Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College

C H A P T E R
4

1. Identify the uses and limitations of an income statement.
2. Prepare a single-step income statement.
3. Prepare a multiple-step income statement.
4. Explain how irregular items are reported.

5. Explain intraperiod tax allocation.
6. Explain where earnings per share information is reported.
7. Measure and report gains and losses from discontinued operations.
8. Prepare a retained earnings statement.

Income
Statement
Format of the
Income Statement
Reporting
Irregular Items
Special Reporting
Issues
Usefulness
Limitations
Quality of earnings
Elements
Single-step
Multiple-step
Intermediate components
Condensed income statement
Discontinued operations
Extraordinary items
Unusual gains and losses
Intraperiod tax allocation
Earnings per share
Retained earnings statement

Uses:
• Evaluate past performance
• Assist in predicting future performance
• Assess potential risk in achieving future cash flows
Limitations:
• Items are excluded if they cannot be reliably measured
• Amounts reported are affected by accounting methods used
• Use of estimates

• The reliability of the information presented is dependent of the quality of earnings
• Information presented (content) is of high quality (or more reliable) if it demonstrates the following attributes:
– contains less judgement and less bias
– can be correlated with cash flows from operations
– has greater predictive and feedback value (i.e. represent ongoing operations )
– represents economic reality (all significant events have been measured and appropriately reported)
• Recall the discussion from Chapter 2 on the qualitative characteristics of information

• Displays only two groupings:
– Revenues
– Expenses
• Income tax expense may be reported as a separate deduction to arrive at net income
• Advantages:
– Ease of preparation
– Elimination of classification problems for various revenue and expense items
• Disadvantages:
– Lack of additional information for users/decision making
– Separation of operating from non-operating activities

Revenues
-
Expenses
=
NET INCOME
Earnings per
Share
Revenues
Sales
Other Revenues
Expenses
Cost of Goods Sold
Selling & Admin. Expenses
Interest Expense
Income Tax Expense
Any Gains/Losses from
Discontinued Operations or
Extraordinary Items must be disclosed separately from
Continuing Operations

• Operating and non-operating activities displayed as separate sections of the income statement
• Expenses classified by function (e.g. cost of goods sold)
• Income tax expense always shown as a separate item for, and within, each section of the statement
• Advantages of this method include:
– provides greater insight into the performance of the enterprise
– provides better opportunity for comparison within the industry
– information provided seen as ‘higher’ quality due to greater predictive and feedback values

Continuing Operations
Operating Section
Nonoperating Section
Income Tax
Goodwill
Discontinued Operations
Income/Loss from Operations
Gain/Loss from Disposition
Reported Net of Taxes
Extraordinary Items
Material Gains/Losses
Reported Net of Taxes

Operating Section
Nonoperating Section
Income Tax
Goodwill
Net Sales
Cost of Goods Sold
Selling Expenses
Administrative or General Expenses
Other Revenues and Gains
Other Expenses and Losses
On Income from
Continuing Operations only
Amortization charge (net of taxes)

• Expenses are reported on the income statement in group totals
• Details of the various expense groups are reported on separate schedules
• Provides the advantage of a concise income statement
– All information is still available to statement users
– Useful when inclusion of all expense detail on the income statement would make the statement
‘cluttered’

• Include the following:
– Discontinued operations
– Extraordinary items
– Unusual gains and losses
• These items are reported on the income statement
• Other items are recorded as adjustments to retained earnings ( CICA Handbook, Section 1506 )
• These ‘other items’ include the following: i. Errors from prior years ii. Retroactively applied changes in accounting policies iii. Foreign exchange gains and losses on self-sustaining foreign subsidiaries

s
• Discontinued operations refer to the disposal of a segment.
• To qualify :
the segment must be a significant and separate line of business
its assets and operations must be distinguishable from other assets and operations
• A distinction is made between:
the segment’s results of operations
the disposal of the segment’s assets
• Each is reported net of tax

• There are three important dates when reporting discontinued operations:
- The measurement date
- The year-end date
- The disposal date
• The measurement date is when management commits itself to a plan of segment’s disposal; gains/losses are accrued
• The year-end date is when the discontinued operation financial information is completed for reporting purposes
• The disposal date is the date of sale of the segment

• There are three distinct reporting scenarios:
1. No Phase-Out Period:
• Measurement date and disposal date are the same
(and are within the fiscal year)
2. Phase-Out Period:
• Disposal date falls after the measurement date
(but both are within the fiscal year)
3. Extended Phase-Out Period:
• Disposal date falls after the measurement date
( and after the end of the fiscal year)

Jan. 1
Oct. 1 Dec. 31
Operating Income for the Segment is calculated for this time period
Measurement
Date and
Disposal Date
Fiscal Year
End Date
Gain or Loss on Disposal is
Measured at this Date

Income from continuing operations (net of tax) $xx,xxx
Discontinued Operations:
Income (Loss) from operations (net of tax) $xx,xxx
Gain (Loss) on disposal (net of tax) xx,xxx xx,xxx
Net Income $xx,xxx

Jan. 1
Oct. 1
Phase Out
Period
Dec. 1 Dec. 31
Operating Income for the Segment is calculated for this time period
Measuremen t Date
Disposal
Date
Gain or Loss on Disposal =
Segment Operating Income during Phase Out Period +
Disposal of Net Assets
Fiscal
Year
End

Income from continuing operations (net of tax) $xx,xxx
Discontinued Operations:
Income (Loss) from operations (net of tax) $xx,xxx
Gain (Loss) on disposal of $x and operating income (loss) of $x both (net of tax) xx,xxx xx,xxx
Net Income $xx,xxx

Jan. 1 Oct. 1 Dec. 31
Extended Phase-Out Period
May. 1
Operating Income for the Segment is calculated for this time period
Measurement
Date
Fiscal
Year
End
Gain or Loss on Disposal
Disposal
Date
If Loss estimated – report at Measurement Date
If Gain estimated – recognize when realized

Expected Loss on Disposal
Income from continuing operations (net of tax) $xx,xxx
Discontinued Operations:
Income (Loss) from operations (net of tax) $xx,xxx
Loss on disposal of $x and operating income (loss) during extended phase-out period of $x both (net of tax) xx,xxx
Net Loss on Disposal xx,xxx
Net Income $xx,xxx

Expected Gain on Disposal – Current Year Income
Statement
Income from continuing operations (net of tax) $xx,xxx
Discontinued Operations:
Income (Loss) from operations (net of tax) $xx,xxx
Operating income during extended phase-out period of $x (net of tax) xx,xxx
Net Gain xx,xxx
Net Income $xx,xxx

Expected Gain on Disposal – Following Year
Income Statement
Income from continuing operations (net of tax)
Discontinued Operations:
Gain on disposal of net assets (net of tax)
Net Income
$xx,xxx xx,xxx
$xx,xxx

• Presented separately on the Income
Statement (net of tax); generally following Discontinued Operations
• Characteristics:
– Material amounts
– Non-recurring events
– Differ significantly from the typical business activities

• Three qualifying criteria:
– Infrequent
– Atypical of normal business activities
– Not primarily dependent on management or owners’ decisions
• All three of these must be met in order to qualify as an Extraordinary Item

• CICA Handbook, Section 3480 lists the following as not qualifying as Extraordinary
Items:
1) Losses, or loss provisions, from bad debts and inventories
2) Foreign exchange gains and losses
3) Contract price adjustments
4) Gains and losses from investment write downs
5) Income tax adjustments
6) Income tax rate or law changes

• Gains and losses that do not qualify as an
Extraordinary Item, but are material in amount
• Disclosed separately on the income statement, immediately above Income
(Loss) before Extraordinary Items
• Alternative presentation is to display a separate section – “Unusual Items”

• Refers to the reporting of amounts Net of Tax
• Specifically the allocation of Income Taxes within a fiscal period
• Income Tax expense (or benefit) is calculated separately for each of:
– income from continuing operations
– discontinued operations
– extraordinary items

• Earnings per share (EPS) is probably the most important business indicator figure
• Indicates dollars earned per common share; it does not report the dollars paid (or to be paid) per common share
• Earnings per share is required to be disclosed on the income statement for all the major sections

•Calculated as:
Net Income less Preferred Dividends
Weighted Average of Common Shares Outstanding
•Preferred dividends are those dividends that have been declared (non-cumulative) or in arrears
(cumulative) for one year only
•Earnings per share is subject to dilution
(reduction) , if issue of additional shares is possible in the future

• Retained earnings are increased by net income and decreased by net loss and dividends for the year
• Corrections of errors in prior period financial statements are shown as prior period adjustments to the beginning balance in retained earnings
• Any part of retained earnings, appropriated
(restricted) for a specific purpose, are shown as
Appropriated Retained Earnings
• Earnings may appropriated by contractual obligation, corporate policy, or discretionary

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