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Income Statement Gaurav Taranekar 09PR001012B067
What is Income Statement <ul><li>Evaluate the past performance of the enterprise. </li></ul><ul><li>Provide a basis for pr...
Limitations of the Income Statement <ul><li>Items that cannot be measured reliably are not reported in the income statemen...
The Single Step Income Statement <ul><li>This statement presents information in broad categories. </li></ul><ul><li>Major ...
Single Step Statement Earnings per Share NET INCOME - = Revenues Revenues Sales Other Revenues Expenses Cost of Goods Sold...
The Multiple Step Income Statement <ul><li>The presentation divides information into major sections on the statement. </li...
Multiple Step Income Statement Operating Section Sales Revenue less: Cost of Goods Sold less:  Selling Expenses less:  Adm...
Irregular Items:  Discontinued Operations
Criteria for Discontinued Operations <ul><li>Discontinued operations refer to the disposal of a segment. </li></ul><ul><li...
Reporting Discontinued Operations <ul><li>There are  two important dates  in reporting discontinued operations: </li></ul>...
Irregular Items: Extraordinary Items
Extraordinary Items <ul><li>Extraordinary  items are: </li></ul><ul><li>nonrecurring  material  items that </li></ul><ul><...
Extraordinary Items: what they  are not <ul><li>Losses from write-down or write-off of receivables, inventories, etc.  </l...
Unusual Gains & Losses <ul><li>Items that are unusual OR infrequent, but not both. </li></ul><ul><li>If material, disclose...
Irregular Items: Cumulative Effect of a Change in Accounting Principle
Change in Accounting Principle <ul><li>An accounting change results when : </li></ul><ul><li>a new principle, different fr...
Change in Accounting Principle Gilbert company buys and places in service an asset on 1/1/2002.  The cost is  $100,000 .  ...
Change in Accounting Principle Year Double-declining Straight line Difference balance depreciation depreciation 2002 $50,0...
Changes in Accounting Estimates <ul><li>Accounting estimates will changes as new events occur, more experience is acquired...
Changes in Accounting Estimates: Example On 1/1/2004, Gilbert Company (see preceding example  for accounting principle cha...
Changes in Accounting Estimates: Example Book value (1/1/2004): $50,000 Less: Salvage value ($5,000) ---------- Revised de...
Intraperiod Tax Allocation <ul><li>Tax expense for year related to specific items. </li></ul><ul><li>Used for: </li></ul><...
Earnings per Share <ul><li>Earnings per share  is a significant  business indicator figure. </li></ul><ul><li>It is comput...
Retained Earnings Statement <ul><li>Retained earnings are increased by net income and decreased by net loss and dividends ...
Other Comprehensive Income – all changes in equity during a period, except those resulting from investments by or distribu...
Other Comprehensive Income must be displayed as: <ul><li>A separate statement of comprehensive income  OR </li></ul><ul><l...
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Income statement

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Income statement

  1. 1. Income Statement Gaurav Taranekar 09PR001012B067
  2. 2. What is Income Statement <ul><li>Evaluate the past performance of the enterprise. </li></ul><ul><li>Provide a basis for predicting future performance. </li></ul><ul><li>Help assess the risk or uncertainty of achieving future cash flows. </li></ul>
  3. 3. Limitations of the Income Statement <ul><li>Items that cannot be measured reliably are not reported in the income statement. </li></ul><ul><li>Income numbers are affected by the accounting methods employed. </li></ul><ul><li>Income measurement involves judgment. </li></ul>
  4. 4. The Single Step Income Statement <ul><li>This statement presents information in broad categories. </li></ul><ul><li>Major sections are Revenues and Expenses. </li></ul><ul><li>The Earnings per Share amount is shown at the bottom of the statement. </li></ul><ul><li>There is no distinction between operating and non-operating activities. </li></ul>
  5. 5. Single Step Statement Earnings per Share NET INCOME - = Revenues Revenues Sales Other Revenues Expenses Cost of Goods Sold Selling & Admn Expenses Interest Expense Income Tax Expense Expenses
  6. 6. The Multiple Step Income Statement <ul><li>The presentation divides information into major sections on the statement. </li></ul><ul><li>The statement distinguishes operating from non-operating activities. </li></ul><ul><li>Continuing operations are shown separately from irregular items. </li></ul><ul><li>The income tax effects are shown separately as well. </li></ul>
  7. 7. Multiple Step Income Statement Operating Section Sales Revenue less: Cost of Goods Sold less: Selling Expenses less: Administrative Expenses 1 Non-Operating Section Add: Other Revenues and Gains Less: Other Expenses and Losses 2 Income Tax 3 Irregular Items Discontinued Operations (net of tax) Extraordinary Items (net of tax) Cumulative Effect of a Change in Accounting Principle (net of tax) 4 Earnings per Share 5
  8. 8. Irregular Items: Discontinued Operations
  9. 9. Criteria for Discontinued Operations <ul><li>Discontinued operations refer to the disposal of a segment. </li></ul><ul><li>To qualify: </li></ul><ul><li>The segment must be a distinct line of business </li></ul><ul><li>Its assets and operations must be distinguishable from other assets and operations. </li></ul><ul><li>A distinction is made between: </li></ul><ul><li>the segment’s results of operations and </li></ul><ul><li>the disposal of the segment’s assets </li></ul>
  10. 10. Reporting Discontinued Operations <ul><li>There are two important dates in reporting discontinued operations: </li></ul><ul><ul><li>the measurement date and </li></ul></ul><ul><ul><li>the disposal date </li></ul></ul><ul><li>The measurement date is when management commits itself to a plan of segment’s disposal. </li></ul><ul><li>The disposal date is the date of sale of segment. </li></ul>
  11. 11. Irregular Items: Extraordinary Items
  12. 12. Extraordinary Items <ul><li>Extraordinary items are: </li></ul><ul><li>nonrecurring material items that </li></ul><ul><li>differ significantly from typical activities </li></ul><ul><li>Extraordinary items must meet two tests : </li></ul><ul><li>they must be unusual and </li></ul><ul><li>they must be infrequent </li></ul><ul><li>The environment in which the business operates is of primary importance </li></ul>
  13. 13. Extraordinary Items: what they are not <ul><li>Losses from write-down or write-off of receivables, inventories, etc. </li></ul><ul><li>Gains and losses from exchange or translation of foreign currency </li></ul><ul><li>Gains and losses from the abandonment of property used in business </li></ul><ul><li>Effects of strike </li></ul><ul><li>Adjustments or accruals on long term contracts. </li></ul>
  14. 14. Unusual Gains & Losses <ul><li>Items that are unusual OR infrequent, but not both. </li></ul><ul><li>If material, disclose separately. </li></ul><ul><li>Do not disclose, net of taxes . </li></ul>
  15. 15. Irregular Items: Cumulative Effect of a Change in Accounting Principle
  16. 16. Change in Accounting Principle <ul><li>An accounting change results when : </li></ul><ul><li>a new principle, different from the one in use, is adopted. </li></ul><ul><li>The effect of the change is to be disclosed after extraordinary items. </li></ul><ul><li>A change in principle is to be distinguished from a change in estimates. </li></ul><ul><li>A change from FIFO to LIFO method in inventory costing is an example. </li></ul>
  17. 17. Change in Accounting Principle Gilbert company buys and places in service an asset on 1/1/2002. The cost is $100,000 . Estimated useful life is 4 years. Ignore salvage value. Tax rate is 30%. The company uses the double-declining method of depreciation in 2002 and 2003. It changes to the straight-line method in 2004 (1/1/2004.) Present the effect of the change in accounting principle.
  18. 18. Change in Accounting Principle Year Double-declining Straight line Difference balance depreciation depreciation 2002 $50,000 $25,000 $25,000 2003 $25,000 $25,000 $ -0- Extraordinary Item $XXXX Cumulative Effect on prior years of retroactive application of new depreciation method (net of tax, $7,500) $17,500 Presentation Net difference $25,000 Increases net income
  19. 19. Changes in Accounting Estimates <ul><li>Accounting estimates will changes as new events occur, more experience is acquired or additional information is obtained </li></ul><ul><li>Changes in accounting estimates are accounted for in period of change and future periods. </li></ul>
  20. 20. Changes in Accounting Estimates: Example On 1/1/2004, Gilbert Company (see preceding example for accounting principle change) revises the useful life of the asset to be 3 more years (2004, 2005 and 2006). The salvage value is estimated to be $5,000. This change involves a revision of initial estimates. The depreciation method remains straight-line.
  21. 21. Changes in Accounting Estimates: Example Book value (1/1/2004): $50,000 Less: Salvage value ($5,000) ---------- Revised depreciable cost: $45,000 Revised depreciable cost: $45,000 Remaining useful life: 3 years Annual straight-line depreciation: $15,000 (years 2004, 2005 and 2006) Note: The changes in useful life and salvage value do not affect prior periods
  22. 22. Intraperiod Tax Allocation <ul><li>Tax expense for year related to specific items. </li></ul><ul><li>Used for: </li></ul><ul><ul><li>Income from continuing operations </li></ul></ul><ul><ul><li>Discontinued operations </li></ul></ul><ul><ul><li>Extraordinary items </li></ul></ul><ul><ul><li>Change in accounting principle </li></ul></ul>
  23. 23. Earnings per Share <ul><li>Earnings per share is a significant business indicator figure. </li></ul><ul><li>It is computed as: Net Income less Preferred Dividends Weighted Average of Common Shares Outstanding </li></ul><ul><li>Earnings per share is required to be disclosed on the income statement for all the major sections. </li></ul><ul><li>Earnings per share is subject to dilution (reduction ), if issue of additional shares is possible in the future. </li></ul>
  24. 24. Retained Earnings Statement <ul><li>Retained earnings are increased by net income and decreased by net loss and dividends for the year. </li></ul><ul><li>Corrections of errors in prior period financial statements are shown as prior period adjustments to the beginning balance in retained earnings. </li></ul><ul><li>Any part of retained earnings, appropriated for a specific purpose, is shown as restricted earnings. </li></ul>
  25. 25. Other Comprehensive Income – all changes in equity during a period, except those resulting from investments by or distributions to owners.
  26. 26. Other Comprehensive Income must be displayed as: <ul><li>A separate statement of comprehensive income OR </li></ul><ul><li>Combined income statement and comprehensive income statement OR </li></ul><ul><li>Part of statement of stockholders equity </li></ul>

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