Ch 04: Income Statement Intermediate 01-KUW · Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and

Ch 04: Income Statement Intermediate 01-KUW

Page 1 of 14 By : Ehab Abdou [97672930]

INTRODUCTION What is the Income Statement ( Earning Statement)? Income statement is the report that measures the success of a company operations for a given period of time. What is the Usefulness of income statement? It provides users ( especially investors and creditors) with information that helps them in predicting the future cash flow of a company, the users can use the income statement information to:

1. Evaluate past performance of the company. 2. Predicting future performance. 3. assess the risk or uncertainty of achieving future cash flows.

What is the limitations of income statement?

1. Companies omit items that cannot be measured reliably, ( Unrealized Gain/Loss on Investments)

2. Income is affected by the accounting methods employed, (Depreciation methods) 3. Income measurement involves judgment, ( Bad debt expenses)

What is the Earning Management ? Is the use of accounting techniques to produce financial reports that may paint an overly positive picture of a company's business activities and financial position. So that:

Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.

FORMAT OF THE INCOME STATEMENT: What is the elements of the income statement? Income statement includes:

1- Income ( Revenues and Gains ) Increase in economic benefits during the accounting period in the form of inflow or enhancements of assets or decrease in liabilities that result in increase in equity, other than those relating to contributions from shareholders. Revenues : arise from ordinary activities of a company. Gain : may or may not arise from ordinary activities of a company.



Revenues Accounts Gain Accounts Sales Revenue Gains on the sale of long-term assets Interest revenue Dividend revenue Service revenue Rent revenue

Unrealized gains on available-for-sale securities

2- Expenses ( Expenses and Losses )

Decrease in economic benefits during the accounting period in the form of outflow or depletions of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to shareholders. Expenses : arise from ordinary activities of a company. Losses : may or may not arise from ordinary activities of a company.

Expenses Accounts Losses Accounts Cost of goods sold Losses on restructuring charges

Depreciation expense Interest expense Rent expense Salary expense

Losses on to sale of long-term assets

Unrealized losses on available-for-sale

securities.

What is the Minimum Disclosure required by IFRS for the income statement? IFRS requires, at a minimum, the following be presented on the income statement.



What is the Intermediate Component of the income statement? It is Common for companies to present some or all of these sections and totals within the income statement

1. Sales or revenue Section.

2. Cost of goods sold section.

= Gross Profit

3. Selling Expenses section.

4. Administrative expenses section.

5. Other income and expenses

= Income from operation

6. Financing costs

= Income before income taxes

7. Income taxes

= Income from Continuing operation.

8. Discontinued operation

= Net Income

9. Non-Controlling interest.

10. Earnings per share

Net Income

×××

Unrealized gains and losses on available-for-sale securities. ×××

Translation gains and losses on foreign currency. ×××

Unrealized gains and losses on certain hedging transaction ×××

Change in revaluation surplus. ×××

Total Comprehensive items

×××

(=) Comprehensive net Income

×××

Comprehensive Income statement



Terminology



Exercise 1: Presented below is information related to Nour Corporation at December 31, 2012.

Sales Revenue 100,000 Selling expenses 18,000

Interest Expenses 5,000

Dividends 6,500 Share Capital 150,000

Cost of goods sold 30,000 Unrealized Gain on available for sale securities

12,500

Administrative expenses 10,000

Gain on Sale of Equipment 8,000 Retained earnings Jan 1, 2012 12,000

Required:

1- Prepare Income statement and retained earnings statement, assuming that: a. The Income tax expenses is 10% of net Income. b. $10,500 of Income is allocated to Non-Controlling Interest. c. There are 100,000 ordinary shares issued and outstanding.

2- Prepare a comprehensive Income statement and statement of change in equity.



Solution of requirement 1: Income Statement

Sales Revenue 100,000 Cost of goods sold 30,000 (=) Gross Profit 70,000 (-) Selling expenses 18,000 (-) Administrative expenses 10,000 (+) Gain on Sale of Equipment 8,000

Total operating expenses (20,000)

(=) Income from operation 50,000 (-) Interest Expenses (5,000)

(=) Income Before Income taxes 45,000 (-) Income Tax Expenses (45,000 × 10%) (4,500)

(=) Net Income 40,500

Attributable to: Shareholders (Controlling Interest ) 30,000 Non-Controlling interest 10,500 Earning Per Share: ($40,500 ÷ 100,000 shares ) $0.405

Retained earnings statement

Retained earnings Jan 1, 2012 12,000 (+) Net Income 40,500 (-) Dividends 6,500

(=) Retained earnings Dec 31, 2012 46,000



Solution of Requirement 2 Comprehensive Income Statement





(=) Net Income 40,500

(+) Unrealized Gain on available for sale securities 12,500 (=) Comprehensive Income 53,000

Attributable to: Shareholders (Controlling Interest ) 30,000 Non-Controlling interest 10,500 Earning Per Share: ($40,500 ÷ 100,000 shares ) $0.405

Statement of change in equity

Share Capital

Retained Earnings

Accumulated Comprehensive

Income

Total Equity

Beginning Balance 150,000 12,000 0 162,000 (+) Total Comprehensive Income 40,500 12,500 53,000 (-) Dividends (6,500) (6,500) (=) Ending Balance 150,000 46,000 12,500 208,500



Exercise 2: Presented below is information related to Nour Corporation at December 31, 2012.


Interest Expenses 5,000

Dividends 6,500 Share Capital 150,000

Cost of goods sold 30,000 Unrealized Gain on available for sale securities

12,500

Administrative expenses 10,000

Gain on Sale of Equipment 8,000 Retained earnings Jan 1, 2012 12,000

Required: 1- Prepare Income statement and retained earnings statement, assuming that:

a. The Income tax expenses is 10% of net Income. b. $10,500 of Income is allocated to Non-Controlling Interest. c. There are 100,000 ordinary shares issued and outstanding d. Nour Corporation intended to sell one of its divisions which has a book

value of $50,000 for $80,000 Cash, and the operating results for this division is as follows:


Cost of goods sold 12,000 Administrative expenses 6,000

2- Prepare a comprehensive Income statement and statement of change in equity.



Solution of requirement 1 Income statement





(=) Income from Continuing operation 49,500

Discontinued Operation: Loss from operation, net of tax (10,000 × 90%) (9,000) Gain from Disposal, net of tax ( 30,000 × 90% ) 27,000

18,000

= Net Income 67,500

Attributable to: Shareholders (Controlling Interest ) 57,000 Non-Controlling interest 10,500 Earnings Per Share: For Continuing operation (49,500 ÷ 100,000) 0.495 For Discontinued operation (18,000 ÷ 100,000) 0.180

For Net Income (67,500 ÷ 100,000 ) $0.675 Retained earnings statement

Retained earnings Jan 1, 2012 12,000 (+) Net Income 67,500 (-) Dividends 6,500

(=) Retained earnings Dec 31, 2012 73,000



Solution of requirement 2 Comprehensive Income Statement:

Sales Revenue 80,000 Cost of goods sold 18,000

(=) Gross Profit 62,000 (-) Selling expenses 6,000 (-) Administrative expenses 4,000 (+) Gain on Sale of Equipment 8,000

Total operating expenses (2,000) (=) Income from operation 60,000 (-) Interest Expenses (5,000) (=) Income Before Income taxes 55,000 (-) Income Tax Expenses (55,000 × 10%) (5,500) (=) Income from Continuing operation 49,500

Discontinued Operation: Loss from operation, net of tax (10,000 × 90%) (9,000) Gain from Disposal, net of tax ( 30,000 × 90% ) 27,000

18,000

= Net Income 67,500

(+) Unrealized Gain on available for sale securities 12,500

(=) Comprehensive Income 80,000

Attributable to: Shareholders (Controlling Interest ) 69,500 Non-Controlling interest 10,500 Earnings Per Share: For Continuing operation (49,500 ÷ 100,000) 0.495 For Discontinued operation (18,000 ÷ 100,000) 0.180 For Net Income (67,500 ÷ 100,000 ) $0.675



Statement of change in equity

Share Capital

Retained Earnings

Accumulated Comprehensive

Income

Total Equity

Beginning Balance 150,000 12,000 0 162,000 (+) Total Comprehensive Income 40,500 12,500 53,000 (-) Dividends (6,500) (6,500)

(=) Ending Balance 150,000 46,000 12,500 208,500 Reporting Issues: 1- Gains and Losses Additional items that may need disclosure:

Losses on write-downs of inventories to net realizable value or of property, plant, and equipment to recoverable amount, as well as reversals of such write-downs.

Losses on restructurings of the activities and reversals of any provisions for the costs of restructuring.

Gains or losses on the disposal of items of property, plant, and, equipment or investments.

Litigation settlements. Other reversals of liabilities.

2- Discontinued Operations A component of an entity that either has been disposed of, or is classified as held-for-sale, and:

1. Represents a major line of business or geographical area of operations, or 2. Is part of a single, co-coordinated plan to dispose of a major line of

business or geographical area of operations, or 3. Is a subsidiary acquired exclusively with a view to resell.

Companies report the following as discontinued operations 1. (in a separate income statement category) the gain or loss from disposal of a

component of a business. 2. The results of operations of a component that has been or will be disposed of

separately from continuing operations. 3. The effects of discontinued operations net of tax, as a separate category after

continuing operations.



3- Comprehensive Income

All changes in equity during a period except 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 equity.

Like: a. Translation gains and losses on foreign currency. b. Unrealized gains and losses on available-for-sale securities.

Types of Comprehensive Income statement: 1. A second income statement. 2. A combined statement of comprehensive income.

4- Statement of Changes in Equity Required, in addition to a statement of comprehensive income.

Generally comprised of share capital—ordinary, share premium—ordinary, retained earnings, and the accumulated balances in other comprehensive items.



Other Reporting Issues: 1- Change in Accounting Estimates Is treated prospectively, No adjustment is required to adjust prior periods 2- Accounting change and errors.

The impact of change in accounting principle and error correction are debited or credited directly to retained earnings Examples of accounting changes includes: Change from FIFO to average cost. Change from the percentage-of-completion to the completed-contract method Exercise: The following is the retained earnings statement for Woods, Inc. for the year ended December 31, 2012.

Woods, Inc Retained Earnings Statement

For the Year Ended December 31, 2012 Balance, January 1, 2012 (Beginning balance of R.E) $ 1,050,000 (+) Net Income 360,000 (-) Dividends (300,000)

Balance, December 31, 2012 (Ending Balance) $ 1,110,000 Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011).

Instructions: Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? Prepare a revised Statement of Retained Earnings for 2012?



Solution:

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Ch 04: Income Statement Intermediate 01-KUW · Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and