CHAPTER
Income Statement
and
Related
Information
……..…………………………………………………………...
Income and expenses for a given period of time.
Usefulness of the Income Statement
 evaluate past performance
 predict future performance
 assess uncertainty of future cash flows
4
Limitations of the Income Statement
Not every
relevant item is
included.
LIFO
FIFO
Numbers not
completely
reliable.
Reliable
measures not
always
available.
Numbers not
always
comparable.
Judgment is
frequently
involved.
$
D LL
Differences in
methods are
allowed.
Transaction approach
 Income calculated based on summary
information of revenue, expense, gain, and
loss transactions
Ledger Accounts
FORMAT OF THE INCOME STATEMENT
Elements
From ongoing, major
operations
From peripheral
transactions
Increase in Net
Assets
Decrease in
Net Assets
Single-Step Income Statement
Revenues
List and total
all revenues
and gains
- Expenses
Net Income
List and total
all expenses
and losses
Multiple-Step Income Statement
Shows both gross
and net sales.
Breakdown of
purchases and
merchandise
inventory.
Sales Revenues
- Cost of Goods Sold
+ Other Rev. & Gains
- Other Exp. & Losses
Income before income tax
Net Income
REPORTING IRREGULAR ITEMS
ALL-INCLUSIVE
APPROACH
CURRENT OPERATING
APPROACH
most items are recorded in
current period income
income from regular and
recurrent items is reported
MODIFIED ALL-INCLUSIVE
APPROACH
irregular items are highlighted
Discontinued Operations
Assets
Operating Results
Activities
Clearly
distinguishable
of the segment
Not “discontinued operations”
 disposal of a part of a business line
 shifting production locations
 phasing out a product line
Income from continuing operations
$20,000,000
Discontinued operations
Loss from operation of discontinued
division (net of tax)
$300,000
Loss from disposal of division
(net of tax)
Net Income
500,000
800,000
$19,200,000
Extraordinary Items
 Unusual (unrelated to ordinary activities)
 Infrequent
Not “extraordinary”
 write-down of receivables, inventories, etc.
 gains or losses from sale of PP&E
 effects of a strike
Question 27, p. 151
$450,000 gain on forced condemnation sale of facility.
Unusual Gains and Losses
 unusual or infrequent but not both
 report in “Other Gains and Losses”
 before income tax
Changes in Accounting Principle
 e.g. change in inventory or depreciation method
 report the retroactive impact as of the beginning
of the year
 report as an adjustment to beginning R/E; not on
the income statement
Brief Exercise 4-7, p. 153
Change in estimate of bad debt expense.
Changes in Estimates
 e.g. change in estimate of the useful life of an
asset or bad debts expense
 do not handle retroactively
 include in ordinary income
Prior Period Adjustments
 record as an adjustment to the beginning
balance of retained earnings
 does not affect net income
SPECIAL REPORTING ISSUES
Earnings per Share
perhaps the most widely followed number in all
of the financial statements
Basic EPS =
Net Income – Preferred dividends
Weighted average common shares outstanding
 break-down EPS for extraordinary items