Fundamentals of Intermediate Accounting
Weygandt, Kieso, and Warfield
Chapter 5: Income Statement and
Related Information
Prepared by
Bonnie Harrison, College of Southern Maryland
LaPlata, Maryland
Chapter 5
Income Statement and Related Information
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After studying this chapter, you should be able to:
Identify the uses and limitations of an income
statement.
Prepare a single-step income statement.
Prepare a multi-step income statement.
Explain how irregular items are reported.
Explain intraperiod tax allocation.
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Chapter 5
Income Statement and Related Information
After studying this chapter you should be able to :
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Explain where earnings per share information
is reported.
Prepare a retained earnings statement.
Explain how other comprehensive income is
reported.
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Usefulness of Income Statement
1. Evaluate the past performance of the
enterprise.
2. Provide a basis for predicting future
performance.
3. Help assess the risk or uncertainty of
achieving future cash flows.
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Limitations of the Income
Statement
1. Items that cannot be measured reliably are
not reported in the income statement.
2. Income numbers are affected by the
accounting methods employed.
3. Income measurement involves judgment.
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The Single Step Income Statement
• This statement presents information in
broad categories.
• Major sections are Revenues and Expenses.
• The Earnings per Share amount is shown at
the bottom of the statement.
• There is no distinction between operating
and non-operating activities.
Single Step Statement
Revenues
Expenses
=
NET INCOME
Earnings per
Share
Revenues
Sales
Other Revenues
Expenses
Cost of Goods Sold
Selling & Admn Expenses
Interest Expense
Income Tax Expense
The Multiple Step Income Statement
• The presentation divides information into
major sections on the statement.
• The statement distinguishes operating from
non-operating activities.
• Continuing operations are shown separately
from irregular items.
• The income tax effects are shown separately
as well.
Multiple Step Income Statement
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Operating
Section
Non-Operating
2
Section
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Sales Revenue
less: Cost of Goods Sold
less: Selling Expenses
less: Administrative Expenses
Add: Other Revenues and Gains
Less: Other Expenses and Losses
Income Tax
Irregular
Items
5 Earnings per Share
Discontinued Operations (net of tax)
Extraordinary Items (net of tax)
Cumulative Effect of a Change in
Accounting Principle (net of tax)
Irregular Items: Discontinued
Operations
Criteria for Discontinued Operations
Discontinued operations refer to the disposal of a
segment.
To qualify:
 The segment must be a distinct 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 and

the disposal of the segment’s assets
Reporting Discontinued Operations
There are two important dates in reporting
discontinued operations:
• the measurement date and
• the disposal date
The measurement date is when management
commits itself to a plan of segment’s disposal.
The disposal date is the date of sale of segment.
Irregular Items:
Extraordinary Items
Extraordinary Items
• Extraordinary items are:
nonrecurring material items that
differ significantly from typical activities
• Extraordinary items must meet two tests:
they must be unusual and
they must be infrequent
• The environment in which the business operates
is of primary importance
Extraordinary Items: what they are not
• Losses from write-down or write-off of receivables,
inventories, etc.
• Gains and losses from exchange or translation of
foreign currency
• Gains and losses from the abandonment of
property used in business
• Effects of strike
• Adjustments or accruals on long term contracts.
Unusual Gains & Losses
• Items that are unusual OR infrequent, but
not both.
• If material, disclose separately.
• Do not disclose, net of taxes.
Irregular Items:
Cumulative Effect of a Change
in Accounting Principle
Change in Accounting Principle
• An accounting change results when:
• a new principle, different from the one in
use, is adopted.
• The effect of the change is to be disclosed
after extraordinary items.
• A change in principle is to be distinguished
from a change in estimates.
• A change from FIFO to LIFO method in
inventory costing is an example.
Change in Accounting Principle
Gilbert company buys and places in service an asset
on 1/1/2002. The cost is $100,000. Estimated useful
life is 4 years. Ignore salvage value. Tax rate is 30%.
The company uses the double-declining method of
depreciation in 2002 and 2003. It changes to the
straight-line method in 2004 (1/1/2004.)
Present the effect of the change in accounting principle.
Change in Accounting Principle
Year
Double-declining
Straight line
balance depreciation depreciation
2002 $50,000
2003 $25,000
Presentation
$25,000
$25,000
Net difference
Increases net income
Difference
$25,000
$ -0$25,000
Extraordinary Item
$XXXX
Cumulative Effect on prior years of
retroactive application of new depreciation
method (net of tax, $7,500)
$17,500
Changes in Accounting Estimates
• Accounting estimates will changes as new
events occur, more experience is acquired or
additional information is obtained
• Changes in accounting estimates are
accounted for in period of change and future
periods.
Changes in Accounting Estimates:
Example
On 1/1/2004, Gilbert Company (see preceding example
for accounting principle change) revises the useful life
of the asset to be 3 more years (2004, 2005 and 2006).
The salvage value is estimated to be $5,000.
This change involves a revision of initial estimates.
The depreciation method remains straight-line.
Changes in Accounting Estimates: Example
Book value (1/1/2004):
Less: Salvage value
Revised depreciable cost:
Revised depreciable cost:
Remaining useful life:
Annual straight-line depreciation:
(years 2004, 2005 and 2006)
$50,000
($5,000)
---------$45,000
$45,000
3 years
$15,000
Note: The changes in useful life and salvage value
do not affect prior periods
Intraperiod Tax Allocation
• Tax expense for year related to specific
items.
• Used for:
–
–
–
–
Income from continuing operations
Discontinued operations
Extraordinary items
Change in accounting principle
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Earnings per Share
• Earnings per share is a significant business indicator
figure.
• It is computed as:
Net Income less Preferred Dividends
Weighted Average of Common Shares Outstanding
• Earnings per share is required to be disclosed on the
income statement for all the major sections.
• Earnings per share is subject to dilution (reduction), if
issue of additional shares is possible in the future.
Retained Earnings Statement
• 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 for a
specific purpose, is shown as restricted earnings.
Other Comprehensive Income –
all changes in equity during a
period, except those resulting
from investments by or
distributions to owners.
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Other Comprehensive Income
must be displayed as:
• A separate statement of comprehensive
income OR
• Combined income statement and
comprehensive income statement OR
• Part of statement of stockholders equity
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