I N T ERMEDIATE ACCOU N T I NG I
CHA PT ER 4
This presentation is under development.

The income statement displays a company’s operating performance during a particular reporting period.

Single-step
– lists all revenues and gains grouped together and all expenses and losses grouped together.

The advantage of the single-step income statement is simplicity of preparation
 Multiple-step – includes a series of intermediate subtotals

An advantage of the multiple-step income statement is that it separates operating and nonoperating items and allows for better analysis of income and expense items.

MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Revenues and gains:
Sales
Interest and dividends
Gain on sale of investments
Total revenues and gains
Expenses and losses:
Cost of goods sold
Office salaries
$302,371
47,341
Depreciation
Miscellaneous
24,888
16,300
Interest
Total expenses and losses
Income before income taxes
Income tax expense
Net income
14,522
$573,522
26,400
5,500
605,422
405,422
200,000
80,000
$120,000

MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Selling Expenses
General and Administrative Expenses
$47,341
24,888
Restructuring Costs
Total operating expenses
Operating income
16,300
Other income (expense):
Interest and dividend revenue
Gain on sale of investments
26,400
5,500
$573,522
302,371
271,151
88,529
182,622
Interest expense
Total other income, net
Income before income taxes
Income tax expense
Net income
(14,522)
17,378
200,000
80,000
$120,000

 Includes revenues, expenses, gains, and losses that will probably continue in future periods.
• Revenue – inflows of resources resulting from providing goods or services to customers
• Expenses – outflows of resources incurred in generating revenue
• Gain – increase in equity from peripheral or incidental transactions
• Loss – decrease in equity from peripheral or incidental transactions
 Gross profit is Sales less Cost of Goods Sold.
 A distinction is often made between operating and nonoperating (other) income.
 Income tax expense is shown as a separate expense.
Matching Principle – revenues and the expenses incurred to generate those revenues should be matched together in the same accounting period.

 Includes revenues, expenses, gains, and losses that will probably continue in future periods.
 Gross profit is Sales less Cost of Goods Sold.
 Income tax expense is shown as a separate expense.
 A distinction is often made between operating and nonoperating income.
Revenue – inflows of resources resulting from providing goods or services to customers
Expenses – outflows of resources incurred in generating revenue
Gain – increase in equity from peripheral or incidental transactions
Loss – decrease in equity from peripheral or incidental transactions

Operating Income
Includes revenues and expenses directly related to the primary revenuegenerating activities of the company.
• Sales revenue
• Services income
• Gains and losses from selling operating assets
Nonoperating Income
Relates to peripheral or incidental activities of the company
• Gains and losses from selling investments
• Interest Revenue and Expense

The ability of reported earnings to predict a company’s future earnings.
• To enhance predictive value, analysts try to separate a company’s permanent earnings effects from its transitory earnings (result from transactions or events that are not likely to occur again in the foreseeable future.)
Not all items included in operating income should be considered indicative of a company’s permanent earnings.
• Restructuring costs include costs associated with shutdown or relocation of facilities or downsizing of operations. GAAP requires these costs to be expensed in the period(s) incurred.
• Asset impairment losses, inventory write-down charges, losses from natural disasters such as earthquakes and floods, and gains and losses from litigation settlements are other operating expenses that call into question the issue of earnings quality.

Costs associated with
•
Reorganizing operations for greater efficiency
•
Shutdown or relocation of facilities
•
Downsizing of operations
 Reported as a separate line item in operating income
 Recognized only in the period incurred
 Disclosure notes should describe the situation
Exercise 4-5

Earnings per share should be disclosed on the face of the income statement

Calculate EPS for
• income from continuing operations
• discontinued operations
• net income

Calculated by dividing each earnings figure by the outstanding common stock shares
Brief Exercise 4-5

Involves the disposal or planned disposal of a component of an entity. A component is any part of the company, such as an operating segment or subsidiary, that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.
•
Reported separately, below income from continuing operations
•
Income tax expense or benefit is shown on a separate line
1. When the component has been sold, the income effects of a discontinued operation includes (1) the operating income or loss of the component from the beginning of the reporting period to the disposal date, and (2) the gain or loss on disposal.
2. When the component is considered held for sale, the income effects of a discontinued operation includes (1) operating income or loss of the component from the beginning of the reporting period to the end of the reporting period, and (2) an impairment loss if the book value, sometimes called carrying value or carrying amount, of the assets of the component is more than fair value minus cost to sell.

The Duluth Holding Company has several operating divisions.
In October 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles.
The division was sold on
December 18, 2016 for a net selling price of $14,000,000. On that date, the assets of the division had a book value of $12,000,000.
For the period January 1 through disposal, the division reported a pre-tax loss from operations of $4,200,000.
The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations.
Income from continuing operations
Discontinued operations:
Loss from operations of discontinued component
Income tax benefit
Loss on discontinued operations
Net income
(2,200,000)
880,000
$22,350,000
(1,320,000_
$21,030,000

The Duluth Holding Company has several operating divisions. In October of 2016, management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles. On December 31, 2016, the end of the company’s fiscal year, the division had not yet been sold. On that date, the assets of the division had a book value of $12,000,000 and a fair value, minus anticipated costs to sell, of $9,000,000. For the year, the division reported a pre-tax loss from operations of $4,200,000. The company’s income tax rate is 40% on all items of income or loss. Duluth generated after-tax profits of $22,350,000 from its continuing operations.
Income from continuing operations
Discontinued operations:
Loss from operations of discontinued component (7,200,000)
$4,200,000
2,880,000
$22,350,000
Net income
Book Value
$9,000,000
12,000,000
Loss from operations of Discontinued Component
(3,000,000)
($7,200,000)
(4,320,000)
$18,030,000

Brief Exercise 4-9
Exercise 4-4

I N T ERMEDIATE ACCOU N T I NG I – CHA PT ER 1
E N D OF P R ESENTATION