Chapter 5
Income Statement
Shows how well company did over a period of time. Helps in making
predictions about amount, timing and degree of uncertainty about
future cash flows. Best predicator of future performance is past
performance.
Header:
capital maintenance:
transactional approach:
comprehensive income:
Purposes of Income Statement:
1.
2.
3.
4.
return on investment:
risk:
financial flexibility:
operating capability:
earnings management –
Elements of income statement
1.
revenues:
a.
recognition:
b.
realization:
c.
four methods of revenue recognition
1. percent of completion
2.
proportional performance
3.
installment method
4.
cost recovery
2.
Expenses
Three recognition principles
a.
association of cause & effect
b.
systematic & rational
c.
immediate recognition
3.
Gains:
4.
Losses:
Differences between revenue/gain and expenses/losses
a)
b)
c)
Gains/Losses classified into three categories:
a)
b)
c)
Income from continuing operations
1.
Sales Revenue
2.
Cost of Goods Sold
3.
Operating Expenses
4.
Other Items
5.
Income Tax Expense
Single Step Format Vs. Multiple Step Format:
Single Step:
all revs & gains
less all exps & losses
income from continuing operations
Advantage:
Multiple Step:
+
-
Net Sales
COGS
Gross Margin (Gross Profit)
Operating Exps
Income from Operations
Other revs & gains
Other exps & losses
Income before taxes
income tax expense
income from continuing operations
Advantage:
Would income from continuing operations ever be different because
single-step were used instead of multiple step?
On either style Income Statement, additional information may
appear after Income from Continuing Operations; if it does not,
then of course Income from Continuing Operations would be called
.
All additional items are reported NET OF TAX.
What does "net of tax" mean?
taxes on gains:
taxes on losses:
1.
Discontinued Operations - disposal of compenent of business.
Two separate lines:
Operating income of segment up to date of disposal
and Gain or Loss on sale
Definition of a component:
Examples:
Disposal of segment
Not disposal of segment
Disclosures:
a)
b)
c)
d)
If you decide to sell in one period and the actual sale isn’t
until
another
period
classify
the
component
as
____________________________. Six criteria have to be met:
a)
b)
c)
d)
e)
f)
When classify as held for sale:
If fair value less the book value:
When you actually sell:
2.
Extraordinary Items-–
Unusual in nature
AND infrequent in occurrence,
considering the environment in which the company operates.
or by Pronouncement:
What do you do with economic events that are material, yet don't
meet the requirements for an extraordinary item? (i.e. they are
EITHER unusual or infrequent, but not both)
Always required
statement is
for
corporation
on
the
.
face
of
Net Income – Preferred Dividends
Weighted average common shares outstanding
Earnings per share -
the
income
Change in Accounting Estimate:
Examples: change in life or salvage value of PPE
Change in estimated collectability of A/R
Limitations of Income Statement –
a)
b)
c)
d)
e)
f)
Statement of Retained Earnings -
Net Income/Net Loss –
Dividends -
Change in Accounting Principle -
Correction of Error -
Comprehensive Income
Three ways to report:
1)
2)
3)
Statement of Cash Flow