The Income Statement and
Statement of Cash Flows
Sid Glandon, DBA, CPA
Associate Professor of Accounting
Comprehensive Income

Total change in equity EXCLUDING
transactions with owners
Other Comprehensive Income

Comprehensive Income
– Change in equity as a result of non-owner
transactions
– Net income, plus (minus)
– Other Comprehensive Income
• Unrealized gains/losses
• Foreign currency translations

Presentation
– Extension of income statement
– Statement of comprehensive income
– Statement of shareholders’ equity
Elements of the Income Statement

Operating income
– Revenues
– Expenses

Other income (expense)
– Gains
– Losses
Multiple-Step Income Statement

Separation of
– Operating activities
– Nonoperating activities

Classification of expenses by functions
– matches costs and expenses with related
revenues
Separately Reported Items
Discontinued Operations (net of tax)
 Extraordinary Items (net of tax)

Format: Multi-Step Income Statement
Operating section
 Nonoperating section
 Income tax
 Discontinued operations
 Extraordinary items
 Earnings per share

Operating Section
Sales (or revenue)
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
Administrative expenses
Income from operations
$XXX
XXX
XXX
XXX
XXX
XXX
$XXX
Nonoperating Section
Income from operations
Other revenues and gains
Other expenses and losses
Income before income tax
$XXX
$XXX
(XXX)
XXX
XXX
Separately Reported Items

Reported above the line - Income from
continuing operations before income tax
– Unusual gains and losses (if material)

Reported below the line - Income before
discontinue operations and extraordinary item
– Discontinued operations (net of tax)
– Extraordinary items (net of tax)
Separately Reported Items
Reported Below the Line
Income before income tax
Income tax
Income before discontinued operations
and extraordinary items
Discontinued operations (net of tax)
Extraordinary items (net of tax)
Net Income
XXX
XXX
XXX
XXX
XXX
XXX
Intra-Period Tax Allocation
Income from operations
 Discontinued operations
 Extraordinary items

Earnings Per Share (EPS)

Reported on the face of the income statement
– Income before discontinued operations and
extraordinary items
– Separately reported items
• Discontinued operations (net of tax)
• Extraordinary items (net of tax)
– Net income

EPS calculation
– [Net income less preferred dividends] ÷ [weighted
average of common shares outstanding]
EPS
Earnings Per Share:
Income from continuing operations
Discontinued operations (net of tax)
Extraordinary items (net of tax)
Net Income
$X.XX
X.XX
X.XX
$X.XX
Income Statement Format
Sales (or revenue)
Cost of goods sold
Gross profit
Operating expenses
Operating income
Other income (expense)
Income before income tax
Income tax
Income from continuing operations
Discontinued operations (net)
Extraordinary items (net)
Net income
EPS:
Income from continuing operations
Discontinued operations (net)
Extraordinary items (net)
Net income
$XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
$XXX
$X.XX
X.XX
X.XX
$X.XX
Accounting Changes
Change in accounting principle
 Change in estimate
 Change in reporting entity

Change in Accounting Principle

Accounted for retrospectively
– Revise prior years’ financial statements
• Note: that a change in amortization,
depreciation or depletion method is a change in
accounting principle, but is reported as a
change in accounting estimate.
Change in Accounting Estimate

Accounted for prospectively
– Adjust current and future years

Estimates include:
– Amortization
– Depreciation
– Depletion
– Bad debt expense
Change in Reporting Entity

Accounted for retrospectively
– Revise prior years’ financial statements
Correction of Accounting Errors
Required a prior period adjustment to
retained earnings
 Made to the earliest period reported in
the comparative financial statements

Retained Earnings Statement
Beginning balance
 Prior period adjustment

– correction of an error in the financial
statements of a prior period
Income or loss
 Dividends
 Ending balance

Statement of Cash Flows
Operating activities
 Investing activities
 Financing activities


Separately reported
– Non-cash investing and/or financing
activities
Methods of Presenting
Cash Flows from Operating Activities
Direct method
 Indirect method

– Reconciliation of net income to cash flows
Indirect Method of Reporting Cash
Flows from Operating Activities

Net income
– Plus:
• Non cash charges
• Increases in current liabilities
• Decreases in current assets
– Less:
• Increases in current assets
• Decreases in current liabilities
– Plus: losses from investing or financing activities
– Less: gains from investing or financing activities
– Net cash provided by (used by) operating activities
Statement of Cash Flows Format
Cash Flows from Operating Activities
Net income
Add: Depreciation, amortization
Increases in current liabilities
Decreases in current assets
Less: Increases in current assets
Decreases in current liabilities
Add: Losses from investing/financing activities
Less: Gains from investing/financing activities
Net cash provided by (used by ) operating activities
Cash Flows from Investing Activities
Sale of property/investments
Purchase of property/investments
Net cash provided by (used by ) investing activities
Cash Flows from Financing Activities
Sale of debt or equity securities
Repurchase/Payment of debt or equity securities
Payment of dividends
Net cash provided by (used by) financing activities
Net increase in cash
Beginning cash
Ending cash
$XXX
$XXX
XXX
XXX
(XXX)
(XXX)
XXX
(XXX)
XXX
XXX
XXX
(XXX)
XXX
XXX
(XXX)
(XXX)
XXX
XXX
XXX
$XXX