1、Prepared by Coby Harmon University of California, Santa BarbaraIntermediate AccountingIntermediate Accounting14th Edition4Income Statement and Related InformationKieso, Weygandt, and Warfield Understand the uses and limitations of an income statement.Prepare a single-step income statement.Prepare a

2、multiple-step income statement.Explain how to report irregular items.Explain intraperiod tax allocation.Identify where to report earnings per share information.Prepare a retained earnings statement.Explain how to report other comprehensive income.Learning ObjectivesElementsSingle-stepMultiple-stepCo

3、ndensed income statementsIncome StatementFormat of the Income StatementReporting Irregular ItemsSpecial Reporting IssuesUsefulnessLimitationsQuality of EarningsDiscontinued operationsExtraordinary itemsUnusual gains and lossesChanges in accounting principlesChanges in estimatesCorrections of errorsI

4、ntraperiod tax allocationEarnings per shareRetained earnings statementComprehensive incomeIncome Statement and Related InformationEvaluate past performance.Income StatementLO 1 Understand the uses and limitations of an income statement.Help assess the risk or uncertainty of achieving future cash flo

5、ws.Predicting future performance.UsefulnessIncome StatementLimitationsLO 1 Understand the uses and limitations of an income statement.Companies omit items that cannot be measured reliably.Income is affected by the accounting methods employed.Income measurement involves judgment.Companies have incent

6、ives to manage income to meet or beat Wall Street expectations, so thatmarket price of stock increases andvalue of stock options increase. Income StatementLO 1 Understand the uses and limitations of an income statement.Quality of earnings is reduced if earnings management results in information that

7、 is less useful for predicting future earnings and cash flows.Quality of EarningsFormat of the Income StatementLO 1 Understand the uses and limitations of an income statement.Revenues Inflows or other enhancements of assets or settlements of its liabilities that constitute the entitys ongoing major

8、or central operations.SalesFee revenueInterest revenueExamples of Revenue AccountsElements of the Income StatementDividend revenueRent revenueFormat of the Income StatementLO 1 Understand the uses and limitations of an income statement.Expenses Outflows or other using-up of assets or incurrences of

9、liabilities that constitute the entitys ongoing major or central operations.Examples of Expense AccountsElements of the Income StatementCost of goods soldDepreciation expenseInterest expenseRent expenseSalary expenseFormat of the Income StatementLO 1 Understand the uses and limitations of an income

10、statement.Gains and losses can result fromsale of investments or plant assets, settlement of liabilities, write-offs of assets.Elements of the Income StatementGains Increases in equity (net assets) from peripheral or incidental transactions.Losses - Decreases in equity (net assets) from peripheral o

11、r incidental transactions.Single-Step FormatLO 2 Prepare a single-step income statement.RevenuesExpensesNet IncomeSingle- StepNo distinction between Operating and Non-operating categories.Single-Step Income StatementSingle-Step FormatLO 2 Prepare a single-step income statement.E4-4: Prepare an incom

12、e statement from the data below.The single-step income statement emphasizesthe gross profit figure.total revenues and total expenses.extraordinary items more than it is emphasized in the multiple-step income statement.the various components of income from continuing operations.ReviewSingle-Step Form

13、atLO 2 Prepare a single-step income statement.Separates operating transactions from nonoperating transactions.Matches costs and expenses with related revenues.Highlights certain intermediate components of income that analysts use. LO 3 Prepare a multiple-step income statement.Multiple-Step Income St

14、atementFormat of the Income StatementOperating section Nonoperating sectionIncome taxDiscontinued operationsExtraordinary itemsEarnings per shareLO 3 Prepare a multiple-step income statement.Multiple-Step FormatIntermediate Components of the Income StatementMultiple-Step FormatLO 3 Prepare a multipl

15、e-step income statement.The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax Multiple-Step FormatIllustration (E4-4): Prepare an income statement from the data below.ReviewA separation of operating and non operating activities of a comp

16、any exists in both a multiple-step and single-step income statement. a multiple-step but not a single-step income statement.a single-step but not a multiple-step income statement.neither a single-step nor a multiple-step income statement.Multiple-Step FormatLO 3 Prepare a multiple-step income statem

17、ent.Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.LO 4 Explain how to report irregular items.Reporting Irregular ItemsIllustration 4-5 Number of Irregular Items Reported in a Recent Year by 500 Large Comp

18、aniesIrregular items fall into six categoriesDiscontinued operations.Extraordinary items.Unusual gains and losses.Changes in accounting principle.Changes in estimates.Corrections of errors.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Occurs when,(a)company eliminates the resul

19、ts of operations and cash flows of a component.there is no significant continuing involvement in that component. Amount reported “net of tax.”Reporting Irregular ItemsLO 4 Explain how to report irregular items.Discontinued OperationsIllustration: KC Corporation had after tax income from continuing o

20、perations of $55,000,000 for the year. During the year, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 for the year. Assume a tax rate of 30%. Prepare a partial income statement for KC. Reporting Discontinued

21、 OperationsIncome from continuing operations$55,000,000Discontinued operations:Loss from operations, net of $135,000 tax315,000Loss on disposal, net of $81,000 tax189,000Net income$54,496,000Total loss on discontinued operations504,000LO 4 Explain how to report irregular items.Reporting Discontinued

22、 OperationsDiscontinued Operations are reported after “Income from continuing operations.”P(pán)reviously labeled as “Net Income”. Moved toLO 4Extraordinary items are nonrecurring material items that differ significantly from a companys typical business activities.Extraordinary Item must be both of an Un

23、usual Nature and Occur InfrequentlyCompany must consider the environment in which it operates.Amount reported “net of tax.” Reporting Irregular ItemsLO 4 Explain how to report irregular items.Are these items Extraordinary?(a) A large portion of a tobacco manufacturers crops are destroyed by a hail s

24、torm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare.(b) A citrus growers Florida crop is damaged by frost. (c) A company sells a block of common stock of a publicly traded company. The block of shares, which represents less than 10% of the publicly-held

25、company, is the only security investment the company has ever owned.YESReporting Extraordinary ItemsNOYESLO 4 Explain how to report irregular items.Are these items Extraordinary?(d) A large diversified company sells a block of shares from its portfolio of securities which it has acquired for investm

26、ent purposes. This is the first sale from its portfolio of securities.(e) An earthquake destroys one of the oil refineries owned by a large multi-national oil company. Earthquakes are rare in this geographical location.(f) A company experiences a material loss in the repurchase of a large bond issue

27、 that has been outstanding for 3 years. The company regularly repurchases bonds of this nature. NOReporting Extraordinary ItemsYESNOLO 4Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 during the year. In addition, it suffered an unusual and infrequent pret

28、ax loss of $770,000 from a volcano eruption. The corporations tax rate is 30%. Prepare a partial income statement for KC Corporation beginning with income from continuing operations.Income from continuing operations$55,000,000Extraordinary loss, net of $231,000 tax539,000Net income$54,461,000Reporti

29、ng Extraordinary Items($770,000 x 30% = $231,000 tax)LO 4 Explain how to report irregular items.Extraordinary Items are reported after “Income from continuing operations.”LO 4Previously labeled as “Net Income”. Moved toReporting Extraordinary ItemsLO 4Illustration 4-8Income Statement Presentation of

30、 Extraordinary ItemsReporting Extraordinary ItemsReporting when both Discontinued Operations and Extraordinary Items are present.Discontinued OperationsLO 4Extraordinary ItemsReporting Irregular ItemsIrregular transactions such as discontinued operations and extraordinary items should be reported se

31、parately in a. both a single-step and multiple-step income statement. b. a single-step income statement only. c. a multiple-step income statement only. d. neither a single-step nor a multiple-step income statement.ReviewLO 4 Explain how to report irregular items.Reporting Irregular ItemsMaterial ite

32、ms that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.”Examples can include:Write-downs of inventoriesForeign exchange transaction gains and lossesThe Board prohibits net-of-tax treatment for these

33、items.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Unusual Gains and LossesReporting Irregular ItemsLO 4 Explain how to report irregular items.Illustration 4-9Income Statement Presentation of Unusual ChargesUnusual Gains and LossesRetrospective adjustment.Cumulative effect adj

34、ustment to beginning retained earnings.Approach preserves comparability.Examples include:change from FIFO to average cost.change from the percentage-of-completion to the completed-contract method.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Changes in Accounting PrinciplesRepo

35、rting Irregular ItemsLO 4 Explain how to report irregular items.Change in Accounting Principle: Gaubert Inc. decided in March 2012 to change from FIFO to weighted-average inventory pricing. Gauberts income before taxes, using the new weighted-average method in 2012, is $30,000. Illustration 4-10Calc

36、ulation of a Change inAccounting PrincipleIllustration 4-11Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Pretax Income DataAccounted for in the period of change and future periods.Not handled retrospectively.Not considered errors or extraordinary items.Exampl

37、es include:Useful lives and salvage values of depreciable assets.Allowance for uncollectible receivables.Inventory obsolescence.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Changes in EstimateChange in Estimate: Arcadia HS, purchased equipment for $510,000 which was estimated

38、to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2012 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Q

39、uestions:What is the journal entry to correct the prior years depreciation?Calculate the depreciation expense for 2012.Change in Estimate ExampleLO 4 Explain how to report irregular items.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 3

40、1, 2011)Change in Estimate ExampleAfter 7 yearsEquipment cost $510,000Salvage value - 10,000Depreciable base500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000 x 7 years = $350,000 First, establish NBV at date of change in estimate.LO 4 Explain how to report irregular items.Change in

41、Estimate ExampleNet book value $160,000Salvage value (new) 5,000Depreciable base155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2012.Depreciation expense 19,375Accumulated depreciation 19,375Journal entry for 2012LO 4 Explain how to report irregul

42、ar items.After 7 yearsResult from:mathematical mistakes.mistakes in application of accounting principles.oversight or misuse of facts.Corrections treated as prior period adjustments.Adjustment to the beginning balance of retained earnings.Reporting Irregular ItemsLO 4 Explain how to report irregular

43、 items.Corrections of ErrorsCorrections of Errors: To illustrate, in 2013, Hillsboro Co. determined that it incorrectly overstated its accountsreceivable and sales revenue by $100,000 in 2010. In 2013, Hillboro makes the following entry to correct for this error (ignore income taxes).Reporting Irreg

44、ular ItemsLO 4 Explain how to report irregular items.Retained earnings100,000Accounts receivable100,000Relates the income tax expense to the specific items that give rise to the amount of the tax expense.Income tax is allocated to the following items:(1)Income from continuing operations before tax.(

45、2) Discontinued operations.(3) Extraordinary items.Special Reporting IssuesLO 5 Explain intraperiod tax allocation.Intraperiod Tax AllocationExtraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation

46、 settlement received on one its properties. Assuming a 30 percent income tax rate.Special Reporting IssuesLO 5 Explain intraperiod tax allocation.Illustration 4-13Intraperiod Tax AllocationExtraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an ex

47、traordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate.Special Reporting IssuesLO 5 Explain intraperiod tax allocation.Illustration 4-14Intraperiod Tax AllocationCalculation of Total TaxExample of Intraperiod Tax Allocation$24,000(135)(61)(231)$23,573LO 5 Explain i

48、ntraperiod tax allocation.Note: losses reduce the total taxAn important business indicator.Measures the dollars earned by each share of common stock.Must be disclosed on the the income statement.Special Reporting IssuesLO 6 Identify where to report earnings per share information. Net income - Prefer

49、red dividends Weighted average number of shares outstandingEarnings Per ShareEarnings Per Share (BE4-8): In 2012, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2012, Hollis had a weighted average of 190,000 common shares outs

50、tanding. Compute Holliss 2012 earnings per share.Special Reporting Issues- $250,000$1,000,000190,000=$3.95 per shareLO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstandingSpecial Reporting IssuesLO 6EPSDivide by wei

51、ghted-average shares outstanding Illustration 4-17LO 7 Prepare a retained earnings statement.IncreaseNet incomeChange in accounting principleError correctionsDecreaseNet lossDividendsChange in accounting principlesError correctionsRetained Earnings StatementSpecial Reporting IssuesBefore issuing the

52、 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). Would this discovery have any impact on the reporting of the Statement of Retai

53、ned Earnings for 2012? Special Reporting IssuesLO 7 Prepare a retained earnings statement.Special Reporting IssuesLO 7 Prepare a retained earnings statement.Restrictions on Retained EarningsDisclosedIn notes to the financial statements.As Appropriated Retained Earnings.LO 7 Prepare a retained earnin

54、gs statement.Special Reporting IssuesAll 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 stockhold

55、ers equity.Special Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehensive IncomeSpecial Reporting IssuesOther Comprehensive IncomeUnrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus others+Reported in Stockho

56、lders EquityLO 8 Explain how to report other comprehensive income.Comprehensive IncomeReviewGains and losses that bypass net income but affect stockholders equity are referred to as comprehensive income. other comprehensive income.prior period income.unusual gains and losses.Special Reporting Issues

57、LO 8 Explain how to report other comprehensive income.Companies must display the components of other comprehensive income in one of three ways:A second separate income statement;A combined income statement of comprehensive income; orAs part of the statement of stockholders equitySpecial Reporting Is

58、suesLO 8 Explain how to report other comprehensive income.Special Reporting IssuesLO 8Illustration 4-19Comprehensive IncomeSecond income statementSpecial Reporting IssuesLO 8Comprehensive IncomeCombined statementSpecial Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehens

59、ive Income Statement of Stockholders EquityIllustration 4-20Special Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehensive Income Balance Sheet PresentationIllustration 4-21Presentation ofAccumulated OtherComprehensive Income in the Balance SheetRegardless of the display

60、 format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders equity section of the balance sheet.ReviewThe FASB decided that the components of other comprehensive income must be displayed in a second separate income statement. in a combined income statement of