Post on 27-Oct-2014
Chapter 4-1
Chapter 4-2
C H A P T E R C H A P T E R 44
INCOME STATEMENT AND INCOME STATEMENT AND RELATED INFORMATIONRELATED INFORMATION
Intermediate Accounting13th Edition
Kieso, Weygandt, and Warfield
Chapter 4-3
1.1. Understand the uses and limitations of an income Understand the uses and limitations of an income statement.statement.
2.2. Prepare a single-step income statement.Prepare a single-step income statement.
3.3. Prepare a multiple-step income statement.Prepare a multiple-step income statement.
4.4. Explain how to report irregular items.Explain how to report irregular items.
5.5. Explain intraperiod tax allocation.Explain intraperiod tax allocation.
6.6. Identify where to report earnings per share Identify where to report earnings per share information.information.
7.7. Prepare a retained earnings statement.Prepare a retained earnings statement.
8.8. Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Chapter 4-4
ElementsElements
Single-stepSingle-step
Multiple-stepMultiple-step
Condensed Condensed income statementsincome statements
Income Income StatementStatement
Format of the Format of the Income Income
StatementStatement
Reporting Reporting Irregular ItemsIrregular Items
Special Special Reporting IssuesReporting Issues
UsefulnessUsefulness
LimitationsLimitations
Quality of Quality of EarningsEarnings
Discontinued Discontinued operationsoperations
Extraordinary Extraordinary itemsitems
Unusual gains and Unusual gains and losseslosses
Changes in Changes in accounting accounting principlesprinciples
Changes in Changes in estimatesestimates
Corrections of Corrections of errorserrors
Intraperiod tax Intraperiod tax allocationallocation
Earnings per shareEarnings per share
Retained earnings Retained earnings statementstatement
Comprehensive Comprehensive incomeincome
Income Statement and Related Income Statement and Related InformationInformation
Income Statement and Related Income Statement and Related InformationInformation
Chapter 4-5
Evaluate past performance.
Income StatementIncome StatementIncome StatementIncome Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Help assess the risk or uncertainty of achieving future cash flows.
Predicting future performance.
Usefulness
Chapter 4-6
Companies omit items that cannot be measured reliably.
Income StatementIncome StatementIncome StatementIncome Statement
Limitations
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Income measurement involves judgment.
Income is affected by the accounting methods employed.
Chapter 4-7
Companies have incentives to manage income to meet or beat Wall Street expectations, so that
market price of stock increases and
value of stock options increase.
Income StatementIncome StatementIncome StatementIncome Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.
Quality of Earnings
Chapter 4-8
Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Revenues – Inflows or other enhancements of assets or – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s settlements of its liabilities that constitute the entity’s ongoing major or central operations.ongoing major or central operations.
SalesSales
Fee revenueFee revenue
Interest revenueInterest revenue
Dividend revenueDividend revenue
Rent revenueRent revenue
Examples of Revenue Accounts
Elements of the Income Statement
Chapter 4-9
Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Expenses – Outflows or other using-up of assets or – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s incurrences of liabilities that constitute the entity’s ongoing major or central operations.ongoing major or central operations.
Cost of goods soldCost of goods sold
Depreciation expenseDepreciation expense
Interest expenseInterest expense
Rent expenseRent expense
Salary expenseSalary expense
Examples of Expense Accounts
Elements of the Income Statement
Chapter 4-10
Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Gains – Increases in equity (net assets) from – Increases in equity (net assets) from peripheral or incidental transactions.peripheral or incidental transactions.
Losses - Decreases in equity (net assets) from - Decreases in equity (net assets) from peripheral or incidental transactions.peripheral or incidental transactions.
Gains and losses can result fromGains and losses can result from
sale of investments or plant assets, sale of investments or plant assets,
settlement of liabilities, settlement of liabilities,
write-offs of assets.write-offs of assets.
Elements of the Income Statement
Chapter 4-11
Single-Step FormatSingle-Step FormatSingle-Step FormatSingle-Step Format
LO 2 Prepare a single-step income statement.LO 2 Prepare a single-step income statement.
The single-step The single-step statement consists of statement consists of just two groupings:just two groupings:
Income Statement (in thousands)
Revenues:
Sales 285,000$
I nterest revenue 17,000
Total revenue 302,000
Expenses:
Cost of goods sold 149,000
Selling expense 10,000
Administrative expense 43,000
I nterest expense 21,000
I ncome tax expense 24,000
Total expenses 247,000
Net income 55,000$
Earnings per share 0.75$
RevenuesRevenues
ExpensesExpenses
Net IncomeNet Income
Single- Single- StepStep
Single- Single- StepStep
No distinction between No distinction between OperatingOperating and and Non-Non-operatingoperating categories. categories.
Chapter 4-12
Single-Step Single-Step FormatFormat
Single-Step Single-Step FormatFormat
LO 2 Prepare a single-step income statement.LO 2 Prepare a single-step income statement.
Administrative expense: Revenues:
Offi cers' salaries 4,900$ Sales 96,500$
Depreciation 3,960 Rental revenue 17,230
Cost of goods sold 63,570 Total revenues 113,730
Rental revenue 17,230 Expenses:
Selling expense: Cost of goods sold 63,570
Transportation- out 2,690 Selling expense 17,150
Sales commissions 7,980 Administrative exense 8,860
Depreciation 6,480 I nterest expense 1,860
Sales 96,500 I ncome tax expense 7,580
I ncome tax expense 7,580 Total expenses 99,020
I nterest expense 1,860 Net income 14,710$
I ncome Statement
For the year ended Dec. 31, 2011
E4-4: Prepare an income statement from the data below.
Solution on notes page
Chapter 4-13
The single-step income statement emphasizesThe single-step income statement emphasizes
a. a. the gross profit figure.the gross profit figure.
b. b. total revenues and total expenses.total revenues and total expenses.
c. c. extraordinary items more than it is extraordinary items more than it is emphasized emphasized in the multiple-step income in the multiple-step income statement.statement.
d. d. the various components of income from the various components of income from continuing operations.continuing operations.
ReviewReview
Single-Step FormatSingle-Step FormatSingle-Step FormatSingle-Step Format
LO 2 Prepare a single-step income statement.LO 2 Prepare a single-step income statement.
Chapter 4-14
Separates operating transactions from nonoperating transactions.
Matches costs and expenses with related revenues.
Highlights certain intermediate components of income that analysts use.
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format
Background
Chapter 4-15
1. Operating section
2. Nonoperating section
3. Income tax
4. Discontinued operations
5. Extraordinary items
6. Earnings per share
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format
Income Statement Sections
Chapter 4-16
Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
The presentation The presentation divides information divides information into major into major sections. sections.
The presentation The presentation divides information divides information into major into major sections. sections.
Income Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000
Gross profit 136,000
Operating expenses:
Selling expenses 10,000
Administrative expenses 43,000
Total operating expense 53,000
Income from operations 83,000
Other revenue (expense):
I nterest revenue 17,000
I nterest expense (21,000)
Total other (4,000)
I ncome bef ore taxes 79,000
I ncome tax expense 24,000
Net income 55,000$
Earnings per share 0.75$
1. Operating 1. Operating Section Section
1. Operating 1. Operating Section Section
2. Nonoperating 2. Nonoperating Section Section
2. Nonoperating 2. Nonoperating Section Section
3. Income tax 3. Income tax 3. Income tax 3. Income tax
Chapter 4-17
Multiple-Step Multiple-Step FormatFormat
Multiple-Step Multiple-Step FormatFormat
Administrative expense: Sales 96,500$
Offi cers' salaries 4,900$ Cost of goods sold 63,750
Depreciation 3,960 Gross profit 32,750
Cost of goods sold 63,750 Operating Expenses:
Rental revenue 17,230 Selling expense 17,150
Selling expense: Administrative exense 8,860
Transportation- out 2,690 Total operating expenses 26,010
Sales commissions 7,980 I ncome from operations 6,740
Depreciation 6,480 Other revenue (expense):
Sales 96,500 Rental revenue 17,230
I ncome tax expense 7,580 I nterest expense (1,860)
I nterest expense 1,860 Total other 15,370
I ncome before tax 22,110
I ncome tax expense 7,580
Net income 14,530$
I ncome Statement
For the year ended Dec. 31, 2011
Illustration (E4-4): Prepare an income statement from the data below.
Solution on notes page
Chapter 4-18
ReviewReview
A separation of operating and non operating activities A separation of operating and non operating activities of a company exists inof a company exists in
a. a. both a multiple-step and single-step income both a multiple-step and single-step income statement.statement.
b. b. a multiple-step but not a single-step income a multiple-step but not a single-step income statementstatement..
c. c. a single-step but not a multiple-step income a single-step but not a multiple-step income statementstatement..
d. d. neither a single-step nor a multiple-step neither a single-step nor a multiple-step income income statementstatement..
Multiple-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step Format
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
Chapter 4-19
Companies are required to report irregular items Companies are required to report irregular items in the financial statements so users can in the financial statements so users can determine the long-run earning power determine the long-run earning power of the company. of the company.
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
Illustration 4-5 Illustration 4-5 Number of Irregular Items Reported in a Recent Year by 600 Large Companies
Chapter 4-20
Irregular items fall into six categories
1. Discontinued operations.
2. Extraordinary items.
3. Unusual gains and losses.
4. Changes in accounting principle.
5. Changes in estimates.
6. Corrections of errors.
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-21
Discontinued Operations occurs when,
(a) company eliminates the
results of operations and
cash flows of a component.
(b) there is no significant continuing involvement in that component.
Amount reported “net of tax.”
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-22
Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 in 2008. During 2008, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in 2008. Assume a tax rate of 30%. Prepare a partial income statement for KC.
Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations
Income from continuing operations $55,000,000
Discontinued operations:
Loss from operations, net of $135,000 tax
315,000Loss on disposal, net of $81,000 tax
189,000Net income $54,496,000
Total loss on discontinued operations 504,000
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-23
Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Discontinued operations:
Loss from operations, net of tax 315
Loss on disposal, net of tax 189
Total loss on discontinued operations 504
Net income 54,496$
Discontinued Discontinued Operations are Operations are
reported after “Income reported after “Income from continuing from continuing
operations.”operations.”
Previously labeled as “Net Income”.
Moved to
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000
Chapter 4-24
Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities.
Extraordinary Item must be both of an
Unusual Nature and Occur Infrequently
Company must consider the environment in which it operates.
Amount reported “net of tax.”
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-25
Are these items Extraordinary?
(a) A large portion of a tobacco manufacturer’s crops are destroyed by a hail storm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare.
(b) A citrus grower's Florida crop is damaged by frost.
(c) A company sells a block of common stock of a publicly traded company. The block of shares, which represents less than 10% of the publicly-held company, is the only security investment the company has ever owned.
YESYES
Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items
NONO
YESYES
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-26
Are these items Extraordinary?
(d) A large diversified company sells a block of shares from its portfolio of securities which it has acquired for investment purposes. This is the first sale from its portfolio of securities.
(e) An earthquake destroys one of the oil refineries owned by a large multi-national oil company. Earthquakes are rare in this geographical location.
(f) A company experiences a material loss in the repurchase of a large bond issue that has been outstanding for 3 years. The company regularly repurchases bonds of this nature.
NONO
Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items
YESYES
NONO
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-27
Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 in 2007. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for KC Corporation beginning with income from continuing operations.
Income from continuing operations $55,000,000
Extraordinary loss, net of $231,000 tax 539,000
Net income $54,461,000
Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items
($770,000 x 30% = $231,000 tax)
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-28
Other revenue (expense):
I nterest revenue 17,000 I nterest expense (21,000)
Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Extraordinary loss, net of tax 539
Net income 54,461$
Extraordinary Items Extraordinary Items are reported after are reported after
“Income from “Income from continuing continuing
operations.”operations.”
Previously labeled as “Net Income”.
Reporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary ItemsReporting Extraordinary Items
Moved to
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000
Chapter 4-29
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
I nterest expense (21,000) Total other (4,000)
I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Discontinued operations:
Loss from operations, net of tax 315
Loss on disposal, net of tax 189
Total loss on discontinued operations 504
I ncome before extraordinary item 54,496
Extraordinary loss, net of tax 539
Net income 53,957$
Reporting when both Reporting when both
Discontinued Discontinued
Operations and Operations and
Extraordinary Items Extraordinary Items
are present. are present.
Discontinued OperationsDiscontinued Operations
Extraordinary ItemExtraordinary Item
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000
Chapter 4-30
Irregular transactions such as discontinued Irregular transactions such as discontinued operations and extraordinary items should be operations and extraordinary items should be reported separately inreported separately in
a. a. both a single-step and multiple-step income both a single-step and multiple-step income statementstatement..
b. b. a single-step income statement onlya single-step income statement only..
c. c. a multiple-step income statement onlya multiple-step income statement only..
d. d. neither a single-step nor a multiple-step neither a single-step nor a multiple-step income income statementstatement..
ReviewReview
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-31
Unusual Gains and Losses
Material items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.”
Examples can include:
Write-downs of inventoriesForeign exchange transaction gains and losses
The Board prohibits net-of-tax treatment for these items.
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-32
Unusual Gains and Losses
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Illustration 4-9Illustration 4-9Income Statement Presentation of Unusual Charges
Chapter 4-33
Changes in Accounting Principles
Retrospective adjustment
Cumulative effect adjustment to beginning retained earnings
Approach preserves comparability
Examples include: change from FIFO to average cost
change from the percentage-of-completion to the completed-contract method
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-34
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Change in Accounting Principle: Gaubert Inc. decided in March 2010 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2010, is $30,000.
Illustration 4-10Illustration 4-10Calculation of a Change inAccounting Principle
Illustration 4-11Illustration 4-11Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)
Pretax Income Data
Solution on notes page
Chapter 4-35
Changes in Estimate
Accounted for in the period of change and future periods
Not handled retrospectively
Not considered errors or extraordinary items
Examples include:
Useful lives and salvage values of depreciable assets
Allowance for uncollectible receivables
Inventory obsolescence
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-36
Change in Estimate: Arcadia HS, purchased Arcadia HS, purchased equipment for $510,000 which was estimated to have a equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2010 (year 8), it is 7 years on a straight-line basis. In 2010 (year 8), it is determined that the total estimated life should be 15 determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that years with a salvage value of $5,000 at the end of that time.time.
Questions:Questions: What is the journal entry to correct the What is the journal entry to correct the
prior years’ depreciation?prior years’ depreciation? Calculate the depreciation expense Calculate the depreciation expense
for 2010.for 2010.
No Entry No Entry RequiredRequired
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-37
EquipmenEquipmentt
$510,000$510,000
Fixed Assets:Fixed Assets:
Accumulated depreciationAccumulated depreciation 350,000350,000
Net book value (NBV)Net book value (NBV) $160,000$160,000
Balance SheetBalance Sheet (Dec. 31, (Dec. 31, 2009)2009)
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleAfter 7 yearsAfter 7 years
Equipment cost Equipment cost $510,000$510,000
Salvage valueSalvage value - 10,000 - 10,000
Depreciable baseDepreciable base 500,000500,000
Useful life (original)Useful life (original) 10 years 10 years
Annual depreciationAnnual depreciation $ 50,000 $ 50,000 x 7 years = x 7 years = $350,000$350,000
First, establish First, establish NBV at date of NBV at date of
change in change in estimate.estimate.
First, establish First, establish NBV at date of NBV at date of
change in change in estimate.estimate.
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-38
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleAfter 7 yearsAfter 7 years
Net book value Net book value $160,000$160,000
Salvage value (new) Salvage value (new) 5,0005,000
Depreciable baseDepreciable base 155,000155,000
Useful life remainingUseful life remaining 8 years 8 years
Annual depreciationAnnual depreciation $ 19,375$ 19,375
Depreciation Depreciation Expense Expense
calculation for calculation for 2010.2010.
Depreciation Depreciation Expense Expense
calculation for calculation for 2010.2010.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2010
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-39
Corrections of Errors
Result from: mathematical mistakes mistakes in application of accounting
principles oversight or misuse of facts
Corrections treated as prior period adjustments
Adjustment to the beginning balance of retained earnings
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-40
Corrections of Errors: To illustrate, in 2011, Hillsboro Co. determined that it incorrectly overstated its accountsreceivable and sales revenue by $100,000 in 2010. In 2011, Hillboro makes the following entry to correct for this error (ignore income taxes).
Reporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular Items
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Retained earnings 100,000
Accounts receivable100,000
Chapter 4-41
Relates the income tax expense to the specific items that give rise to the amount of the tax expense.
Income tax is allocated to the following items:
(1) Income from continuing operations before tax
(2) Discontinued operations
(3) Extraordinary items
(4) Changes in accounting principle
(5) Correction of errors
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 5 Explain intraperiod tax allocation.LO 5 Explain intraperiod tax allocation.
Intraperiod Tax Allocation
Chapter 4-42
Extraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation settlement received on one its properties. Assuming a 30 percent income tax rate.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 5 Explain intraperiod tax allocation.LO 5 Explain intraperiod tax allocation.
Intraperiod Tax Allocation
Illustration 4-13
Chapter 4-43
Extraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 5 Explain intraperiod tax allocation.LO 5 Explain intraperiod tax allocation.
Intraperiod Tax Allocation
Illustration 4-14
Chapter 4-44
I nterest expense (21,000) Total other (4,000)
I ncome f rom cont. oper. bef ore taxes 79,000 I ncome tax expense 24,000 I ncome from continuing operations 55,000
Discontinued operations:
Loss on operations, net of $135 tax 315
Loss on disposal, net of $61 tax 189
Total loss on discontinued operations 504
I ncome before extraordinary item 54,496
Extraordinary loss, net of $231 tax 539
Net income 53,957$
Calculation of Calculation of
Total TaxTotal Tax
Example of Intraperiod Tax Example of Intraperiod Tax AllocationAllocation
Example of Intraperiod Tax Example of Intraperiod Tax AllocationAllocation
$24,000$24,000
(135)(135)(61)(61)
(231)(231)
$23,573$23,573LO 5 Explain intraperiod tax allocation.LO 5 Explain intraperiod tax allocation.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Note: losses reduce Note: losses reduce
the total taxthe total tax
Chapter 4-45
An important business indicator.
Measures the dollars earned by each share of common stock.
Must be disclosed on the the income statement.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 6 Identify where to report earnings per share LO 6 Identify where to report earnings per share information.information.
Net income - Preferred dividends
Weighted average number of shares outstanding
Earnings Per Share
Chapter 4-46
Earnings Per Share (BE4-8): In 2010, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2010, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2010 earnings per share.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
- $250,000$1,000,000
190,000= $3.95 per share
LO 6 Identify where to report earnings per share LO 6 Identify where to report earnings per share information.information.
Net income - Preferred dividends
Weighted average number of shares outstanding
Chapter 4-47
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO LO 66
EPS
Divide by weighted-average shares
outstanding
Chapter 4-48 LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
IncreaseIncrease
Net income
Change in accounting principle
Error corrections
DecreaseDecrease
Net loss
Dividends
Change in accounting principles
Error corrections
Retained Earnings Statement
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
Chapter 4-49
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Chapter 4-50
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1 (restated) 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
Solution on notes page
Chapter 4-51
Restricted Retained Earnings
Disclosed
In notes to the financial statements
As Appropriated Retained Earnings
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
Chapter 4-52
Comprehensive Income
All changes in equity during a period except All changes in equity during a period except
those resulting from investments by owners and those resulting from investments by owners and distributions to owners.
Includes:
all revenues and gains, expenses and losses reported in net income, and
all gains and losses that bypass net income but affect stockholders’ equity.
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
Chapter 4-53
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
Income Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000
Gross profit 136,000
Operating expenses:
Selling expenses 10,000
Administrative expenses 43,000
Total operating expense 53,000
Income from operations 83,000
Other revenue (expense):
I nterest revenue 17,000
I nterest expense (21,000)
Total other (4,000)
I ncome bef ore taxes 79,000
I ncome tax expense 24,000
Net income 55,000$
Other Comprehensive Other Comprehensive IncomeIncome
Unrealized gains and losses on available-for-sale securities.
Translation gains and losses on foreign currency.
Plus others
+
Reported in Stockholders’ Equity
Comprehensive Income
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-54
ReviewReview
Gains and losses that bypass net income but affect Gains and losses that bypass net income but affect stockholders' equity are referred to as stockholders' equity are referred to as
a. a. comprehensive income.comprehensive income.
b. b. other comprehensive incomeother comprehensive income..
c. c. prior period incomeprior period income..
d. d. unusual gains and lossesunusual gains and losses..
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-55
Three approaches to reporting Comprehensive Income (SFAS No. 130, June 1997):
1. A second separate income statement;
2. A combined income statement of comprehensive income; or
3. As part of the statement of stockholders’ equity
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-56
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Illustration 4-19Comprehensive Income
Second income statement
Chapter 4-57
V. Gill I nc.
Combined Statement of Comprehensive I ncome
For the Year Ended December 31, 2010
Sales revenue 800,000$
Cost of goods sold 600,000
Gross profi t 200,000
Operating expenses 90,000
Net income 110,000
Unrealized holding gain, net of tax 30,000
Comprehensive income 140,000$
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Comprehensive Income
Combined income statement
Chapter 4-58
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Comprehensive Income - Statement of Stockholder’s Equity Illustration 4-20
Chapter 4-59
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Comprehensive Income - Balance Sheet Presentation Illustration 4-21
Regardless of the display format used, the Regardless of the display format used, the accumulated accumulated other comprehensive income other comprehensive income of $90,000 is reported in the of $90,000 is reported in the stockholders’ equity section of the balance sheet.stockholders’ equity section of the balance sheet.
Chapter 4-60
ReviewReview
The FASB decided that the components of other The FASB decided that the components of other comprehensive income must be displayed comprehensive income must be displayed
a. a. in a second separate income statement.in a second separate income statement.
b. b. in a combined income statement of in a combined income statement of comprehensive comprehensive incomeincome..
c. c. as a part of the statement of stockholders' as a part of the statement of stockholders' equityequity..
d. d. Any of these options is permissibleAny of these options is permissible..
Special Reporting IssuesSpecial Reporting IssuesSpecial Reporting IssuesSpecial Reporting Issues
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-61
Under iGAAP, companies must classify expenses by either nature or function. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements.
Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. iGAAP does not mention a single-step or multiple-step approach. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under iGAAP.
Chapter 4-62
Under iGAAP, companies are required to prepare as a primary financial statement either a statement of stockholders’ equity similar to the one prepared under U.S. GAAP or a statement of recognized income and expense (called a SoRIE ).
Both iGAAP and U.S. GAAP have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information. iGAAP allows either the statement of stockholders’ equity approach or the SoRIE format.
Under iGAAP revaluation of land, buildings, and intangible assets is permitted.
Chapter 4-63
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