Chapter 4

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Chapter 4
Income Statement
1.
2.
3.
4.
To help evaluate management's past
performance.
To help predict the company’s future income
and cash flows.
To help assess the company’s
“creditworthiness.”
To help in comparisons with other
companies.


Income is money received from the sales of
services or products that a business
provides. This may include items such as
sales of crops, livestock.
Income reported on income statement
is based on Accrual Accounting, all
revenues earned in the year & all expenses
incurred in that year (Not on the cash
generated or cash paid during accounting
period).



The income statement presents the financial
results of a business for a stated period of
time.
The statement shows the amount of revenue
generated and expenses incurred by an
organization, as well as any resulting net
profit or loss.
The income statement is an essential part of
the financial statements that an organization
releases.



Covers a period of time
◦ For the Year/Quarter/Month Ended...
Income Statement may be presented in the
multi-step or single step form
Single-step format
◦ Total of all revenues and gains
◦ Less the total of all expenses and losses
◦ No operating Income in this analysis.

Multiple-step format
◦ Gross profit (sales – cost of goods sold)
◦ Operating income (income before taxes,
interest, and other revenues and
expenses)
◦ Income before taxes
◦ Net income

sales revenue or sales

cost of merchandise sold
◦ the amount that a business earns from selling
merchandise inventory is called sales revenue, or
sales.
◦ the major expense of a merchandiser is cost of
goods sold.

Gross margin or Gross profit
◦

The excess of sales over cost of sales is called
gross margin.
Merchandise inventory
◦ Merchandise on hand at the end of an account
period.
Proper
Heading
Revenue
s & Gains
Expenses
& Losses
{
{
{
Income Statement
For the Year Ended 12/31/03
Revenues and gains:
Sales, net
Interest income
Gain on sale of plant assets
Total revenues and gains
Expenses and losses:
Cost of goods sold
Selling expenses
General and admin. exp.
Depreciation expense
Interest expense
Income taxes
Loss on sale of investment
Total expenses & losses
Net income
$
$
785,250
62,187
24,600
872,037
351,800
197,350
78,500
17,500
27,000
62,500
9,000
$
743,650
128,387
Multiple-Step Company
Income Statement
For the Year Ended December 31, 20XX
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses:
General & Administrative
Advertising
Uncollectible Accounts
Operating Income
Interest Income
Other Revenue
Income Before Taxes
Income Taxes
Net Income
$ 496,120
234,972
261,148
$ 131,409
128,325
22,664
Sales
Interest Income
Other Income
$ 496,120
122,757
44,715
663,592
282,398
(21,250)
122,757
44,715
Single-Step Company
Income Statement
For the Year Ended December 31, 20XX
167,472
146,222
8,498
$ 137,724
Costs and Expenses:
Cost of Goods Sold
General & Administrative
Advertising
Uncollectible Accounts
Income Before Taxes
Income Taxes
Net Income
$ 234,972
131,409
128,325
22,664
517,370
146,222
8,498
$ 137,724


Revenue from the sale of principal goods or
services sold to customers
Shown net of
◦ Discounts
◦ Returns
◦ Allowances

The cost of goods that were sold to produce
revenue
Retailer
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
Manufacturer
Beginning Inventory
+ Cost of Goods
Manufactured
– Ending Inventory
= Cost of Goods Sold


Reflects the nature of the business
Examples
◦
◦
◦
◦
Lease revenue
Royalty revenue
Finance charges
Commission revenue

Selling expenses
◦ Result from the company’s effort to create sales
◦ Examples
 Advertising
 Sales commissions
 Sales supplies used

Administrative expenses
◦ Relate to the general administration of the
company’s operation
◦ Examples
 Salaries
 Insurance
 Bad debt expense

Secondary activities not directly related to
operations
◦
◦
◦
◦
Dividend income
Interest income
Gains (losses) from sale of assets
Interest expense

Unusual or Infrequent Items Disclosed
Separately
◦ If material, disclosed separately, before income
taxes
◦ Relate to operations

Equity in Earnings of Nonconsolidated
Subsidiaries
◦ The investor’s proportional share of the
investee’s net income
◦ Does not represent cash flow to the investor
 Cash dividends received represent cash flow
◦ Analysis issues:
 Investor’s net income includes revenue of other
entity
 May distort ratios
 Presented before tax; tax consequences typically
immaterial

Income Taxes Related to Operations
◦ Federal, state, and local
◦ Includes both paid and deferred taxes

Discontinued Operations
◦ Reported net of income tax
◦ Analysis issues:
 Inadequate disclosure of associated assets
 Lack of historical profit and loss information on the
discontinued operations

Minority Share of Earnings
◦ Earnings of a partially-owned consolidated
subsidiary that would accrue to the minority
owners
◦ Presentation may be either pre-tax or net-of-tax

Earnings per Share
Net income ÷ Number of shares outstanding
Reported as part of the Statement of Owners' Equity or
combined with the Income Statement
+
±
=
+
–
=
Beginning of year balance of retained earnings
Prior period adjustments
Cumulative effect of a change in accounting
principle
Beginning balance as adjusted
Net income
Dividends
End-of-year balance of retained earnings

Comprehensive Income may be
reported in one of three ways:
◦ on the face of the income statement
◦ in a separate statement of
comprehensive income
◦ in a statement of stockholders’
equity.
Net income
+ The period’s change
comprehensive income
= Comprehensive income
in
accumulated
other
• Foreign currency translation adjustments
• Unrealized holding gains and losses on availablefor-sale marketable securities
• Changes to owners' equity resulting from
additional minimum pension liability adjustments
• Unrealized gains and losses from derivative
instruments
XYZ Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 20XX
Net income
Other comprehensive income
Available-for-sale security adjustment, net of tax
Minimum pension liability adjustment, net of tax
Foreign currency transaction adjustment, net of tax
Total other comprehensive income
Comprehensive income
$ 34,000
5,500
3,500
(5,000)
4,000
$ 38,000
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 20XX
Sales
Cost of goods sold
$ 230,000
140,000
Gross profit
Operating expenses
370,000
40,000
Operating income
330,000
Other income
4,000
Income before income taxes
326,000
Income taxes
20,000
Net income
Other comprehensive income
Available-for-sale security adjustment, net of tax
Minimum pension liability adjustment, net of tax
Foreign currency transaction adjustment, net of tax
306,000
5,500
3,500
(5,000)
Other comprehensive income
4,000
Comprehensive income
$ 310,000
Earnings per share (for net income only)
$
2.80
XYZ Corporation
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 20XX
Beginning Balance
Net Income
Available-for-sale
security adjustment,
net of tax
Minimum pension
liability adjustment, net
of tax
Foreign currency
transaction adjustment,
net of tax
Comprehensive income
Ending Balance
Retained
Total
Earnings
$180,000
$60,000
34,000
34,000
Accumulated
Other
Comprehensive
Common Stock
Income
Amount Shares
$10,000 $110,000 55,000
5,500
5,500
3,500
3,500
(5,000)
38,000
(5,000)
$218,000
$94,000
$14,000 $110,000
55,000




What is the primary difference between the
Balance Sheet and the Income Statement?
Owners Equity is comprised of what two
components?
What is the only account that is not appear in
the trial balance ?
Account appear both of balance sheet and
income statement.
ACCOUNT
Accounts payable
Accounts receivable
Cash
Capital Stock
Delivery equipment
Delivery expense
Delivery revenue
Insurance expense
Loans payable
Notes payable
Office equipment
Prepaid insurance
Rent expense
Retained earnings (on April 30th)
Wages expense
BALANCE
$10,200
23,000
8,000
25,000
22,000
1,300
12,000
500
10,500
3,500
3,700
2,000
1,500
8,000
7,200
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