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Income Statement. Chapter 4. What is Income Statement? What is the major difference between Income Statement and Balance Sheet?. Income Statement Balance Sheet. Reports the assets, liabilities, and owner’s equity At a specific date. Presents the revenues And expenses and - PowerPoint PPT Presentation
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Income StatementIncome Statement
Chapter 4Chapter 4
What is Income Statement?What is Income Statement?
What is the major difference between What is the major difference between Income Statement and Balance Sheet?Income Statement and Balance Sheet?
Income StatementIncome Statement Balance Sheet Balance Sheet
Presents the revenues Presents the revenues And expenses and And expenses and resulting net incomeresulting net income
Or net lossOr net lossFor a specificFor a specificPeriod of timePeriod of time
Reports the assets, Reports the assets, liabilities, and liabilities, and owner’s equity owner’s equity
At a specific dateAt a specific date
Usefulness of the income StatementUsefulness of the income Statement
Evaluate the past performance of the enterpriseEvaluate the past performance of the enterprise
Predict future performancePredict future performance
Assess the risk of achieving future cash flowsAssess the risk of achieving future cash flows
Limitations of the Income StatementLimitations of the Income Statement
Items that might be relevant but cannot be reliably Items that might be relevant but cannot be reliably measured are not reportedmeasured are not reported
Some numbers depend on accounting methods Some numbers depend on accounting methods used used
Some numbers depend on judgments and estimates Some numbers depend on judgments and estimates
Format of the Income Format of the Income StatementStatement
Gross ProfitGross Profit is the excess of net sales over the cost of goods sold. is the excess of net sales over the cost of goods sold. Net IncomeNet Income is the amount by which revenues exceed expenses. is the amount by which revenues exceed expenses. Net LossNet Loss is the amount by which expenses exceed revenues. is the amount by which expenses exceed revenues. RevenueRevenue is the gross increase in owner’s equity resulting from is the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning income.business activities entered into for the purpose of earning income. ExpenseExpense is the cost of assets consumed or services used in the is the cost of assets consumed or services used in the
process of earning revenue.process of earning revenue. Net salesNet sales “sales “sales lessless sales returns and allowance and sales sales returns and allowance and sales
discount”discount” Cost of goods soldCost of goods sold is the total cost of merchandise sold during the is the total cost of merchandise sold during the
period. period.
Elements of income statementElements of income statement
RevenuesRevenues ExpensesExpenses GainsGains LossesLosses
Single-Step Income StatementSingle-Step Income Statement
Two groups exist Two groups exist
Expenses are Expenses are deducteddeducted from revenues to arrive at net income or from revenues to arrive at net income or net lossnet loss
Income tax is reported separately as the last item before net income Income tax is reported separately as the last item before net income to indicate its relationship to income before income taxto indicate its relationship to income before income tax
Revenues Expenses
Dan Deines CompanyDan Deines Company
Income StatementIncome Statement
For the year ended Dec 31, 2004For the year ended Dec 31, 2004
RevenuesRevenues
Net Sales 2,972,413Net Sales 2,972,413
Dividend Revenue 98,500Dividend Revenue 98,500
Rental Revenue Rental Revenue 72,91072,910
Total Revenues Total Revenues 3,143,8233,143,823
ExpensesExpenses
Cost of Goods Sold 1,982,542Cost of Goods Sold 1,982,542
Selling Expenses 453,028Selling Expenses 453,028
Administrative Expenses 350,771Administrative Expenses 350,771
Interest Expense 126,060Interest Expense 126,060
Income Tax Expense Income Tax Expense 66,93466,934
Total Expenses Total Expenses 2,979,4892,979,489
Net Income Net Income 164,489164,489
Earning per common share 1.74Earning per common share 1.74
Multiple-Step Income StatementMultiple-Step Income Statement
It provides more useful information because:It provides more useful information because:
1.1. It separates operating and non-operating activities.It separates operating and non-operating activities.
2.2. It classifies expenses by function.It classifies expenses by function. 3.3. It allows instant comparisons and ratio computations It allows instant comparisons and ratio computations
which evaluate performance of the companywhich evaluate performance of the company
Dan Deines CompanyDan Deines Company
Income StatementIncome Statement
For the year ended Dec 31, 2004For the year ended Dec 31, 2004
RevenuesRevenues
Sales 3,053,081Sales 3,053,081
Less: sales discount 24,241Less: sales discount 24,241
sales returns and allowance sales returns and allowance 56,42756,427 ( (80,668)80,668)
Net Sales Revenues Net Sales Revenues 2,972,4132,972,413
Cost of Goods SoldCost of Goods Sold
Merchandise inventory, Jan 1, 2004 Merchandise inventory, Jan 1, 2004 (beginning inventory)(beginning inventory) 461,219461,219
Purchases 1,989,693Purchases 1,989,693
Less:Less: Purchase discount 10,270 Purchase discount 10,270
Purchase returns and allowance Purchase returns and allowance 9,0009,000
Net Purchases 1,970,423Net Purchases 1,970,423
Add:Add: Freight and transportation-in Freight and transportation-in 40,61240,612
Cost of Goods Purchased Cost of Goods Purchased 2,011,0352,011,035
Cost of goods available for sale 2,472,254 Cost of goods available for sale 2,472,254
Less:Less: Inventory, Dec 31 Inventory, Dec 31 489,713489,713
Cost of goods soldCost of goods sold ( (1,982,541)1,982,541)
Gross Profit on sales 989,872Gross Profit on sales 989,872
Gross Profit on sales 989,872Gross Profit on sales 989,872
Operating ExpensesOperating Expenses
Selling expensesSelling expenses
Sales commissions 202,644Sales commissions 202,644
Sales office salaries 59,200 Sales office salaries 59,200
Advertising expense 38,315Advertising expense 38,315
Freight-out and transportation 41,209Freight-out and transportation 41,209
Shipping supplies and expense 24,712 Shipping supplies and expense 24,712 366,080366,080
Administrative expensesAdministrative expenses
Officers’ salaries 247,200Officers’ salaries 247,200
Legal and professional services 23,721Legal and professional services 23,721
Utilities expense 23,275Utilities expense 23,275
Insurance expense 17,029Insurance expense 17,029
Depreciation of building 27,064Depreciation of building 27,064
Depreciation of office equipment 16,000Depreciation of office equipment 16,000
Postage and stationery 19,663 Postage and stationery 19,663
Travel and entertainment 48,940Travel and entertainment 48,940
Tel and internet expense 12,215 Tel and internet expense 12,215
Miscellaneous office expense Miscellaneous office expense 2,611 2,611 437,719437,719 ( (803,799)803,799)
Income from Operations 186,073Income from Operations 186,073
Income from Operations 186,073Income from Operations 186,073
Other revenues and gainsOther revenues and gains
Dividend revenue 98,500Dividend revenue 98,500
Gain on sale of assets 20,910Gain on sale of assets 20,910
Rental revenue Rental revenue 50,00050,000 171,410171,410
357,483357,483
Other expenses and lossesOther expenses and losses
Loss on sale of investments 20,000Loss on sale of investments 20,000
Interest on bonds and notes 106,060 (Interest on bonds and notes 106,060 (126,060)126,060)
Income before income tax 231,423Income before income tax 231,423
Income tax (Income tax ( 66,934)66,934)
Net income for the year 164,489Net income for the year 164,489
Earnings per common share 1.74Earnings per common share 1.74
Income Statement SectionsIncome Statement Sections
1- Operating Section1- Operating Section
A-A- Sales or RevenueSales or Revenue Usually presented as sales minus Usually presented as sales minus sales discounts, returns, and allowances.sales discounts, returns, and allowances.
B-B- Cost of GoodsCost of Goods represents the amount a product cost represents the amount a product cost you. you.
C-C- Selling expensesSelling expenses represent expenses needed to sell represent expenses needed to sell products (e.g., sales salaries and commissions, advertising, freight, products (e.g., sales salaries and commissions, advertising, freight, shipping, depreciation of sales equipment).shipping, depreciation of sales equipment).
D- D- General and administrative expensesGeneral and administrative expenses represent represent expenses to manage the business (e.g., officer salaries, legal and expenses to manage the business (e.g., officer salaries, legal and professional fees, utilities, insurance, depreciation of office building professional fees, utilities, insurance, depreciation of office building and equipment, stationery supplies) and equipment, stationery supplies)
2- 2- Non-operating sectionNon-operating section
A- A- Other revenues or gainsOther revenues or gains - revenues and gains from - revenues and gains from other than primary business activities (e.g. rent, patents). It also other than primary business activities (e.g. rent, patents). It also includes unusual gains and losses that are either unusual or includes unusual gains and losses that are either unusual or
infrequent, but not both (e.g. sale of securities or fixed assets).infrequent, but not both (e.g. sale of securities or fixed assets). B-B- Other expenses or lossesOther expenses or losses - expenses or losses not - expenses or losses not
related to primary business operations.related to primary business operations.
3- Income Tax3- Income Tax
4- 4- Irregular items Irregular items A- A- Discontinued operationsDiscontinued operations (e.g. Shifting business (e.g. Shifting business
location, stopping production temporarily).location, stopping production temporarily). Discontinued operations are classified as a separate items shown in Discontinued operations are classified as a separate items shown in
a separate section in the income statement a separate section in the income statement after continuing after continuing operations but before extraordinary items.operations but before extraordinary items.
B-B- Extraordinary itemsExtraordinary items - unusual (abnormal) and - unusual (abnormal) and infrequent, for example, unexpected nature disaster, expropriation, infrequent, for example, unexpected nature disaster, expropriation, prohibitions under new regulations. Note: nature disaster might not prohibitions under new regulations. Note: nature disaster might not qualify depending on location.qualify depending on location.
Separate section in the income statement entitled “Extraordinary Separate section in the income statement entitled “Extraordinary items” between discontinued operations and changes in principles.items” between discontinued operations and changes in principles.
C- Changes in accounting principleC- Changes in accounting principle - for example, - for example, changing method of computing depreciation from straight-line to changing method of computing depreciation from straight-line to sum-of-the-years'-digits. However, changes in estimates (e.g. sum-of-the-years'-digits. However, changes in estimates (e.g. estimated useful life of a fixed asset) do not qualify.estimated useful life of a fixed asset) do not qualify.
The effect on net income of adopting the new accounting principle The effect on net income of adopting the new accounting principle should be disclosed as a separate item should be disclosed as a separate item following extraordinary following extraordinary items in the income statements. “between extraordinary items items in the income statements. “between extraordinary items and net income”and net income”
5- Earnings per share5- Earnings per share
Net Income – Preferred DividendsNet Income – Preferred Dividends = Earnings per Share = Earnings per Share
Weighted Average of Common Weighted Average of Common
Shares OutstandingShares Outstanding
EPSEPS is “the net income earned by each share of outstanding common is “the net income earned by each share of outstanding common stock”.stock”.
Outstanding stockOutstanding stock is “capital stock that has been issued and is being is “capital stock that has been issued and is being held by stockholders”.held by stockholders”.
DividendDividend is “a distribution by a corporation to its stockholders on is “a distribution by a corporation to its stockholders on proportional basis”.proportional basis”.
SummarySummary
Income before income taxIncome before income tax
Income taxIncome tax
Discontinued operationsDiscontinued operationsExtraordinary itemsExtraordinary items
Changes in principlesChanges in principles
Net incomeNet income
EPSEPS
ExerciseExercisePresented below are selected ledger accounts of Garden Corporation at Presented below are selected ledger accounts of Garden Corporation at
Dec 31, 2004Dec 31, 2004Sales 3,040,000 Depreciation of Furniture 15,000 Sales 3,040,000 Depreciation of Furniture 15,000
Sales discount 40,000 Sales commissions 17,000 Sales discount 40,000 Sales commissions 17,000
Freight-out Freight-out 12,000 Miscellaneous expense 12,000 Miscellaneous expense 3,000 3,000
Officers’ salaries 120,000 Officers’ salaries 120,000 Loss on sale of assetsLoss on sale of assets 6,000 6,000
IInventory, Jan 1, 2004nventory, Jan 1, 2004 40,000 Insurance expense 4,000 40,000 Insurance expense 4,000
Loss due to earthquake 275,200 Loss due to earthquake 275,200 Tel expenseTel expense 5,000 5,000
Purchases Purchases 2,020,000 Advertising expense 8,000 2,020,000 Advertising expense 8,000
Gain on sales of investments 200,000 Gain on sales of investments 200,000 Rent expense Rent expense 30,000 30,000
Purchase returns and allowance 20,000 Freight-in Purchase returns and allowance 20,000 Freight-in 8,000 8,000
Inventory, Dec 31 88,000 Inventory, Dec 31 88,000
InstructionsInstructions
Prepare the income statement for 2004. Assume that 100,000 shares of common stock are outstanding. Prepare the income statement for 2004. Assume that 100,000 shares of common stock are outstanding. And dividends applicable to preferred stock SR10,000.And dividends applicable to preferred stock SR10,000.
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Revenues
Sales 3,040,000
Less: sales discount 40,000 (40,000)
Net Sales Revenues 3,000,000
Cost of Goods Sold
Inventory, Jan 1, 2004 40,000
Purchases 2,020,000
Less: Purchase returns and allowance 20,000
Net Purchases 2,000,000
Add: Freight-in 8,000
Cost of Goods Purchased 2,008,000
Cost of goods available for sale 2,048,000
Less: Inventory, Dec 31 88,000
Cost of goods sold (1,960,000)
Gross Profit on sales 1,040,000
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Gross Profit on sales 1,040,000
Operating Expenses
Selling expenses
Sales commissions 17,000
Advertising expense 8,000
Freight-out 12,000 37,000
Administrative expenses
Officers’ salaries 120,000
Insurance expense 4,000
Depreciation of Furniture 15,000
Rent expense 30,000
Tel expense 5,000
Miscellaneous expense 3,000 177,000 (214,000)
Income from Operations 826,000
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Income from Operations 826,000
Other revenues and gains
Gain on sale of investments 200,000
1,026,000
Other expenses and losses
Loss on sale of assets (6,000)
Income before income tax 1,026,000
Income tax (20%) (205,200)
Income before Extraordinary items 820,800
Extraordinary items:
Loss due to earthquake (275,200)
Net income for the year 545,600
Earnings per common share 5.3