Chapter 4-1 CHAPTER INCOME STATEMENT AND RELATED INFORMATION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 4-2 Learning Learning Objectives Objectives Understand the uses and limitations of an income statement Prepare a single-step income statement Prepare a multiple-step income statement Explain how to report irregular items Explain intraperiod tax allocation Identify where to report earnings per share information Prepare a retained earnings statement Explain how to report other comprehensive income Chapter 4-3 Income Income Statement Statement and and Related Related Information Information Income Statement Chapter 4-4 Format of the Income Statement Usefulness Limitations Elements Single-step Quality of Earnings Multiple-step Condensed income statements Reporting Irregular Items Special Reporting Issues Discontinued operations Extraordinary items Intraperiod tax allocation Earnings per share Unusual gains and losses Changes in accounting principles Changes in estimates Corrections of errors Retained earnings statement Comprehensive income Income Income Statement Statement Usefulness Evaluate past performance Predicting future performance Help assess the risk or uncertainty of achieving future cash flows Chapter 4-5 LO Understand the uses and limitations of an income statement Income Income Statement Statement Limitations Companies omit items that cannot be measured reliably Income is affected by the accounting methods employed Income measurement involves judgment Chapter 4-6 LO Understand the uses and limitations of an income statement Income Income Statement Statement Quality of Earnings Companies have incentives to manage income to meet or beat Wall Street expectations, so that market price of stock increases and value of stock options increase Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows Chapter 4-7 LO Understand the uses and limitations of an income statement Format Format of of the the Income Income Statement 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 Chapter 4-8 LO Understand the uses and limitations of an income statement Format Format of of the the Income Income Statement 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 Chapter 4-9 LO Understand the uses and limitations of an income statement Format Format of of the the Income Income Statement 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 Chapter 4-10 LO Understand the uses and limitations of an income statement Special Special Reporting Reporting Issues Issues Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010) Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011? Chapter 4-49 LO Prepare a retained earnings statement Special Special Reporting Reporting Issues Issues Chapter 4-50 Solution on notes page LO Prepare a retained earnings statement Special Special Reporting Reporting Issues Issues Restricted Retained Earnings Disclosed In notes to the financial statements As Appropriated Retained Earnings Chapter 4-51 LO Prepare a retained earnings statement Special Special Reporting Reporting Issues Issues Comprehensive Income All changes in equity during a period except those resulting from investments by owners and distributions to owners Includes: Chapter 4-52 all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders’ equity LO Prepare a retained earnings statement Special Special Reporting Reporting Issues Issues Comprehensive Income + Other Comprehensive Income Unrealized gains and losses on availablefor-sale securities Translation gains and losses on foreign currency Plus others Reported in Stockholders’ Equity Chapter 4-53 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Review 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 Chapter 4-54 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Three approaches to reporting Comprehensive Income (SFAS No 130, June 1997): Chapter 4-55 A second separate income statement; A combined income statement of comprehensive income; or As part of the statement of stockholders’ equity LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Comprehensive Income Illustration 4-19 Second income statement Chapter 4-56 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Comprehensive Income Combined income statement Chapter 4-57 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Comprehensive Income - Statement of Stockholder’s Equity Illustration 4-20 Chapter 4-58 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues 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 Chapter 4-59 LO Explain how to report other comprehensive income Special Special Reporting Reporting Issues Issues Review The FASB decided that the components of other comprehensive income must be displayed a in a second separate income statement b in a combined income statement of comprehensive income c as a part of the statement of stockholders' equity d Any of these options is permissible Chapter 4-60 LO Explain how to report other comprehensive income Chapter 4-61 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 Chapter 4-62 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 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 Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 4-63 .. .CHAPTER INCOME STATEMENT AND RELATED INFORMATION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 4-2 Learning Learning Objectives... how to report other comprehensive income Chapter 4-3 Income Income Statement Statement and and Related Related Information Information Income Statement Chapter 4-4 Format of the Income Statement... items that cannot be measured reliably Income is affected by the accounting methods employed Income measurement involves judgment Chapter 4-6 LO Understand the uses and limitations of an income