holding gain on available-for-sale securities $21,000. Extraordinary gain $133,000 Loss on disc ops 105,000 Admin expenses 336,000 Rent revenue 56,000 Extraordinary loss 84,000 Shares outstanding during 2014 were 100,000. (a) Prepare a multiple-step income statement for 2014, (b) prepare a retained earnings statement for 2014 and (c) show how comprehensive income is reported using the one statement format.
Cash dividends declared $210,000
Ret earnings, 1/1/ ,000
Cost of goods sold 1,190,000
Selling expenses 420,000
Sales 2,660,000

43. E4-17B

44. E4-17B