Ch04 Income.Statement and Cash.Flow

Ch04 Income.Statement and Cash.Flow tài liệu, giáo án, bài giảng , luận văn, luận án, đồ án, bài tập lớn về tất cả các l...

The Income Statement and

Statement of Cash Flows

Chapter 4

Learning Objectives

Discuss the importance of income from continuing operations and describe its

components.

Outflows of resources incurred in generating revenues.

Increases or decreases in equity from peripheral or incidental transactions

of an entity.

Income from Continuing Operations

Income Tax Expense

Because of

its importance and size, income tax expense is a separate item

Operating Income

Nonoperating

Income

Income

Includes revenues and expenses directly related to the principal revenue- generating activities of the company

Includes gains and

losses and revenues and expenses related

to peripheral or incidental activities of the company

Income Statement (Single-Step)

Income Statement (Multiple-Step)

Learning Objectives

Describe earnings quality and how it is impacted by management practices to

manipulate earnings.

Earnings Quality

Earnings quality refers to the ability of

reported earnings to predict

a company’s future earnings.

Transitory Earnings

versus Permanent Earnings

Earnings Quality

Should all items of revenue and expense included in

operating income be considered indicative of a

company’s permanent earnings?

No, not necessarily.

Operating expenses may include the following unusual items

that may or may not continue in the future:

• Restructuring costs

• Goodwill impairment

• Long-lived asset impairment

• In-process research and development

Nonoperating Income and Earnings Quality

Gains and losses from the sale of operational

assets and investments often can significantly

inflate or deflate current earnings.

Example

As the stock market boom reached its

height late in the year 2000, many

companies recorded large gains from

sale of investments that had

appreciated significantly in value

How should those gains be interpreted in terms of their relationship to

future earnings? Are they transitory

or permanent?

Separately Reported Items

Reported separately, net of taxes:

Discontinued

operations

$ xxx xx xxx xx

xx

Extraordinary items (net of $xx in

taxes)

Income from continuing operations

before income taxes and

extraordinary items

Income tax expense

Income from continuing operations

before extraordinary items

Discontinued operations (net of $xx

by a new accounting standard in 2005

Reporting Discontinued Operations

Reporting for Components Sold

Income or loss from

Reporting for Components Held For Sale

Income or loss from

operations of the

component from the

beginning of the

reporting period to the

end of the reporting

period

An “impairment loss” if the carrying value of the assets of the component is more than the fair value minus cost to sell

During the year, Apex Co sold an unprofitable component of the company The component had a net loss from operations

during the period of $150,000 and its assets sold at a loss of $100,000 Apex reported

income from continuing operations of

$128,387 All items are taxed at 30%

How will this appear in the income

statement?

Discontinued Operations Example

Discontinued Operations Example

Computation of Loss from Discontinued Operations

(Net of Tax Effect):

Income Statement Presentation:

Discontinued Operations Example

Learning Objectives

Define extraordinary items and describe the appropriate income statement presentation for

these transactions.

During the year, Apex Co experienced a

loss of $75,000 due to an earthquake at one

of its manufacturing plants in Nashville

This was considered an extraordinary item

The company reported income before

extraordinary item of $128,387 All gains

and losses are subject to a 30% tax rate.

How would this item appear in the

income statement?

Extraordinary Items Example

Income Statement Presentation:

Extraordinary Items Example

Computation of Loss from Extraordinary Item (Net of

Tax Effect):

Unusual or Infrequent Items

Items that are material and are either

unusual or infrequent— but not both —

are included as a separate item in

continuing operations.

Learning Objectives

Define earnings per share (EPS) and explain required disclosures of EPS for certain income

statement components.

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.

the options were exercised.

Earnings Per Share Disclosure

Report EPS data separately for:

1 Income from Continuing Operations

2 Separately Reported Items

a) Discontinued Operations b) Extraordinary Items

3 Net Income

Type of Accounting

Change in Accounting

Principle

Change from one GAAP method

to another GAAP method Change in Accounting

Estimate

Revision of an estimate because of new information or new experience

Change in Reporting

Entity

Preparation of financial statements for an accounting entity other than the entity that existed in the previous period

Accounting Changes

Change in Accounting Estimate

Revision of a previous accounting

estimate

Use new estimate in

current and future

periods

Includes treatment for

changes in depreciation,

amortization, and depletion methods

Change in Accounting Estimate Example

On January 1, 2013, Palm Corp purchased equipment costing $30,000, with a useful life of 10 years and no salvage value

During 2013 , The Corporation determine that the remaining useful is 5 years We

use straight-line depreciation.

Compute the revised depreciation

expense for 2013.

Asset cost $ 30,000

Accumulated depreciation

Record depreciation expense of $4,200 for

2006 and subsequent years.

Change in Accounting Estimate Example

Change in Accounting Principle

 Occurs when changing from one GAAP

method to another GAAP method

 For example, a change from LIFO to FIFO

 Voluntary changes in accounting

principles are accounted for

retrospectively by revising prior years’

financial statements.

 Changes in depreciation, amortization, or

depletion methods are accounted for the

same way as a change in accounting

estimate

Change in Accounting Principle

During the year, Apex Co decided to change from the double-declining balance to the

straight-line method for depreciation The

effect of this change is an increase in net

income of $65,000 Apex reported income of

$128,387 during the year All items of

income are subject to a 30% tax rate.

How would this item appear on the

income statement?

Income Statement Presentation:

Example

Change in Reporting Entity

If two entities combine, a single set of consolidated

financial statements is generally required.

Learning Objectives

Explain the accounting treatments correction of

errors.

Correction of Accounting Errors

Errors occur when transactions are either

recorded incorrectly or not recorded at all

Previous years’ financial statements that are incorrect as a result of the error are retrospectively restated to

reflect the correction

Material Errors

Discovered in

Subsequent Year

 Corrections of errors from a

Prior Period Adjustments Example

While reviewing the depreciation entries for 2011-2014, the controller found that

in 2013 depreciation expense was

incorrectly debited for $150,000 when in

fact it should have been debited

$125,000 All items are taxed at 30%

Prepare the necessary journal entry in

2014 to correct this prior period error.

GENERAL JOURNAL Page: 180

12/31/13 Depreciation Expense 150,000

Accumulated Depreciation 150,000

If this was the original entry, how do we correct it?

Can we just reverse it?

Why or why not?

If this was the original entry, how do we correct it?

Can we just reverse it?

Why or why not?

Prior Period Adjustments Example

GENERAL JOURNAL Page: 180

GENERAL JOURNAL Page: 180

We can’t credit Depreciation Expense

since it was closed in 2003, so we credit

Retained Earnings

Prior Period Adjustments Example

GENERAL JOURNAL Page: 180

Comprehensive Income

An expanded version of income that includes four types of gains and

losses that traditionally have not been included

in income statements.

Other Comprehensive Income

Statement of Financial Accounting Standards No 130

Comprehensive income includes traditional net income and changes in equity from nonowner transactions.

Statement of Financial Accounting Standards No 130

Comprehensive income includes traditional net income

and changes in equity from nonowner transactions.

1 Changes in the market value of securities available for sale

(described in Chapter 12)

2 Gains, losses, and amendment costs for pensions and other

postretirement plans (described in Chapter 17)

3 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 (described in Chapter 14)

4 Gains or losses from changes in foreign currency exchange rates

(discussed elsewhere in your accounting curriculum)

1 Changes in the market value of securities available for sale

(described in Chapter 12)

2 Gains, losses, and amendment costs for pensions and other

postretirement plans (described in Chapter 17)

3 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 (described in Chapter 14)

4 Gains or losses from changes in foreign currency exchange rates

(discussed elsewhere in your accounting curriculum)

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 millions, except shares) 2004 2003 Common Stockholders' Investment:

Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares $ 30 $ 30 issued for 2003

Additional paid-in capital 1,079 1,088 Retained earnings 7,001 6,250 Accumulated other comprehensive loss (46) (30)

8,064

7,338 Less deferred compensation and treasury

stock at cost 28 50 Total common stockholders' investment $ 8,036 $ 7,288

FedEx Corporation Balance Sheet 31-May

Learning Objectives

Describe the purpose of the statement of cash

flows.

The Statement of Cash Flows

 Provides relevant information about a company’s cash receipts and cash disbursements.

 Helps investors and creditors to assess

 future net cash flows

 liquidity

 long-term solvency.

 Required for each income statement period

presented.

Learning Objectives

Identify and describe the various classifications

of cash flows presented in a statement of cash

flows.

Operating Activities

Cash Flows from Operating Activities

Cash Flows from Operating Activities

Direct and Indirect Methods of Reporting

Two Formats for Reporting Operating Activities

Reports the cash

effects of each

operating activity

Direct Method

Starts with accrual net income and converts to cash

basis Indirect Method

Direct and Indirect Methods

Cash flows from Operating Activities

Cash received from customers $ 78

Cash paid for administrative expenses (25)

Net cash flows from operating activities $ 53

ARLINGTON LAWN CARE Statement of Cash Flows For the Year Ended December 31, 2013 ($ in thousands) Direct Method Cash flows from Operating Activities Net income $ 35

Adjustments for noncash effects: Depreciation expense $ 8

Increase in accounts receivable (12)

Increase in accounts payable 7

Increase in income taxes payable 15 18

Net cash flows from operating activities $ 53

ARLINGTON LAWN CARE

Statement of Cash Flows For the Year Ended December 31, 2013

($ in thousands)

Indirect

Method

Cash Flows from Investing Activities

Cash Flows from Investing Activities

 Sale of investment securities

(stocks and bonds).

 Sale of investment securities

(stocks and bonds).

 Collection of nontrade

receivables.

_

Outflows to:

 Purchase of long-term assets

used in the business.

 Purchase of investment

securities (stocks and bonds).

 Loans to other entities.

Outflows to:

 Purchase of long-term assets

used in the business.

 Purchase of investment

securities (stocks and bonds).

 Loans to other entities.

Cash Flows from Financing Activities

Cash Flows from Financing Activities

+

_

Financing Activities

Inflows from:

 Sale of shares to owners.

 Borrowing from creditors

through notes, loans,

mortgages, and bonds.

Inflows from:

 Sale of shares to owners.

 Borrowing from creditors

through notes, loans,

mortgages, and bonds.

Outflows to:

 Owners in the form of dividends

or other distributions.

 Owners for the reacquisition of

shares previously sold.

 Creditors as repayment of the

principal amounts of debt.

Outflows to:

 Owners in the form of dividends

or other distributions.

 Owners for the reacquisition of

shares previously sold.

 Creditors as repayment of the

principal amounts of debt.

Cash Flow Examples

Cash Flow Examples

Balance Sheets of Dublin Enterprises($ in millions):

Income Statement For the Year Ended December 31, 2013

-Revenue ……… $2,100 Cost of goods sold………(1,400) Gross profit ……… 700

Operating expenses: Selling and administrative … (355)

Depreciation expense ……… (85)

Total operating expenses ……… (440)

Income before income taxes ……… 260

Income tax expense ……… (78)

Net income ……… 182

Balance Sheets of Dublin Enterprises($ in millions):

Comparative Balance Sheets 12/31/13 12/31/12

Assets:

Cash ……… $ 300 ………$ 220

Accounts receivable (net) ………227 ……… 240

Inventory ……….160 ……… 120

Property, plant & equipment ……… 960 ……… 800

Less: Accumulated depreciation …………(405) ……… (320)

Total assets ……….1,242 ……… 1,060 Liabilities and shareholders’ equity: Accounts payable ………145 ……… 130

Payables for S&A expenses ……….147 ……… 170

Income taxes payable ……… 95 ……… 50

Long-term debt ……… –0– ……… 100

Common stock ………463 ……… 400

Retained earnings ……… 392 ……… 210

Total liabilities and shareholders’ equity 1,242 ……….$1,060

(S&A: Selling & Administrative)

Required:

Prepare DEI’s 2013 statement of cash flows using the direct method &

indirect method.

Noncash Investing and Financing Activities

Significant investing and financing

transactions not involving cash also

are reported.

Acquisition of equipment (an investing activity) by

issuing a long-term note payable (a financing

activity).