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4. Elements of the Income Statement Limitations of the Income Statement Effects of GAAP on the Income Statement Noncash Items The Income Statement Financial Statements, Taxes, and Cash Flow > The Income Statement Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_32&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. The income statement consists of revenues and expenses along with the resulting net income or loss over a period of time due to earning activities. The income statement shows investors and management if the firm made money during the period reported. The operating section of an income statement includes revenue and expenses. Revenue consists of cash inflows or other enhancements of assets of an entity, and expenses consist of cash outflows or other using-up of assets or incurring of liabilities. The non-operating section includes revenues and gains from non-primary business activities, items that are either unusual or infrequent, finance costs like interest expense, and income tax expense. The "bottom line" of an income statement is the net income that is calculated after subtracting the expenses from revenue. It is important to investors - also on a per share basis (as earnings per share, EPS) - as it represents the profit for the accounting period attributable to the shareholders. Elements of the Income Statement Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-statements-taxes-and-cash-flow-2/the-income-statement- 32/elements-of-the-income-statement-179- 8370?campaign_content=book_192_section_32&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess A Sample Income Statement View on Boundless.com Financial Statements, Taxes, and Cash Flow > The Income Statement

6. Income statements include judgments and estimates, which mean that items that might be relevant but cannot be reliably measured are not reported and that some reported figures have a subjective component. With respect to accounting methods, one of the limitations of the income statement is that income is reported based on accounting rules and often does not reflect cash changing hands. Income statements can also be limited by fraud, such as earnings management, which occurs when managers use judgment in financial reporting to intentionally alter financial reports to show an artificial increase (or decrease) of revenues, profits, or earnings per share figures. Limitations of the Income Statement Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-statements-taxes-and-cash-flow-2/the-income-statement- 32/limitations-of-the-income-statement-180- 3904?campaign_content=book_192_section_32&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Income statement View on Boundless.com Financial Statements, Taxes, and Cash Flow > The Income Statement

7. Items that create temporary differences due to the recording requirements of GAAP include rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets. Also there are events, usually one-time events, which create "permanent differences," such as GAAP recognizing as an expense an item that the IRS will not allow to be deducted. The four basic principles of GAAP can affect items on the income statement. These principles include the historical cost principle, revenue recognition principle, matching principle, and full disclosure principle. Effects of GAAP on the Income Statement Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-statements-taxes-and-cash-flow-2/the-income-statement-32/effects- of-gaap-on-the-income-statement-181- 1037?campaign_content=book_192_section_32&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Income statement View on Boundless.com Financial Statements, Taxes, and Cash Flow > The Income Statement

8. Noncash items should be added back in when analyzing income statements to determine cash flow because they do not contribute to the inflow or outflow of cash like other gains and expenses eventually do. Depreciation refers to the decrease in value of assets and the allocation of the cost of assets to periods in which the assets are used--for tangible assets, such as machinery. Amortization is a similar process to deprecation when applied to intangible assets, such as patents and trademarks. Noncash Items Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-statements-taxes-and-cash-flow-2/the-income-statement- 32/noncash-items-182- 3903?campaign_content=book_192_section_32&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Machinery View on Boundless.com Financial Statements, Taxes, and Cash Flow > The Income Statement

9. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

10. Key terms amortization The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life of the asset. deferred Of or pertaining to a value that is not realized until a future date, e.g. annuities, charges, taxes, income, either as an asset or liability. depreciation The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets. fair market value An estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation but is subjective. Fair market value differs from other ways of determining value, such as intrinsic and imposed value. FIFO Method for for accounting for inventories. FIFO stands for first-in, first-out, and assumes that the oldest inventory items are recorded as sold first. gross profit The difference between net sales and the cost of goods sold. income bond a debt instrument where coupon payments are only made if the issuer can afford it income statement a calculation which shows the profit or loss of an accounting unit during a specific period of time, providing a summary of how the profit or loss is calculated from gross revenue and expenses LIFO Method for accounting for inventory. LIFO stands for last-in, first-out, and assumes that the most recently produced items are recorded as sold first. matching principle According to the principle, expenses are recognized when obligations are (1) incurred (usually when goods are transferred or services rendered, e.g. sold), and (2) offset against recognized revenues, which were generated from those expenses, no matter when cash is paid out. In cash accounting—in contrast—expenses are recognized when cash is paid out. net income Gross profit minus operating expenses and taxes. obsolescence The state of being obsolete—no longer in use; gone into disuse; disused or neglected. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow

11. statement of cash flows a financial document that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow

12. Machinery Machinery is an example of a noncash asset. Free to share, print, make copies and changes. Get yours at www.boundless.com Fotopedia. CC BY-SA http://www.fotopedia.com/items/flickr-6836303340 View on Boundless.comCC BY-SAhttp://www.fotopedia.com/items/flickr-6836303340View on Boundless.com Financial Statements, Taxes, and Cash Flow

13. A Sample Income Statement Expenses are listed on a company's income statement. Free to share, print, make copies and changes. Get yours at www.boundless.com Flickr. "All sizes | y2cary3n6mng-5ha51l-income-statement-example | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/sampjb/7690678408/sizes/l/ View on Boundless.comCC BY-SAhttp://www.flickr.com/photos/sampjb/7690678408/sizes/l/ View on Boundless.com Financial Statements, Taxes, and Cash Flow

14. Income statement GAAP and IRS accounting can differ. Free to share, print, make copies and changes. Get yours at www.boundless.com Flickr. "All sizes | y2cary3n6mng-5ha51l-income-statement-example | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/sampjb/7690678408/sizes/m/in/photostream/ View on Boundless.comCC BY http://www.flickr.com/photos/sampjb/7690678408/sizes/m/in/photostream/View on Boundless.com Financial Statements, Taxes, and Cash Flow

15. Income statement Accounting for inventory can be done in different ways, leading to differences in statements. Free to share, print, make copies and changes. Get yours at www.boundless.com Flickr. "All sizes | y2cary3n6mng-5ha51l-income-statement-example | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/sampjb/7690678408/sizes/m/in/photostream/ View on Boundless.comCC BY http://www.flickr.com/photos/sampjb/7690678408/sizes/m/in/photostream/View on Boundless.com Financial Statements, Taxes, and Cash Flow

16. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following is NOT a step in constructing a multi-step income statement? A) Add all revenues, then subtract all expenses. B) Subtract operating expenses from gross profit to determine income from operations. C) Subtract non-operating expenses from income from operations. D) Subtract income tax expense from income before taxes.

17. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following is NOT a step in constructing a multi-step income statement? A) Add all revenues, then subtract all expenses. B) Subtract operating expenses from gross profit to determine income from operations. C) Subtract non-operating expenses from income from operations. D) Subtract income tax expense from income before taxes.

18. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following is a non-operating expense? A) Depreciation and Amortization B) Research & Development expenses C) Selling, General and Administrative Expenses D) Interest expense

19. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following is a non-operating expense? A) Depreciation and Amortization B) Research & Development expenses C) Selling, General and Administrative Expenses D) Interest expense

20. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following is a limitation associated with income statements? A) Items that might be relevant to a company's value cannot be reliably measured and are not reported. B) Some figures are based on differing accounting methods. C) All of these answers D) Some values are based on judgments and estimates.

21. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following is a limitation associated with income statements? A) Items that might be relevant to a company's value cannot be reliably measured and are not reported. B) Some figures are based on differing accounting methods. C) All of these answers D) Some values are based on judgments and estimates.

22. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following is NOT one of the four basic GAAP principles? A) Assets and liabilities should be reported based on acquisition cost. B) Revenue should be recorded when realized or realizable and when cash is received. C) Deciding which information to disclose should be based on a trade-off analysis. D) Expenses should be recognized when the product it is associated with generates recognized revenue.

23. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following is NOT one of the four basic GAAP principles? A) Assets and liabilities should be reported based on acquisition cost. B) Revenue should be recorded when realized or realizable and when cash is received. C) Deciding which information to disclose should be based on a trade-off analysis. D) Expenses should be recognized when the product it is associated with generates recognized revenue.

24. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following best summarizes why there may be a difference between a company's pretax income and taxable income? A) The tax code requires full disclosure, GAAP does not. B) Pretax income is based on revenue recognition; taxable income is based on the company's cashflow. C) GAAP requires that companies use historical costs, while the tax code does not. D) All of these answers

25. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following best summarizes why there may be a difference between a company's pretax income and taxable income? A) The tax code requires full disclosure, GAAP does not. B) Pretax income is based on revenue recognition; taxable income is based on the company's cashflow. C) GAAP requires that companies use historical costs, while the tax code does not. D) All of these answers

26. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow Which of the following is a noncash item that would be included on the income statement? A) Depreciation and Amortization B) Unrealized losses from investments C) All of these answers. D) Write down of inventory.

27. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Statements, Taxes, and Cash Flow Which of the following is a noncash item that would be included on the income statement? A) Depreciation and Amortization B) Unrealized losses from investments C) All of these answers. D) Write down of inventory.

28. Attribution Wiktionary. "deferred." CC BY-SA 3.0 http://en.wiktionary.org/wiki/deferredCC BY-SA 3.0http://en.wiktionary.org/wiki/deferred Wiktionary. "fair market value." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fair+market+valueCC BY-SA 3.0http://en.wiktionary.org/wiki/fair+market+value Wikibooks. "Accountancy/Non-current assets." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Accountancy/Non-current_assetsCC BY-SA 3.0http://en.wikibooks.org/wiki/Accountancy/Non-current_assets Wikipedia. "Asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/AssetCC BY-SA 3.0http://en.wikipedia.org/wiki/Asset Wikipedia. "Fixed asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fixed_assetCC BY-SA 3.0http://en.wikipedia.org/wiki/Fixed_asset Wikipedia. "Intangible asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Intangible_assetCC BY-SA 3.0http://en.wikipedia.org/wiki/Intangible_asset Wikibooks. "Intermediate Accounting/Preparation of Financial Statements." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Intermediate_Accounting/Preparation_of_Financial_StatementsCC BY-SA 3.0 http://en.wikibooks.org/wiki/Intermediate_Accounting/Preparation_of_Financial_Statements Wikipedia. "Income statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_statementCC BY-SA 3.0http://en.wikipedia.org/wiki/Income_statement Wikipedia. "Amortization." CC BY-SA 3.0 http://en.wikipedia.org/wiki/AmortizationCC BY-SA 3.0http://en.wikipedia.org/wiki/Amortization Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/DepreciationCC BY-SA 3.0http://en.wikipedia.org/wiki/Depreciation Wiktionary. "obsolescence." CC BY-SA 3.0 http://en.wiktionary.org/wiki/obsolescenceCC BY-SA 3.0http://en.wiktionary.org/wiki/obsolescence Wiktionary. "amortization." CC BY-SA 3.0 http://en.wiktionary.org/wiki/amortizationCC BY-SA 3.0http://en.wiktionary.org/wiki/amortization Wiktionary. "depreciation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/depreciationCC BY-SA 3.0http://en.wiktionary.org/wiki/depreciation Wikibooks. "Getting Started as an Entrepreneur/Plan/Measuring Your Success." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Getting_Started_as_an_Entrepreneur/Plan/Measuring_Your_SuccessCC BY-SA 3.0 http://en.wikibooks.org/wiki/Getting_Started_as_an_Entrepreneur/Plan/Measuring_Your_Success Wikipedia. "Creative accounting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Creative_accountingCC BY-SA 3.0http://en.wikipedia.org/wiki/Creative_accounting Wikipedia. "Valuation (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Valuation_%2528finance%2529CC BY-SA 3.0http://en.wikipedia.org/wiki/Valuation_%2528finance%2529 Wikipedia. "Matching principle." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Matching_principleCC BY-SA 3.0http://en.wikipedia.org/wiki/Matching_principle Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow

29. Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/DepreciationCC BY-SA 3.0http://en.wikipedia.org/wiki/Depreciation Wikipedia. "Income statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_statementCC BY-SA 3.0http://en.wikipedia.org/wiki/Income_statement Wikipedia. "LIFO." CC BY-SA 3.0 http://en.wikipedia.org/wiki/LIFOCC BY-SA 3.0http://en.wikipedia.org/wiki/LIFO Wikipedia. "FIFO." CC BY-SA 3.0 http://en.wikipedia.org/wiki/FIFOCC BY-SA 3.0http://en.wikipedia.org/wiki/FIFO Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/matching-principleCC BY-SA 3.0http://www.boundless.com//finance/definition/matching-principle Wikipedia. "FIFO and LIFO accounting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/FIFO_and_LIFO_accountingCC BY-SA 3.0http://en.wikipedia.org/wiki/FIFO_and_LIFO_accounting Wikibooks. "Intermediate Accounting/Preparation of Financial Statements." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Intermediate_Accounting/Preparation_of_Financial_StatementsCC BY-SA 3.0 http://en.wikibooks.org/wiki/Intermediate_Accounting/Preparation_of_Financial_Statements Wikipedia. "Income statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_statementCC BY-SA 3.0http://en.wikipedia.org/wiki/Income_statement Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/income-bondCC BY-SA 3.0http://www.boundless.com//finance/definition/income-bond Wikipedia. "Statement of cash flows." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Statement_of_cash_flowsCC BY-SA 3.0http://en.wikipedia.org/wiki/Statement_of_cash_flows Wiktionary. "income statement." CC BY-SA 3.0 http://en.wiktionary.org/wiki/income+statementCC BY-SA 3.0http://en.wiktionary.org/wiki/income+statement Wiktionary. "gross profit." CC BY-SA 3.0 http://en.wiktionary.org/wiki/gross+profitCC BY-SA 3.0http://en.wiktionary.org/wiki/gross+profit Wiktionary. "net income." CC BY-SA 3.0 http://en.wiktionary.org/wiki/net+incomeCC BY-SA 3.0http://en.wiktionary.org/wiki/net+income Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Statements, Taxes, and Cash Flow