CHAPTERS
15 &18
FINANCIAL REPORTING:
Part 1: The Income Statement
INCOME STATEMENTS
Additional Sections
•
Additional sections follow below operating income;
they are for reporting material items not typical of
regular operations.
•
These non-typical times include:
1. Non Operating Revenues and Expenses
2. Discontinued operations
3. Extraordinary items
•
Each item should be carefully explained in notes to
the financial statements, and the income statement
should report the income tax expense or savings
applicable to each item.
INCOME STATEMENTS
1. Non Operating Revenues and Expenses
• Any item that does not have anything to
do with the regular business activities of
the business. Examples include:
– Minor “other” revenues
– Interest expense
– Gains and losses on the disposal of assets
INCOME STATEMENTS
2. Discontinued Operations
•
Discontinued operations refers to the disposal of a
significant segment of a business, such as the
elimination of an entire activity or of a major class
of customers.
•
Income (loss) from discontinued operations
consists of
1. Income (loss) from operations, and
2. Gain (loss) on disposal of the segment.
INCOME STATEMENTS
3. Extraordinary Items
•
Extraordinary items are events and
transactions that meet three conditions:
1. Infrequent
2. Non-typical
3. Not subject to management decision
INCOME STATEMENTS
Extraordinary vs. Non-Extraordinary
Extraordinary Items
Ordinary Items
(But not Operating Items)
1. Effects of major
1. Effects of major
casualties (acts of God)
casualties (acts of
if rare in the area
God) if frequent in the
2. Expropriation
area
(takeover) of property
2. Write down of
by a government
inventories or write off
3. Effects of a newly
of receivables
enacted law or
3. Losses attributable to
regulation, such as a
labour disputes
condemnation action
4. Gains or losses from
sale of capital assets
INCOME STATEMENTS
Presentation – From Operating Income Onwards
Operating Income
$504,850
Non – Operating Items
Other Revenues and Gains
Interest Revenue
Gain on sale of Equipment
Total non-operating revenues and gains
$2,900
8,000
10,900
Other Expenses and Losses
Interest Expense
Casualty Loss from Vandalism
Total non-operating expenses and losses
Total Income before Taxes
Less: Income Taxes (assume 40% tax rate)
Income from Continuing Operations
Discontinued Operations
Income from real estate division, net of tax expense
Loss from sale of real estate division, net of tax savings
Income (Loss) on Discontinued Operations
Income before Extraordinary Items
Expropriation of Property, net of tax savings
Net Income
$(3,750)
(5,000)
(8,750)
$507,000
(202,800)
$304,200
$5,000 –$2,000
$3,000 (40%) is…
$50,000(30,000)
–$20,000 (40%) is…
(27,000)
277,200
(60,000) – 24,000
(36,000)
(40%) is…
241,200
INCOME STATEMENTS
Earnings Per Share - Additional Disclosures
HWA ENERGY, INC.
Net income
Earnings per share
Income from continuing operations
Loss from discontinued operations
Income before extraordinary item
Extraordinary loss
Net income
$301,000
$5.60
(2.10)
3.50
(.49)
$3.01
When the income statement contains any nontypical item, EPS should be disclosed for each
component.
Prior Period Adjustments
• Whenever a change in an accounting
policy or procedure is made (e.g. FIFO
to LIFO), the effects on Net Income (net
of tax) for all prior years is charged
directly to Capital.
– Capital Account (for sole proprietorships)
– Retained Earnings (for corporations)
Prior Period Adjustments
• A business with a 6 year old machine, and a 40%
tax rate, changes it’s amortization method from
straight line to declining balance. This produces
$40,000 of additional expense up to Jan. 1 of this
year. It is shown in the Equity section as follows
Begin. Balance Jan. 1 as previously reported
Change in accounting policy net of $16,000
in tax
Retained Earnings Jan. 1 as adjusted
$100,000
Add: Net Income
Less: Drawings/Dividends
Change in Equity for the year
Ending Balance, Dec. 31
$124,000
(24,000)
$80,000
(20,000)
60,000
$160,000
Do Problems:
P15-6A
P15-7A, plus add the following:
A change in accounting policy reduced
a prior period’s net income by $166,000
before a tax savings of $40,000
EARNINGS PER SHARE
• Earnings per share (EPS) indicates the net
income earned by each common share.
• Companies report earnings per share on
the income statement
• The formula to calculate earnings per
share when there has been no change in
shares during the year is as follows:
Net Income –
Preferred Dividends

Number of
Common Shares
Earnings per
Share
PRICE - EARNINGS RATIO
The price-earnings (P/E) ratio helps investors determine
whether the shares are a good investment in relation to
earnings. It is a per share calculation, calculated by dividing
the market price of the shares by its earnings per share.
Market price
per share

Earnings
per share
Price-Earnings
Ratio
A high P/E ratio can be one indicator that investors believe the
company has future growth potential.