View
254
Download
5
Category
Tags:
Preview:
Citation preview
Chapter 5
Income Statement & Related Information
Income Statement
• Revenues: inflows from major operations• Expenses: outflows from major operations• Gains & Losses: changes in equity from
peripheral activities• Non-recurring items• Net income: bottom line all operating activities
recorded on the income statement• Comprehensive income: Changes in equity from
all non-owner sources (note: usually not reported on the income statement
Income Statement Usefulness
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving future cash flows.
Income Statement Limitations
Companies omit items that cannot be measured reliably.
Income is affected by the accounting methods employed.
Income measurement involves judgment.
Earnings Quality
• Companies have incentives to manage income to meet or beat Wall Street expectations, so that
the market price of stock increases and
the value of stock options increase.
• Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.
Revenue
• Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.
Sales
Fee Revenue (services, etc.)
Interest Revenue
Dividend Revenue
Rent Revenue
Expenses
• Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations.
Expenses by Category
• Cost of goods sold (manufacturing, retail)• Cost of sales (services or services included)• Operating expenses (selling, general &
administrative, research & development, other)
• Interest income & expenses • Provision for tax
Gains & Losses
•Gains – Increases in equity (net assets) from peripheral or incidental transactions.
•Losses - Decreases in equity (net assets) from peripheral or incidental transactions.
• Gains and losses can result from
sale of investments or plant assets,
settlement of liabilities,
write-offs of assets.
Non-recurring Items
• Extraordinary items• Discontinued operations• Accounting changes Change in accounting principle Change in accounting estimate Correction of an error
Single Step Income Statement
Income Statement (in thousands)
Revenues:
Sales ####
I nterest revenue 17,000
Total revenue ####
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 ####
Net income ####
Earnings per share 0.75$
Multiple Step Income Statement
Separates operating transactions from non-operating transactions.
Matches costs and expenses with related revenues.
Highlights certain intermediate components of income that analysts use.
Multiple Step Income StatementIncome Statement (in thousands)
Sales ####
Cost of goods sold 149,000
Gross profit 136,000
Operating expenses:
Advertising expense 10,000
Depreciation expense 43,000
Total operating expense53,000
Income from operations83,000
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 ####
Earnings per share 0.75$
Non-recurring & Other Irregular Items
• Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company. (Irregular items for 600 companies, 1 Year.)
Discontinued Operations
• Discontinued Operations occur 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” (intra-period tax allocation).
Extraordinary Items
• Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities. With SFAS #145-relatively rare.
• Extraordinary Item must be both of an
Unusual nature and Occur infrequently
• Company must consider the environment in which it operates.
• Amount reported “net of tax.”
Unusual Gains & Losses
• Material items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.” These are not non-recurring items.
• Examples can include:
Write-downs of inventories
Foreign exchange transaction gains and losses
• The Board prohibits net-of-tax treatment for these items.
Changes in Accounting Principle
Retrospective adjustment
Cumulative effect adjustment to beginning retained earnings
Approach preserves comparability
Examples include:change from FIFO to average costchange from the percentage-of-completion to
the completed-contract method
Changes in Estimate
Accounted for in the period of change and future periods
Not handled retrospectively
Not considered errors or extraordinary items
Examples include:Useful lives and salvage values of depreciable
assetsAllowance for uncollectible receivables Inventory obsolescence
Correction of an Error
Result 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
Tax Allocation
Tax Allocation Result 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
Tax affect is reported within the line item.
Inter-period Tax Allocation is the timing difference between GAAP and tax accounting; for example, most companies use straight-line depreciation for financial reporting and accelerated for tax purposes
Earnings Per Share (EPS)
• Calculation:– Net income - Preferred dividends
Weighted average number of shares outstanding
An important business indicator.
Measures the dollars earned by each share of common stock.
Must be disclosed on the income statement.
Changes in Retained Earnings
Increases:
Net income
Change in accounting principle Error corrections
Decreases:
Net loss
Dividends Change in accounting principles Error corrections
All-Inclusive Income
• Net income is considered “modified” all-inclusive income
• All-inclusive is Comprehensive Income• Some companies report comprehensive
income as part of the income statement• For most companies, comprehensive income
has to be calculated.
Other Comprehensive Income
Gains & losses not reported on the income statement (also called “dirty surplus):Unrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Pension & derivatives gains & lossesOther
Comprehensive Income
• Usually reported at part of the statement of stockholders’ equity.
Comprehensive Income
• Balance Sheet presentation (part of stockholders’ equity):
Earnings Measures
• Gross profit• Operating income• Income before tax• Earnings before income & taxes (EBIT)• Income from continuing operations• Net income• Comprehensive income
Recommended