CHAPTER 4: CONTINUED

INCOME STATEMENT AND RELATED INFORMATION

Sommers – ACCT 3311

Discussion Question

Q4-12 What is the basis for distinguishing between operating and nonoperating items?

Discussion Question

Q4-30 On January 30, 2013, a suit was filed against Frazier Corp. under the EPA. On August 6, 2014, Fraizer agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2014 financial statements?

Changes in Accounting Principles

Changes in Estimate

Corrections of Errors

Reporting Irregular Items

Earnings Per Share Disclosure

One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned

by a company expressed on a per share basis.

Basic EPS

Net income less preferred dividends

Weighted-average number of common shares outstanding for the

period

Diluted EPS

Reflects the potential dilution that could occur for companies that have certain

securities outstanding that are convertible into common shares or stock options that could create additional common shares if

the options were exercised.

P&G’s Income Statement

Earnings Per Share (BE4-8): In 2014, Hollis Corporation

reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2014, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2014 earnings per share.

- $250,000$1,000,000

190,000= $3.95 per share

Net income - Preferred dividends

Weighted average number of shares outstanding

Special Reporting Issues

EPS

Divide by weighted-average shares outstanding

Illustration 4-19

Special Reporting Issues

Discussion Question

Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.

a. Loss on inventory write-down.

b. Loss from strike.

Discussion Question

Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.

c. Bad debt expense.

d. Loss on disposal of a component of the business.

e. Gain on sale of machinery.

Discussion Question

Q4-17 Indicate the section of a multiple-step income statement in which each of the following is shown.

f. Interest revenue.

g. Depreciation Expense.

h. Material write-offs of notes receivable.

Increase

Net income

Change in accounting

principle

Error corrections

Decrease

Net loss

Dividends

Change in accounting

principles

Error corrections

Retained Earnings Statement

Special Reporting Issues

Restrictions on Retained Earnings

Disclosed

In notes to the financial statements.

As Appropriated Retained Earnings.

Special Reporting Issues

Understanding Equity

Beginning equity

+ Received from owners

– Distributed to owners (other than dividends)

– Dividends declared

+ Net income (or – net loss)

+ Other comprehensive income

= Ending equity

Contributed capital

Retained earnings

Accum OCI

Com

preh

ensi

vein

com

e

If OCI = 0, earnings are “clean surplus” else they are “dirty surplus”.

On Income Statement

Not on Income Statement

Comprehensive Income

An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.

1. Net unrealized holding gains (losses) from investments (net of tax).

2. Gains and losses due to reviewing assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan.

3. When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction.

4. Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity.

Weird stuff

Income Statement (in thousands)

Sales 285,000$

Cost of goods sold 149,000

Gross profit 136,000

Operating expenses:

Selling expenses 10,000

Administrative expenses 43,000

Total operating expense 53,000

Income from operations 83,000

Other revenue (expense):

Interest revenue 17,000

Interest expense (21,000)

Total other (4,000)

Income before taxes 79,000

Income tax expense 24,000

Net income 55,000$

Other Comprehensive Income

Unrealized gains and losses on available-for-sale securities.

Translation gains and losses on foreign currency.

Plus others

+

Reported in Stockholders’ Equity

Comprehensive Income

Accumulated Other Comprehensive Income

In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as

an additional component of shareholders’ equity.

In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as

an additional component of shareholders’ equity.

(In thousands) 2014 2013Shareholders' equity:Common stock 212$ 211$ Additional paid-in capital 1,340,687 1,265,382 Retained earnings 1,131,403 1,116,035 Accumulated other comprehensive income 170,960 109,898 Treasury stock (200,251) (200,251) Total shareholders' equity 2,443,011$ 2,291,275$

JABIL CIRCUITS INC.Consolidated Balance Sheets (in part)

Yesrs Ended August 31

Companies must display the components of other

comprehensive income in one of three ways:

1. A second separate income statement;

2. A combined income statement of comprehensive

income; or

3. As part of the statement of stockholders’ equity

Special Reporting Issues

LO 8

Illustration 4-19

Comprehensive Income

Second income statement

Special Reporting Issues

P&G’s Statement of Comprehensive Income

LO 8

Comprehensive Income

Combined statement

V. Gill Inc.

Combined Statement of Comprehensive Income

For the Year Ended December 31, 2012

Sales revenue 800,000$

Cost of goods sold 600,000

Gross profit 200,000

Operating expenses 90,000

Net income 110,000

Unrealized holding gain, net of tax 30,000

Comprehensive income 140,000$

Special Reporting Issues

Comprehensive Income – Statement of Stockholder’s Equity

Illustration 4-26

Special Reporting Issues

Comprehensive Income – Balance Sheet Presentation

Illustration 4-27Presentation ofAccumulated OtherComprehensive Income in the Balance Sheet

Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.

Special Reporting Issues

Example 1

Bryant Co. reports the following information for 2012:

Sales revenue $750,000

Cost of goods sold $500,000

Operating expenses $ 80,000

Unrealized holding loss on

available-for-sale securities $ 50,000

Bryant declared and paid a cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012.

• Prepare a statement of stockholders’ equity.

Example 1

RELEVANT FACTS

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. Extraordinary items are prohibited under IFRS.

Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the U.S. SEC requires a functional presentation.

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 Insights

RELEVANT FACTS

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.

Both GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest.

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.

IFRS Insights

RELEVANT FACTS

Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. GAAP provides three possible formats for presenting this information: single income statement, combined statement of comprehensive income, in the statement of stockholders’ equity. Most companies that follow GAAP present this information in the statement of stockholders’ equity. IFRS allows a separate statement of comprehensive income or a combined statement.

Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is 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.

IFRS Insights

E4-17B

The following information was taken from the records of Cantu Inc. for the year 2014. Income tax applicable to income from continuing operations $261,800; income tax applicable to loss on discontinued operations $35,700; income tax applicable to extraordinary gain $45,220; income tax applicable to extraordinary loss $28,560; and unrealized holding gain on available-for-sale securities $21,000.

Extraordinary gain $133,000

Loss on disc ops 105,000

Admin expenses 336,000

Rent revenue 56,000

Extraordinary loss 84,000

Shares outstanding during 2014 were 100,000.

(a) Prepare a multiple-step income statement for 2014, (b) prepare a retained earnings statement for 2014 and (c) show how comprehensive income is reported using the one statement format.

Cash dividends declared$210,000

Ret earnings, 1/1/2014 840,000

Cost of goods sold 1,190,000

Selling expenses 420,000

Sales 2,660,000

E4-17B

E4-17B