1. UNIT-5 Acct - 103

2. Income Statement and Related Information
Format of the Income Statement
Reporting Irregular Items
Special Reporting Issues
Usefulness
Limitations
Quality of Earnings
Elements
Single-step
Multiple-step
Condensed income statements
Discontinued operations
Extraordinary items
Unusual gains and losses
Changes in accounting principles
Changes in estimates
Corrections of errors
Intraperiod tax allocation
Earnings per share
Retained earnings statement
Comprehensive income
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

3. Income Statement Evaluate past performance.
Usefulness of the Income Statement
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving future cash flows.

4. 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.

5. 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

6. Elements of the Income Statement
Expenses – Outflows or other using-up of assets or incurrence 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

7. 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.

8. 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.

9. Single-Step Income Statement
Review
The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items more than it is emphasized in the multiple-step income statement.
d. the various components of income from continuing operations.

10. Multiple-Step Income Statement
Background
Separates operating transactions from nonoperating transactions.
Matches costs and expenses with related revenues.
Highlights certain intermediate components of income that analysts use.

11. 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.

12. Multiple-Step Income Statement
The presentation divides information into major sections.
1. Operating Section
2. Nonoperating Section
3. Income tax

13. Learning Objectives
Explain the uses and limitations of a balance sheet.
Identify the major classifications of the balance sheet.
Prepare a classified balance sheet using the report and account formats.
Determine which balance sheet information requires supplemental disclosure.
Describe the major disclosure techniques for the balance sheet.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

14. Balance Sheet Evaluating the capital structure.
Usefulness of the Balance Sheet
Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the company’s:
Liquidity,
Solvency, and
Financial flexibility.

15. Balance Sheet
Limitations of the Balance Sheet
Most assets and liabilities are reported at historical cost.
Use of judgments and estimates.
Many items of financial value are omitted.

16. Balance Sheet Three General Classifications
Classification in the Balance Sheet
Three General Classifications
Assets, Liabilities, and Stockholders’ Equity
Companies further divide these classifications:

17. Balance Sheet
Current Assets
Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.

18. Balance Sheet Review The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories.
b. Cash, accounts receivable, inventories, prepaid items.
c. Cash, inventories, accounts receivable, prepaid items.
d. Cash, inventories, prepaid items, accounts receivable.

19. Balance Sheet – “Current Assets”
Cash
Generally any monies available “on demand.”
Cash equivalents are short-term highly liquid investments that will mature within three months or less.
Any restrictions or commitments must be disclosed.

20. Balance Sheet – “Current Assets”
Short-Term Investments
Portfolios
Type
Valuation
Classification
Held-to-Maturity
Debt
Amortized Cost
Current or Noncurrent
Trading
Debt or Equity
Fair Value
Current
Available- for-Sale
Debt or Equity
Fair Value
Current or Noncurrent

21. Balance Sheet – “Current Assets”
Receivables
Claims held against customers and others for money, goods, or services.
Accounts receivable – oral promises
Notes receivable – written promises
Major categories of receivables should be shown in the balance sheet or the related notes.

22. Balance Sheet – “Current Assets”
Accounts Receivable – Presentation Options 1
Current Assets:
Cash SR 346
Accounts receivable 500
Less allowance for doubtful accounts
Inventory
Total current assets SR1,633 2
Current Assets:
Cash SR 346
Accounts receivable, net of SR.25 allowance 475
Inventory
Total current assets SR1,633

23. Balance Sheet – “Current Assets”
Inventories
Company discloses:
basis of valuation (e.g., lower-of-cost-or-market) and
the method of pricing (e.g., FIFO or LIFO).

24. Balance Sheet – “Current Assets”
Prepaid Expenses
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
Cash Payment
Expense Recorded
BEFORE
Prepayments often occur in regard to:
insurance
supplies
advertising
rent
maintenance on equipment

25. Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiaries or affiliated companies.

26. Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Securities
bonds,
stock, and
long-term notes
For marketable securities, management’s intent determines current or noncurrent classification.

27. Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Fixed Assets
Land held for speculation

28. Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Special Funds
Sinking fund
Pensions fund
Cash surrender value of life insurance

29. Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Nonconsolidated Subsidiaries or Affiliated Companies

30. Balance Sheet – “Noncurrent Assets”
Property, Plant, and Equipment
Assets of a durable nature used in the regular operations of the business.

31. Balance Sheet – “Noncurrent Assets”
Intangibles
Lack physical substance and are not financial instruments.
Limited life intangibles amortized.
Indefinite-life intangibles tested for impairment.

32. Balance Sheet – “Exercise”
BE5-6 Mickey Snyder Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2007: Prepaid Rent SR12,000; Goodwill SR40,000; Franchise Fees Receivable SR2,000; Franchises SR47,000; Patents SR33,000; Trademarks SR10,000. Prepare the intangible assets section of the balance sheet.
Intangibles
Goodwill SR 40,000
Franchises 47,000
Patents 33,000
Trademarks 10,000
Total SR130,000

33. Balance Sheet – “Noncurrent Assets”
Other Assets
This section should include only unusual items sufficiently different from assets in the other categories.

34. Balance Sheet
Current Liabilities
“Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”

35. Balance Sheet
Long-Term Liabilities
“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”
All covenants and restrictions must be disclosed.

36. Balance Sheet – “Exercise”
BE5-9 Included in Ewing Company’s December 31, 2007, trial balance are the following accounts: Accounts Payable SR240,000; Pension Liability SR375,000; Discount on Bonds Payable SR24,000; Advances from Customers SR41,000; Bonds Payable SR400,000; Wages Payable SR27,000; Interest Payable SR12,000; Income Taxes Payable SR29,000. Prepare the long-term liabilities section of the balance sheet.
Long-term liabilities
Pension liability SR375,000
Bonds payable 400,000
Discount on bonds payable (24,000)
Total 751,000

37. Balance Sheet
Owners’ Equity
Companies usually divide equity into three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings.

38. Balance Sheet Classification Exercise
Account
Classification
(a) Investment in preferred stock
(a) Current asset/Investment
(b) Treasury stock
(b) Equity
(c) Common stock
(c) Equity
(d) Cash dividends payable
(d) Current liability
(e) Accumulated depreciation
(e) Contra-asset
(f) Interest payable
(f) Current liability
(g) Deficit
(g) Equity
(h) Trading securities
(h) Current asset
(i) Unearned revenue
(i) Current liability

39. Balance Sheet - Format Account form Report form
Classified Balance Sheet
Account form
Report form
Accounting Trends and Techniques—2004 (New York: AICPA) indicates that all of the 600 companies surveyed use either the “report form” (506) or the “account form” (94), sometimes collectively referred to as the “customary form.”

40. Additional Information Reported
There are normally four types of information that are supplemental to account titles and amounts presented in the balance sheet:
Contingencies
Accounting Policies
Contractual Situations
Fair Values