Solution Manual Intermediate Accounting by Kieso, Weygandt, and Warfield
11111 Intermediate Accounting, Ninth Edition Kieso and Weygandt Prepared by Catherine Katagiri, CPA...
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Transcript of 11111 Intermediate Accounting, Ninth Edition Kieso and Weygandt Prepared by Catherine Katagiri, CPA...
11111
Intermediate Accounting, Ninth EditionIntermediate Accounting, Ninth Edition
Kieso and WeygandtKieso and Weygandt
Prepared byPrepared by
Catherine Katagiri, CPACatherine Katagiri, CPA
The College of Saint RoseThe College of Saint Rose
Albany, New YorkAlbany, New York
John Wiley & Sons, IncJohn Wiley & Sons, Inc..
Chapter 4: Income Statement and Related Information
After studying this chapter you should be able to:After studying this chapter you should be able to:
• Identify the uses and limitations of an income statement.
• Prepare a single-step income statement.
• Prepare a multi-step income statement.
• Explain how irregular items are reported.
• Explain intraperiod tax allocation.
• Explain where earnings per share information is reported.
• Prepare a retained earnings statement.
• Explain how other comprehensive income is reported.
333
Income Statement
• Income StatementIncome Statement
– This statement is also known as the results
of operations.
– Used to predict amount, time and certainty
of future cash flows.
– Used to help users determine the risk of
NOT achieving particular cash flows.
– Used to evaluate routine performance.
44
Income Statement
• Income statementIncome statement
– Used to assess likelihood of repayment to creditors.
– Accrual based.
– Limitations:
» Historically based information.
» Only quantifiable information included.
» Quality of earnings must be assessed.
• Manipulation of income is possible (GAAP, intentions).
• Use of liberal (aggressive) accounting policies report higher
income numbers in the short run. Quality of earnings would be
low.
55
Income Statement
• Capital maintenance approachCapital maintenance approach to net income:
– Assets less liabilities equals owners’ equity (residual).
– Change in the assets less the change in the liabilities
equals the change in the owners’ equity. If you add
dividends to this change and subtract investments you
have the concept of comprehensive income.
– Detailed information on the calculation of net income is
not present.
66
• Transactions approachTransactions approach to net income
calculation (GAAP).
– Net income = Revenues less Expenses
– Please see page 149, test, for elements of
the income statement.
Income Statement
Revenues
Gains
Expenses
Losses
77
Income Statement
Income from operations is
very important! It would be
expected that this item
would be the “heart” of the
business-normal, routine-
and would continue to
occur from one period to
the next.
88
Income Statement Format
Single-step statement (page 150, text)
– Income is calculated in one step, little detail provided.
– No gross profit figure is calculated.
– Revenues and gains are reported as a group.
– Expenses and losses are reported as a group.
– Simple; no indication of priorities.
– Often provided for those who do not wish a great
amount of detail but want just the “bottom line”.
– Same presentation (as the multi-step format) of
extraordinary items, discontinued operations and
changes in accounting principles.
99
Multi-step statement (page 153)
– Greater detail.
– Gross Profit figure is calculated (most indicative
of the multi-step format).
– Revenues and gains are presented separately
by source (operations, other).
– Expenses and losses are presented separately
by source (operations, other).
– Manufacturers use the cost of goods
manufactured to replace the purchases figure
within the cost of goods sold calculation.
Income Statement Format
1010
Income Statement Format
Single-step and multi-step statements: The
presentation of extraordinary items,
discontinued operations or accounting
principle changes is the same.
• Condensed statements of income are found
which follow the multi-step format with detail
contained in supporting schedules (page 154,
text).
• Both Single and Multi-step formats are GAAP.
Both yield the same net income figure. It is a
matter of form not substance.
1111
• What should be included on the current period’s
income statement? There are 3 schools of thought:
Income Statement Format
Current operating performance.Current operating performance. This school would have
all usual items that affect income and have their
origins this period included in the income calculation.
Items from prior periods or unusual items would be
excluded from the current income calculation.
All-inclusive.All-inclusive. This school would have all items that
effect income included in current net income
regardless if they had their origins in prior periods or
were unusual in nature.
1212
Income Statement Format
Modified all-inclusive. Modified all-inclusive. Adopted by APB #9. States
all income items should be reported on the income
statement, current operations, except for the
following items:
Prior period adjustments (PPA). These flow
directly to the statement of retained earnings,
net of tax, as an adjustment to the beginning
balance.
Disposal of a segment of a business
(Discontinued operations--Appendix).
Extraordinary items.
Cumulative effect of a change in accounting
principle.
1313
The specified items, excluding Prior Period
Adjustments, are to be presented on the current
period income statement after income from
continuing operations (net of tax). The specified
exceptions are each given their own line and are
presented net of their tax effect. The order is (if
present)
– Disposal of a segment
– Extraordinary items
– Cumulative Effect of a
Change in Accounting Principle
Income Statement Format
1414
Reporting Irregular Items
• Extraordinary items: APB #30
– For events that affect income to be considered
extraordinary items the following criteria must be
met (BOTH)
» Unusual in nature
» Infrequent in occurrence
– The APB gave specific examples (page 157) of
those items which were NOT extraordinary items.
The definition of an extraordinary item was meant to
be very restrictive!
1515
– What non-extraordinary items have in common is that they
are to to some degree under management control:
Reporting Irregular Items
Foreign currency
transactions.
Write-down of inventory,
receivables.
Asset exchanges.
Labor strikes.
Change in long-term
accruals.
Disposal of a segment.
1616
Reporting Irregular Items
– If items are unusual in nature or infrequent
in occurrence but not both they should be
listed in the “other” section of revenues or
expenses.
– Specific items which have been designated
extraordinary items are:
» Gain or loss on the extinguishment of
debt (issuer).
» Expropriation by a foreign government.
» Acts of God.
1717
Reporting Irregular Items
• Prior Period Adjustments: FASB #16
– Treatment is to adjust the beginning balance of Retained Earnings rather than have the item reflected on the income statement of any period (unless comparative statements are presented).
– Prior Period Adjustments are
» The correction of errors (mistakes, omissions)
» To account for the effect of operating loss tax
carryforwards of purchased subsidiaries.
» Reported net-of-tax.
» We will deal with the correction of errors
1818
– For example: You “forgot” to depreciate a
building last period ($20,000, tax rate is
20%)
To adjust:
Reporting Irregular Items
Adjustment Account 20,000
Accum. Deprec. Building
20,000
RE 16,000
Tax Asset (refund) 4,000
Adjustment Account 20,000
1919
• Occurs when an entity discontinues clearly separable
operations, not just a disposal of assets incident to
operations.
– You must define the segment, assets, method of
disposal, time periods involved, estimates of
income between dates available, estimated salvage
value of assets, etc.
– Measurement date-Date the contract signed.
– Disposal date-Date operations close and assets
sold.
Discontinued Operations
2020
Discontinued Operations
• Case #1 Measurement and disposal date the same day:
– All figures are known and are within the same accounting
period.
Presentation:
Income from continuing operations, after taxes XX
Discontinued Operations:
Gain/Loss from operations, less taxes XX
Gain/Loss on disposal, less taxes XX XX
Net Income XX
2121
• Case #2 Measurement date and disposal date are
different days but within the same accounting period.
– All facts are known by the end of the
accounting period.
– You must separate the results of
operations from the beginning of the
period to the measurement date from the
results of operations between the
measurement and disposal dates.
Discontinued Operations
2222
Discontinued Operations
Presentation Case #2:
Income from continuing operations, after taxes XX
Discontinued Operations:
Gain/Loss from operations, less taxes XX
Gain/Loss on disposal, including
operating G/L and G/L on
disposal of assets, less taxes XX XX
Net Income XX
2323
• Case #3 Measurement date and disposal date are different
and not in the same accounting period
– Use of estimates is required as all is not known
by the end of the accounting period. Any
changes are treated as changes in estimates.
– If losses are expected recognize immediately.
Expected gains may be recognized to the
extent of anticipated losses but no further.
Realized gains are recorded in the period they
occur. Follow conservatism!
Discontinued Operations
2424
Discontinued Operations
Presentation Case #3:
Income from continuing operations, after taxes XX
Discontinued Operations:
Gain/Loss from operations, less taxes XX
Gain/Loss on disposal, including
estimated operating G/L and estimated
G/L on disposal of assets, less taxes XX XX
Net Income XX
2525
• Cumulative Effect of a Change in Accounting Cumulative Effect of a Change in Accounting
PrinciplePrinciple
– Covered in Chapter 23 so we will be brief here!
– Two types:
» “Usual” or “common” type Report using the
new principle in the year of change. Any effect
on income of changing the principle on prior
years is reported in the current year, net of tax
after extraordinary items. For example,
changing from Straight-Line depreciation to
Declining Balance for your assets. Enhances
consistency over comparability.
Change in Accounting Principle
2626
Change in Accounting Principle
» “Unusual” or “specified exception” Restate financial
statements of all periods presented. For periods not
presented that the change affects, restate the
beginning balance of RE for the first year presented.
Enhances comparability over consistency. For
example: Changes in accounting method for long-
term construction contracts.
2727
Intraperiod Tax Allocation
• Intraperiod Tax AllocationIntraperiod Tax Allocation
– The concept that items are presented on financial
statements with their related tax effects attached to
them.
– Tax expense is allocated within the period to the items
that helped give rise to it.
– We have seen this with the tax attached to:
Operations
Discontinued operations
Prior period adjustments
Extraordinary items
Changes in Accounting Principles
2828
• Earnings per share (EPS) Chapter 17Earnings per share (EPS) Chapter 17
– Very wide-spread financial calculation (book not cash).
– Only required financial ratio calculation.
– To Put it SIMPLY now To Put it SIMPLY now
Net income to common stockholders
Weighted average number of shares
– Area of recent change by Financial Accounting Standards
Board.
The new standard has simplified the required
calculation of earnings per share.
Earnings Per Share
2929
Statement of Retained Earnings
• Statement of Retained EarningsStatement of Retained Earnings
– May be separately presented or appended to the
Income Statement.
– Of great interest to shareholders.
– Appropriations:
» The earmarkings of retained earnings for a
future purpose.
» It is really a statement of management intention.
» Appropriations of retained earnings in NO WAY
provides funds for the intention.
– See Statement of Retained Earnings, page 165, text.
3030
Comprehensive Income
• Comprehensive incomeComprehensive income includes all changes in equity during the
period except those resulting from investments by owners and
distributions to owners.
– Components of comprehensive income are to be displayed in
one of three ways:
» A separate income statement.
» A combined income statement of comprehensive income.
» As a part of stockholder’s equity.
– Regardless of format comprehensive income will be presented
in the stockholders’ equity section of the balance sheet. Please
see Illustration 4-23, page 19, our text.