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Chapter 4 Income Statement. Income Statement. Usefulness of the Income Statement. Evaluate past performance. Predicting future performance. Help assess the risk or uncertainty of achieving future cash flows. LO 1 Understand the uses and limitations of an income statement. Income Statement. - PowerPoint PPT Presentation
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Chapter 4-1
Chapter 4
Income Statement
Chapter 4-2
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving future cash flows.
Income StatementIncome StatementIncome StatementIncome Statement
Usefulness 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.
Chapter 4-3
Companies omit items that cannot be measured reliably.
Income is affected by the accounting methods employed.
Income measurement involves judgment.
Income StatementIncome StatementIncome StatementIncome Statement
Limitations 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.
Chapter 4-4
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 4-5
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 4-6
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 4-7
Single-Step Income StatementSingle-Step Income StatementSingle-Step Income StatementSingle-Step Income Statement
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:
I ncome Statement (in thousands)
Revenues:
Sales 285,000$ I nterest revenue 17,000
Total revenue 302,000 Expenses:
Cost of goods sold 149,000 Advertising expense 10,000 Depreciation 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 4-8
Multi-Step Income Statement
Chapter 4-9
Separates operating transactions from nonoperating transactions.
Matches costs and expenses with related revenues.
Highlights certain intermediate components [or subtotals] of income that analysts use.
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
Background
Chapter 4-10
Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
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.
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Gross profi t 136,000
Operating expenses:
Advertising expense 10,000 Depreciation expense 43,000
Total operating expense 53,000 I ncome 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 4-11
Sales– Cost of goods sold= Gross profit Operating expenses:– Selling expenses– General and
administrative expenses= Income from operations+/– Other revenues and expenses= Income before taxes– Income tax expense= Net income
Fourimportantsubtotals
Multi-Step Income Statement
Chapter 4-12
JC Penney, Inc. JC Penney, Inc. Statement of OperationsStatement of Operations
In MillionsIn Millions
JC Penney, Inc. JC Penney, Inc. Statement of OperationsStatement of Operations
In MillionsIn Millions
For the Years Ended January 30, 2016 2015
Net Sales 12,547 12,625 Less: Cost of Goods Sold 8,071 8,074 Gross Profit 4,476 4,551
Less: Selling, General, and Administrative Expenses 4,081 4,640 Operating Income/(Loss) 395 (89)
Less: Interest Expense 363 405 Less: Loss on Extinguishment of Debt 30 10 Income/(Loss) before Income Taxes 2 (504)
Less: Income Tax Expense/ (Benefit) 1 9 Income/(Loss) from Continuing Operations 1 (513)
Discontinued Operations (Net of Tax) --- ---Net Income/(Loss) 1 (513)
Chapter 4-13
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 Income from operations 6,740
Depreciation 6,480 Other revenue (expense):
Sales 96,500 Rental revenue 17,230
Income tax expense 7,580 Interest expense (1,860)
Interest expense 1,860 Total other 15,370
Income before tax 22,110
Income tax expense 7,580
Net income 14,530$
Income Statement
For the year ended Dec. 31, 2016
Illustration (E4-4): Prepare an income statement from the data below.
Solution on notes page
Chapter 4-14
ReviewReviewA 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 Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
LO 3 Prepare a multiple-step income statement.LO 3 Prepare a multiple-step income statement.
Chapter 4-15
Discontinued Operations
Chapter 4-16
Discontinued Operations
Shown Below
Income After Taxes
Before
Net Income
on the Income Statement
Chapter 4-17
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 4-18
Reporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued OperationsReporting Discontinued Operations
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:
Gain - Net of Tax 504
Net income 55,504$
Income Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Discontinued Discontinued
Operations are Operations are reported reported
afterafter
““Income from Income from continuing continuing
operations.”operations.”
Net of TaxNet of Tax
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-19
Financial Ratios to Remember
*Gross Profit Margin %
*Profit Margin %
Chapter 4-20
Analysis of ProfitabilityAnalysis of ProfitabilityAnalysis of ProfitabilityAnalysis of Profitability
Gross
Profit %Profit
Margin %
Of particular
interest to current and
potentialinvestors
Chapter 4-21
JC Penney, Inc. JC Penney, Inc. Statement of OperationsStatement of Operations
In MillionsIn Millions
JC Penney, Inc. JC Penney, Inc. Statement of OperationsStatement of Operations
In MillionsIn Millions
For the Years Ended January 30, 2016 2015
Net Sales 12,547 12,625 Less: Cost of Goods Sold 8,071 8,074 Gross Profit 4,476 4,551
Less: Selling, General, and Administrative Expenses 4,081 4,640 Operating Income/(Loss) 395 (89)
Less: Interest Expense 363 405 Less: Loss on Extinguishment of Debt 30 10 Income/(Loss) before Income Taxes 2 (504)
Less: Income Tax Expense/ (Benefit) 1 9 Income/(Loss) from Continuing Operations 1 (513)
Discontinued Operations (Net of Tax) --- ---Net Income/(Loss) 1 (513)
Chapter 4-22
Gross Profit (Margin) % = Gross Profit (Margin) % = Gross Profit Gross Profit SalesSales
(How many cents on every $ of sales are left over after covering the cost of the product)
JC Penney, Inc. - Profitability
(in Millions) 2016 2015 2014
Net sales $12,547 $12,625 $12,257Cost of sales 8,071 8,074 7,996Gross profit $ 4,476 $ 4,551 $ 4,261
Gross profit % = 36% 36% 35%
Chapter 4-23
Profit Margin % = Profit Margin % = Net IncomeNet Income SalesSales
(How many cents on every $ of sales are left over after covering all expenses)
(in Millions) 2016 2015 2014
Net sales $ 12,547 $12,625 $12,257
Net income $ 1 $ (513) $ (717)
Profit margin % = .008% - 4.1% -5.9%
JC Penney, Inc. - Profitability
Chapter 4-24
Earnings Per Share
Chapter 4-25
An important business indicator.
Measures the dollars earned by each share of common stock.
Must be disclosed on the the income statement.
Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share
LO 6 Identify where to report earnings per share information.LO 6 Identify where to report earnings per share information.
Net income - Preferred dividends
Weighted average number of shares outstanding
Calculation
Chapter 4-26
Brief Exercise 4-8 In 2017, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2017, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2017 earnings per share.
Brief Exercise 4-8 In 2017, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2017, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2017 earnings per share.
Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share
- $250,000$1,200,000 190,000
= $5.00 per share
LO 6 Identify where to report earnings per share information.LO 6 Identify where to report earnings per share information.
Net income - Preferred dividends
Weighted average number of shares outstanding
Chapter 4-27
Craig Rusch Corporation reports the following information:
Net income $500,000Dividends on common stock 140,000Dividends on preferred stock 60,000Weighted average common shares
outstanding 100,000
Rusch should report earnings per share ofa. $3.00.b. $3.60c. $4.40.d. $5.00.
Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share
Chapter 4-28
Statement of Retained Earnings
And
Prior Period Adjustments
Chapter 4-29
Prior Period Adjustments
Adjustments to the Beginning Balance of Retained Earnings to correct accumulated earnings reported from prior years.
Prior Period Adjustments may be reported to adjust for
1. Changes in Accounting Principle
2. Corrections of Errors
LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.
Chapter 4-30
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2017
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2017, you discover a $50,000 error (net of tax) that caused the 2016 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2016). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2017?
Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Chapter 4-31
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2017
Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement
LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.
Chapter 4-32
Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement
XMax Corporation reports the following information:XMax Corporation reports the following information:
Overstatement of Depreciation ExpenseOverstatement of Depreciation Expensein prior years, net of taxin prior years, net of tax $ $
260,000260,000 Dividends declaredDividends declared 300,000 300,000 Net incomeNet income 1,500,000 1,500,000 Retained earnings, 1/1/16, as reportedRetained earnings, 1/1/16, as reported 2,400,000 2,400,000
XMax should report beginning retained earnings, XMax should report beginning retained earnings, 1/1/16, as adjusted at1/1/16, as adjusted at
a.a. $2,140,000.$2,140,000.b.b. $2,400,000.$2,400,000.c.c. $3,860,000.$3,860,000.d.d. $2,660,000.$2,660,000.
Chapter 4-33
Comprehensive Income
Chapter 4-34
All changes in equity during a period except those All changes in equity during a period except those resulting from investments by owners and resulting from investments by owners and distributions to owners.distributions to owners.
Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
I ncome Statement (in thousands)
Sales 285,000$
Cost of goods sold 149,000 Gross profi t 136,000
Operating expenses:
Advertising expense 10,000 Depreciation expense 43,000
Total operating expense 53,000 I ncome 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.
Minimum Pension Liability Adjustments.
+
Reported in Stockholders’ Equity
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-35
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..
Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.
Chapter 4-36
Companies must display the components of other
comprehensive income in one of two ways:
1. A single continuous statement (one statement
approach) or
2. two separate, but consecutive statements of net income
and other comprehensive income (two statement
approach).
Comprehensive IncomeComprehensive Income
LO 7
Chapter 4-37
One Statement Approach
Comprehensive IncomeComprehensive Income
Advantage – does
not require the
creation of a new
financial statement.
Disadvantage - net
income buried as a
subtotal on the
statement.ILLUSTRATION 4-20
One Statement Format: Comprehensive Income
LO 7
Chapter 4-38
ILLUSTRATION 4-19Two Statement
Approach
Comprehensive IncomeComprehensive Income
ILLUSTRATION 4-21Two Statement Format: Comprehensive Income
Chapter 4-39
Reports the changes in each stockholders’ equity
account and total equity for the period.
Following items are disclosed in the statement:
► Contributions (issuances of shares) and distributions
(dividends) to owners.
► Reconciliation of the carrying amount of each
component of stockholders’ equity from the beginning
to the end of the period.
Statement of Stockholders’ Equity
Comprehensive IncomeComprehensive Income
LO 7
Chapter 4-40
Statement of Stockholders’ EquityStatement of Stockholders’ Equity
ILLUSTRATION 4-22Presentation of Comprehensive Income
in Stockholders’ Equity Statement
LO 7
Chapter 4-41
Both GAAP and IFRS require companies to indicate the amount of net income attributable to noncontrolling interest.
With the recent FASB Accounting Standards Update, under both IFRS and GAAP, unusual and infrequent income items are reported in Income
before income taxes (i.e., not an extraordinary item treatment).
Both 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.
LO 8 Compare the accounting for income reporting under GAAP and IFRS.
RELEVANT FACTS - Similarities
Chapter 4-42
Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. Both GAAP and
IFRS allow a one statement or two statement approach to preparing the statement of comprehensive income.
RELEVANT FACTS - Similarities
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.
Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the SEC requires a
functional presentation.
RELEVANT FACTS - Differences
LO 8
Chapter 4-43
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 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.
Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted, with gains 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.
RELEVANT FACTS - Differences
LO 8
Chapter 4-44
The IASB and FASB are working on a project that would rework the structure of
financial statements. One stage of this project will address the issue of how to
classify various items in the income statement. A main goal of this new
approach is to provide information that better represents how businesses are
run. The FASB and IASB have issued a proposal to require comprehensive
income be reported in a combined statement of comprehensive income. This
approach draws attention away from just one number—net income.
ON THE HORIZON
LO 8