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CHAPTER 4: CONTINUED
INCOME STATEMENT AND RELATED INFORMATION
Sommers – ACCT 3311
Discussion Question
Q4-12 What is the basis for distinguishing between operating and nonoperating items?
Discussion Question
Q4-30 On January 30, 2013, a suit was filed against Frazier Corp. under the EPA. On August 6, 2014, Fraizer agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2014 financial statements?
Changes in Accounting Principles
Changes in Estimate
Corrections of Errors
Reporting Irregular Items
Earnings Per Share Disclosure
One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned
by a company expressed on a per share basis.
Basic EPS
Net income less preferred dividends
Weighted-average number of common shares outstanding for the
period
Diluted EPS
Reflects the potential dilution that could occur for companies that have certain
securities outstanding that are convertible into common shares or stock options that could create additional common shares if
the options were exercised.
P&G’s Income Statement
Earnings Per Share (BE4-8): In 2014, Hollis Corporation
reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2014, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2014 earnings per share.
- $250,000$1,000,000
190,000= $3.95 per share
Net income - Preferred dividends
Weighted average number of shares outstanding
Special Reporting Issues
EPS
Divide by weighted-average shares outstanding
Illustration 4-19
Special Reporting Issues
Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
a. Loss on inventory write-down.
b. Loss from strike.
Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
c. Bad debt expense.
d. Loss on disposal of a component of the business.
e. Gain on sale of machinery.
Discussion Question
Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.
f. Interest revenue.
g. Depreciation Expense.
h. Material write-offs of notes receivable.
Increase
Net income
Change in accounting
principle
Error corrections
Decrease
Net loss
Dividends
Change in accounting
principles
Error corrections
Retained Earnings Statement
Special Reporting Issues
Restrictions on Retained Earnings
Disclosed
In notes to the financial statements.
As Appropriated Retained Earnings.
Special Reporting Issues
Understanding Equity
Beginning equity
+ Received from owners
– Distributed to owners (other than dividends)
– Dividends declared
+ Net income (or – net loss)
+ Other comprehensive income
= Ending equity
Contributed capital
Retained earnings
Accum OCI
Com
preh
ensi
vein
com
e
If OCI = 0, earnings are “clean surplus” else they are “dirty surplus”.
On Income Statement
Not on Income Statement
Comprehensive Income
An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.
1. Net unrealized holding gains (losses) from investments (net of tax).
2. Gains and losses due to reviewing assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan.
3. When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction.
4. Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity.
Weird stuff
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):
Interest revenue 17,000
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000
Net income 55,000$
Other Comprehensive Income
Unrealized gains and losses on available-for-sale securities.
Translation gains and losses on foreign currency.
Plus others
+
Reported in Stockholders’ Equity
Comprehensive Income
Accumulated Other Comprehensive Income
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as
an additional component of shareholders’ equity.
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as
an additional component of shareholders’ equity.
(In thousands) 2014 2013Shareholders' equity:Common stock 212$ 211$ Additional paid-in capital 1,340,687 1,265,382 Retained earnings 1,131,403 1,116,035 Accumulated other comprehensive income 170,960 109,898 Treasury stock (200,251) (200,251) Total shareholders' equity 2,443,011$ 2,291,275$
JABIL CIRCUITS INC.Consolidated Balance Sheets (in part)
Yesrs Ended August 31
Companies must display the components of other
comprehensive income in one of three ways:
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 Issues
LO 8
Illustration 4-19
Comprehensive Income
Second income statement
Special Reporting Issues
P&G’s Statement of Comprehensive Income
LO 8
Comprehensive Income
Combined statement
V. Gill Inc.
Combined Statement of Comprehensive Income
For the Year Ended December 31, 2012
Sales revenue 800,000$
Cost of goods sold 600,000
Gross profit 200,000
Operating expenses 90,000
Net income 110,000
Unrealized holding gain, net of tax 30,000
Comprehensive income 140,000$
Special Reporting Issues
Comprehensive Income – Statement of Stockholder’s Equity
Illustration 4-26
Special Reporting Issues
Comprehensive Income – Balance Sheet Presentation
Illustration 4-27Presentation ofAccumulated OtherComprehensive Income in the Balance Sheet
Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.
Special Reporting Issues
Example 1
Bryant Co. reports the following information for 2012:
Sales revenue $750,000
Cost of goods sold $500,000
Operating expenses $ 80,000
Unrealized holding loss on
available-for-sale securities $ 50,000
Bryant declared and paid a cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012.
• Prepare a statement of stockholders’ equity.
Example 1
RELEVANT FACTS
Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach. Extraordinary items are prohibited under IFRS.
Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the U.S. SEC requires a functional presentation.
IFRS identifies certain minimum items that should be presented on the income statement. GAAP has no minimum information requirements. However, the SEC rules have more rigorous presentation requirements.
IFRS Insights
RELEVANT FACTS
IFRS does not define key measures like income from operations. SEC regulations define many key measures and provide requirements and limitations on companies reporting non-GAAP/IFRS information.
Both GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest.
GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard- setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation.
IFRS Insights
RELEVANT FACTS
Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. GAAP provides three possible formats for presenting this information: single income statement, combined statement of comprehensive income, in the statement of stockholders’ equity. Most companies that follow GAAP present this information in the statement of stockholders’ equity. IFRS allows a separate statement of comprehensive income or a combined statement.
Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.
IFRS Insights
E4-17B
The following information was taken from the records of Cantu Inc. for the year 2014. Income tax applicable to income from continuing operations $261,800; income tax applicable to loss on discontinued operations $35,700; income tax applicable to extraordinary gain $45,220; income tax applicable to extraordinary loss $28,560; and unrealized holding gain on available-for-sale securities $21,000.
Extraordinary gain $133,000
Loss on disc ops 105,000
Admin expenses 336,000
Rent revenue 56,000
Extraordinary loss 84,000
Shares outstanding during 2014 were 100,000.
(a) Prepare a multiple-step income statement for 2014, (b) prepare a retained earnings statement for 2014 and (c) show how comprehensive income is reported using the one statement format.
Cash dividends declared$210,000
Ret earnings, 1/1/2014 840,000
Cost of goods sold 1,190,000
Selling expenses 420,000
Sales 2,660,000
E4-17B
E4-17B