Intermediate Accounting (New Mexico State University)ch04

Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield

Chapter 4: Income Statement and Related InformationPrepared by Jep Robertson and Renae Clark New Mexico State University

Chapter 4: Income Statement and Related InformationAfter studying this chapter, you should be able to:1. Identify the uses and limitations of an income statement. 2. Prepare a single-step income statement. 3. Prepare a multiple-step income statement. 4. Explain how irregular items are reported. 5. Explain intraperiod tax allocation.

Chapter 4: Income Statement and Related Information6. Explain where earnings per share information is reported. 7. Prepare a retained earnings statement. 8. Explain how other comprehensive income is reported.

Usefulness of Income Statement Evaluate the past performance of the enterprise. Provide a basis for predicting future performance. Help assess the risk or uncertainty of achieving future cash flows.

Limitations of the Income Statement Items that cannot be measured reliably are not reported in the income statement. Income numbers are affected by the accounting methods employed. Income measurement involves judgment.

The Single Step Income Statement This statement presents information in broad categories. Major sections are Revenues and Expenses. The Earnings per Share amount is shown at the bottom of the statement. There is no distinction between operating and non-operating activities.

The Single Step Income StatementRevenues Revenues Sales Other Revenues

Expenses

=Net Income Earnings per Share

Expenses Cost of Goods Sold Selling & Admin. Exp. Interest Expense Income Tax Expense

The Multiple Step Income Statement The presentation divides information into major sections on the statement. The statement distinguishes operating from non-operating activities. Continuing operations are shown separately from irregular items. The income tax effects are shown separately as well.

The Multiple Step Income StatementOperating 1 Section 2 3 4 5 Non-Operating Section Income Tax Irregular Items Net IncomeSales Revenue less: Cost of Goods Sold less: Selling Expenses less: Administrative Expenses Add: Less: Other Revenues and Gains Other Expenses and Losses

Discontinued Operations (net of tax) Extraordinary Items (net of tax) Cumulative Effect of a Change in Accounting Principle (net of tax)

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Earnings per Share

Irregular Item: Discontinued OperationsDiscontinued operations refer to the disposal of a segment. To qualify: The segment must be a distinct line of business Its assets and operations must be distinguishable from other assets and operations. A distinction is made between: the segment’s results of operations and the disposal of the segment’s assets

Reporting Discontinued OperationsThere are two important dates in reporting discontinued operations: the measurement date (when management commits itself to a plan of segment’s

disposal) and the disposal date (the date of sale of the segment).

Irregular Item: Extraordinary Items Extraordinary items are: nonrecurring material items that differ significantly from typical activities Extraordinary items must meet two tests: they must be unusual and they must be infrequent The environment in which the business operates is of primary importance

Extraordinary Items: what they

are not Losses from write-down or write-off of receivables, inventories, etc. Gains and losses from exchange or translation of foreign currency Gains and losses from the abandonment of property used in business Effects of strike Adjustments or accruals on long term contracts.

Unusual Gains and Losses Items that are unusual or infrequent, but not both. If material, disclose separately. Do not disclose net of taxes.

Irregular Item: Change in Accounting PrincipleAn accounting change results when: a new principle, different from the one in use, is adopted. The effect of the change is to be disclosed after extraordinary items. A change in principle is to be distinguished from a change in estimate. A change from FIFO to LIFO method in inventory costing is an example.

Irregular Item: Changes in Accounting Estimates Accounting estimates will change as new events occur, more experience is acquired or additional information is obtained. Changes in accounting estimates are accounted for in period of change and future periods.