Lecture Intermediate Accounting (13th edition) - Chapter 4: Income statement and related information

After studying this chapter, you should be able to: understand how firms create value and manage performance, understand how users use information about performance to make decisions, understand the concept of and be able to assess quality of earnings/information,...

Chapter 4-1 CHAPTER INCOME STATEMENT AND RELATED INFORMATION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield  Chapter 4-2 Learning Objectives Learning Objectives Understand the uses and limitations of an income statement Prepare a single­step income statement Prepare a multiple­step 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 Statement and Related Information Income Statement and Related Information Income Statement Format of the Income Statement Usefulness Limitations Elements Single-step Quality of Earnings Multiple-step Condensed income statements Chapter 4-4 Reporting Irregular Items Discontinued operations Extraordinary items Unusual gains and losses Changes in accounting principles Changes in estimates Corrections of errors Special Reporting Issues Intraperiod tax allocation Earnings per share Retained earnings statement Comprehensive income Income Statement Income Statement Usefulness Evaluate past performance Predicting future performance Help assess the risk or uncertainty of  achieving future cash flows Chapter 4-5 LO 1  Understand the uses and limitations of an income statement Income Statement Income 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 1  Understand the uses and limitations of an income statement Income Statement Income 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 1  Understand the uses and limitations of an income statement Format of the Income Statement Format of the Income 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 1  Understand the uses and limitations of an income statement Format of the Income Statement Format of the Income Statement Elements of the Income Statement Expenses  – Outflows or other using­up 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 1  Understand the uses and limitations of an income statement Format of the Income Statement Format of the Income 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,  write­offs of assets Chapter 4-10 LO 1  Understand the uses and limitations of an income statement Special Reporting Issues Special Reporting Issues Woods, Inc Statement of Retained Earnings For the Year Ended December 31, 2011 Balance, January Net income Dividends Balance, December 31 $ $ 1,050,000 360,000 (300,000) 1,110,000 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 7  Prepare a retained earnings statement Special Reporting Issues Special Reporting Issues Woods, Inc Statement of Retained Earnings For the Year Ended December 31, 2011 Balance, January Prior period adjustment - error correction Balance, January (restated) Net income Dividends Balance, December 31 Chapter 4-50 Solution on  notes page $ $ 1,050,000 (50,000) 1,000,000 360,000 (300,000) 1,060,000 LO 7  Prepare a retained earnings statement Special Reporting Issues Special Reporting Issues Restricted Retained Earnings Disclosed In notes to the financial statements As Appropriated Retained Earnings Chapter 4-51 LO 7  Prepare a retained earnings statement Special Reporting Issues Special Reporting Issues Comprehensive Income All changes in equity during a period except those resulting from  investments by owners and distributions to owners.  investments by owners and  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 7  Prepare a retained earnings statement Special Reporting Issues Special Reporting Issues Comprehensive Income I nc o m e   S t a t e m e nt   ( in t ho us a nd s ) S a le s $  2 ,0 0 Co s t o f  g o o d s  s o ld Gr o s s  pr o f it O pe r a t ing   e x pe ns e s :      14 ,0 0      13 ,0 0 S e lling  e x pe ns e s        10 ,0 0 Ad m inis t r a tive  e x pe ns e s      4 ,0 0 T o ta l o pe r at ing  e x pe ns e      5 ,0 0 I nc o m e   f r o m   o pe r a t io ns      8 ,0 0 O t h e r   r e ve nue   ( e x pe ns e ) : I nt e r e s t  r e ve nue I nt e r e s t  e x pe ns e T o ta l o t he r I nc o m e  b e f o r e  t ax e s I nc o m e  t a x  e x pe ns e Ne t   inc o m e Chapter 4-53        17 ,0 0     ( 1,0 0 )        ( ,0 0 )      7 ,0 0      2 ,0 0 $    5 ,0 0 + Other Comprehensive Income Unrealized gains and losses  on available­for­sale  securities Translation gains and losses  on foreign currency Plus others Reported in Stockholders’  Equity LO 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting 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 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting Issues Three approaches to reporting Comprehensive Income (SFAS  No. 130, June 1997): A second separate income statement; A combined income statement of comprehensive income; or As part of the statement of stockholders’ equity Chapter 4-55 LO 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting Issues Comprehensive  Income Illustration 4­19 Second     income  statement Chapter 4-56 LO 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting Issues Comprehensive  Income Combined income  statement Chapter 4-57 V. Gill I nc Co m b ine d  S t at e m e nt  o f  Co m p r e h e ns ive  I nc o m e Fo r  t h e  Ye ar  End e d  De c e m b e r  3 1, 2 10 S ale s  r e ve nue $   0 ,0 0 Co s t  o f  g o o d s  s o ld     6 0 ,0 0 Gr o s s  p r o f it     2 0 ,0 0 O p e r at ing  e x p e ns e s       9 ,0 0 Ne t  inc o m e      110 ,0 0 Unr e aliz e d  h o ld ing  g ain, ne t  o f  t ax       3 ,0 0 Co m p r e h e ns ive  inc o m e $   14 ,0 0 LO 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting Issues Comprehensive Income  ­ Statement of Stockholder’s Equity Illustration 4­20 Chapter 4-58 LO 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting Issues Comprehensive Income  ­ Balance Sheet Presentation Illustration 4­21 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 8  Explain how to report other comprehensive income Special Reporting Issues Special Reporting 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       c.  as a part of the statement of stockholders'  equity      d.  Any of these options is permissible Chapter 4-60 income LO 8  Explain how to report other comprehensive income  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 single­step or  multiple­step format.  iGAAP does not mention a single­step or multiple­step 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 4-61  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 do 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.  Chapter 4-62 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 back­up 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 ... Identify where to report earnings per share? ?information Prepare a retained earnings? ?statement Explain how to report other comprehensive? ?income Chapter 4-3 Income? ?Statement? ?and? ?Related? ?Information Income? ?Statement? ?and? ?Related? ?Information. . .CHAPTER INCOME STATEMENT AND RELATED INFORMATION Intermediate? ?Accounting 13th Edition Kieso, Weygandt,? ?and? ?Warfield  Chapter 4-2 Learning Objectives Learning Objectives Understand the uses? ?and? ?limitations of an? ?income? ?statement. .. Dividend revenue Rent revenue Chapter 4-8 LO 1  Understand the uses? ?and? ?limitations of an? ?income? ?statement Format of the? ?Income? ?Statement Format of the? ?Income? ?Statement Elements of the? ?Income? ?Statement Expenses