UNIT-5
Acct - 103
Dr. Masharique Ahmad
College of Business Administration,
Al-Kharj
Salman Bin Abdulaziz University
KINGDOM OF SAUDI ARABIA
Income Statement and Related Information
Income
Statement
Usefulness
Limitations
Quality of Earnings
Format of the
Income
Statement
Elements
Single-step
Multiple-step
Condensed income
statements
Reporting
Irregular Items
Discontinued
operations
Extraordinary items
Unusual gains and
losses
Changes in
accounting
principles
Changes in
estimates
Corrections of
errors
Special
Reporting
Issues
Intraperiod tax
allocation
Earnings per share
Retained earnings
statement
Comprehensive
income
Income Statement
Usefulness of the Income Statement
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving
future cash flows.
Income Statement
Limitations of the Income Statement
Companies omit items that cannot be measured
reliably.
Income is affected by the accounting methods
employed.
Income measurement involves judgment.
Elements of the Income Statement
Revenues – Inflows or other enhancements of assets
or settlements of its liabilities that constitute the
entity’s ongoing major or central operations.
Examples of Revenue Accounts
Sales
Fee revenue
Interest revenue
Dividend revenue
Rent revenue
Elements of the Income Statement
Expenses – Outflows or other using-up of assets or
incurrence of liabilities that constitute the entity’s
ongoing major or central operations.
Examples of Expense Accounts
Cost of goods sold
Depreciation expense
Interest expense
Rent expense
Salary expense
Elements of the Income Statement
Gains – Increases in equity (net assets) from
peripheral or incidental transactions.
Losses - Decreases in equity (net assets) from
peripheral or incidental transactions.
Gains and losses can result from
sale of investments or plant assets,
settlement of liabilities,
write-offs of assets.
Single-Step Income Statement
The single-step statement
consists of just two
groupings:
Revenues
Expenses
SingleStep
Net Income
No distinction between
Operating and Non-operating
categories.
Income Statement (in thousands)
Revenues:
Sales
Interest revenue
Total revenue
Expenses:
Cost of goods sold
Advertising expense
Depreciation expense
Interest expense
Income tax expense
Total expenses
Net income
Earnings per share
$ 285,000
17,000
302,000
149,000
10,000
43,000
21,000
24,000
247,000
$ 55,000
$
0.75
Single-Step Income Statement
Review
The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items more than it is emphasized
in the multiple-step income statement.
d. the various components of income from
continuing operations.
Multiple-Step Income Statement
Background
Separates operating transactions from
nonoperating transactions.
Matches costs and expenses with related
revenues.
Highlights certain intermediate components of
income that analysts use.
Multiple-Step Income Statement
Review
A separation of operating and non operating activities of
a company exists in
a.
both a multiple-step and single-step income
statement.
b. a multiple-step but not a single-step income
statement.
c.
a single-step but not a multiple-step income
statement.
d. neither a single-step nor a multiple-step income
statement.
Multiple-Step Income Statement
The presentation
divides information
into major sections.
1. Operating Section
2. Nonoperating
Section
3. Income tax
Income Statement (in thousands)
Sales
Cost of goods sold
Gross profit
Operating expenses:
Advertising expense
Depreciation expense
Total operating expense
Income from operations
$ 285,000
149,000
136,000
10,000
43,000
53,000
83,000
Other revenue (expense):
Interest revenue
Interest expense
Total other
Income before taxes
Income tax expense
Net income
$
Earnings per share
$
17,000
(21,000)
(4,000)
79,000
24,000
55,000
0.75
Learning Objectives
1.
Explain the uses and limitations of a balance sheet.
2.
Identify the major classifications of the balance sheet.
3.
Prepare a classified balance sheet using the report and
account formats.
4.
Determine which balance sheet information requires
supplemental disclosure.
5.
Describe the major disclosure techniques for the balance
sheet.
Balance Sheet
Usefulness of the Balance Sheet
Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the company’s:

Liquidity,

Solvency, and

Financial flexibility.
Balance Sheet
Limitations of the Balance Sheet
Most assets and liabilities are reported at
historical cost.
Use of judgments and estimates.
Many items of financial value are omitted.
Balance Sheet
Classification in the Balance Sheet
Three General Classifications
Assets, Liabilities, and Stockholders’ Equity
Companies further divide these classifications:
Balance Sheet
Current Assets
Cash and other assets a company expects to
convert into cash, sell, or consume either in one
year or in the operating cycle, whichever is longer.
Balance Sheet
Review
The correct order to present current assets is
a.
Cash, accounts receivable, prepaid items,
inventories.
b. Cash, accounts receivable, inventories, prepaid
items.
c.
Cash, inventories, accounts receivable, prepaid
items.
d. Cash, inventories, prepaid items, accounts
receivable.
Balance Sheet – “Current Assets”
Cash
Generally any monies available “on demand.”
Cash equivalents are short-term highly liquid
investments that will mature within three
months or less.
Any restrictions or commitments must be
disclosed.
Balance Sheet – “Current Assets”
Short-Term Investments
Portfolios
Type
Valuation
Classification
Held-toMaturity
Debt
Amortized
Cost
Current or
Noncurrent
Trading
Debt or Equity Fair Value
Current
Debt or Equity Fair Value
Current or
Noncurrent
Availablefor-Sale
Balance Sheet – “Current Assets”
Receivables
Claims held against customers and others for
money, goods, or services.
Accounts receivable – oral promises
Notes receivable – written promises
Major categories of receivables should be shown in
the balance sheet or the related notes.
Balance Sheet – “Current Assets”
Accounts Receivable – Presentation Options
1
2
Current Assets:
Cash
Accounts receivable
Less allowance for doubtful accounts
Inventory
Total current assets
Current Assets:
Cash
Accounts receivable, net of SR.25 allowance
Inventory
Total current assets
SR 346
500
25
475
812
SR1,633
SR 346
475
812
SR1,633
Balance Sheet – “Current Assets”
Inventories
Company discloses:
basis of valuation (e.g., lower-of-cost-ormarket) and
the method of pricing (e.g., FIFO or LIFO).
Balance Sheet – “Current Assets”
Prepaid Expenses
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:
insurance
supplies
advertising
rent
maintenance on equipment
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiaries or
affiliated companies.
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Securities
bonds,
stock, and
long-term notes
For marketable securities,
management’s intent
determines current or
noncurrent classification.
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
285000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Fixed Assets
Land held for
speculation
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
285000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Special Funds
Sinking fund
Pensions fund
Cash surrender
value of life
insurance
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
285000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Nonconsolidated
Subsidiaries or
Affiliated
Companies
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
285000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
Balance Sheet – “Noncurrent Assets”
Property, Plant, and Equipment
Assets of a durable
nature used in the
regular operations
of the business.
Balance Sheet (in thousands)
Current assets
Cash
Total investments
Property, Plant, and Equip.
Building
Land
Machinery and equipment
Capital leases
Leasehold improvements
Accumulated depreciation
Total PP&E
Intangibles
Goodwill
Patents
Trademarks
285000
2,696,592
1,375,778
975,000
234,958
384,650
175,000
(975,000)
2,170,386
3,000,000
177,000
40,000
Balance Sheet – “Noncurrent Assets”
Intangibles
Lack physical
substance and are not
financial instruments.
Limited life
intangibles amortized.
Indefinite-life
intangibles tested for
impairment.
Balance Sheet (in thousands)
Current assets
Cash
Accumulated depreciation
Total PP&E
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
285000
(975,000)
2,170,386
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
Balance Sheet – “Exercise”
BE5-6 Mickey Snyder Corporation’s adjusted trial balance
contained the following asset accounts at December 31, 2007:
Prepaid Rent SR12,000; Goodwill SR40,000; Franchise Fees
Receivable SR2,000; Franchises SR47,000; Patents SR33,000;
Trademarks SR10,000. Prepare the intangible assets section of
the balance sheet.
Intangibles
Goodwill
SR 40,000
Franchises
47,000
Patents
33,000
Trademarks
10,000
Total
SR130,000
Balance Sheet – “Noncurrent Assets”
Other Assets
This section should
include only unusual
items sufficiently
different from assets
in the other
categories.
Balance Sheet (in thousands)
Current assets
Cash
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
Total Assets
285000
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
9210978
Balance Sheet
Current Liabilities
“Obligations that a
company reasonably
expects to liquidate
either through the use
of current assets or the
creation of other
current liabilities.”
Balance Sheet (in thousands)
Current liabilities
Notes payable
Accounts payable
Accrued compensation
Unearned revenue
Income tax payable
Current maturities LT debt
Total current liabilities
Long-term liabilities
Long-term debt
Obligations capital lease
Deferred income taxes
Total long-term liabilities
Stockholders' equity
233450
131,800
43,000
17,000
23,400
121,000
569,650
979,500
345,800
77,909
2,093,859
Balance Sheet
Long-Term Liabilities
“Obligations that a
company does not
reasonably expect to
liquidate within the
normal operating cycle.”
All covenants and
restrictions must be
disclosed.
Balance Sheet (in thousands)
Current liabilities
Notes payable
Accounts payable
Accrued compensation
Unearned revenue
Income tax payable
Current maturities LT debt
Total current liabilities
Long-term liabilities
Long-term debt
Obligations capital lease
Deferred income taxes
Total long-term liabilities
Stockholders' equity
233450
131,800
43,000
17,000
23,400
121,000
569,650
979,500
345,800
77,909
2,093,859
Balance Sheet – “Exercise”
BE5-9 Included in Ewing Company’s December 31, 2007, trial
balance are the following accounts: Accounts Payable SR240,000;
Pension Liability SR375,000; Discount on Bonds Payable SR24,000;
Advances from Customers SR41,000; Bonds Payable SR400,000;
Wages Payable SR27,000; Interest Payable SR12,000; Income
Taxes Payable SR29,000. Prepare the long-term liabilities section
of the balance sheet.
Long-term liabilities
Pension liability
Bonds payable
Discount on bonds payable
Total
SR375,000
400,000
(24,000)
751,000
Balance Sheet
Owners’ Equity
Companies usually divide equity into three parts,
(1) Capital Stock, (2) Additional Paid-In Capital,
and (3) Retained Earnings.
Balance Sheet Classification Exercise
Account
Classification
(a) Investment in preferred stock
(a) Current asset/Investment
(b) Treasury stock
(b) Equity
(c) Common stock
(c) Equity
(d) Cash dividends payable
(d) Current liability
(e) Accumulated depreciation
(e) Contra-asset
(f) Interest payable
(f) Current liability
(g) Deficit
(g) Equity
(h) Trading securities
(h) Current asset
(i) Unearned revenue
(i) Current liability
Balance Sheet - Format
Classified Balance Sheet
Account form
Report form
Accounting Trends and Techniques—2004 (New York:
AICPA) indicates that all of the 600 companies surveyed
use either the “report form” (506) or the “account
form” (94), sometimes collectively referred to as the
“customary form.”
Additional Information Reported
There are normally four types of information that are
supplemental to account titles and amounts presented in the
balance sheet:
Contingencies
Accounting Policies
Contractual Situations
Fair Values