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- 1. Income Statement Chapter 4 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 2. Learning Objectives After studying this chapter the student will be able to : • To identity Basic Elements of the Income Statement • To understand income statement items that require special disclosure. Chapter 3, Slide #2 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 3. Chapter 4, Slide #3 The Income Statement • The income statement is often considered to be the most important financial statement. • Frequently used titles for this statement include: Statement of Operations Statement of income Statement of Earnings Profit or loss statement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 4. Chapter 4, Slide #4 The Income Statement • Dated for a period of time – For the Year Ended... • Multiple-step format – Gross profit – Operating income – Income before taxes – Net income • Single-step format – Total of all revenues and gains – Less the total of all expenses and losses © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 5. Chapter 4, Slide #5 Multiple-Step Single Step Net revenue $37,586 Cost of sales 16,742 Gross margin 20,844 Operating Expenses: General & administrative 5,458 $ Resaarch & development 5,722 Restructuring charges 710 11,890 Operating income 8,954 Interest income (expense) 488 Other gains (losses) (net) (1,756) (1,268) Income before taxes 7,686 Provision for taxes 2,394 Net Income 5,292 $ Multiple-Step Company Income Statement For the Year Ended December 31, 20XX Net revenue 37,586 $ Interest income 488 Other income - 38,074 Costs and Expenses: Cost of sales 16,742 $ General & administrative 5,458 Research & development 5,722 Other losses 1,756 Restructuring charges 710 30,388 Income before taxes 7,686 Provision for taxes 2,394 Net income 5,292 $ Single-Step Company Income Statement For the Year Ended December 31, 20XX © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 6. Chapter 4, Slide #6 Basic Elements of the Income Statement • Net Sales (Revenues) • Cost of Goods Sold (Cost of Sales) • Other Operating Revenue • Research and Development • Restructuring Charges • Impairment Charges • Operating Expenses • Other Income or Expense ( gains or losses) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 7. Chapter 4, Slide #7 • Revenue from the sale of principal goods or services sold to customers • Shown net of – Discounts – Returns – Allowances Net Sales © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 8. Chapter 4, Slide #8 • The cost of goods that were sold to produce revenue (cost of services in a service company) Retailer Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold Manufacturer Beginning Inventory + Cost of Goods Manufactured – Ending Inventory = Cost of Goods Sold Cost of Goods Sold © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 9. Chapter 4, Slide #9 • Reflects the nature of the business • Examples – Lease revenue – Royalty revenue – Finance charges – Commission revenue Other Operating Revenue © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 10. Chapter 4, Slide #10 Operating Expenses • Selling expenses – Result from the company’s effort to create sales – Examples • Advertising • Sales commissions • Sales supplies used • Administrative expenses – Relate to the general administration of the company’s operation – Examples • Salaries • Insurance • Bad debt expense © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 11. Chapter 4, Slide #11 Other Income or Expense • Secondary activities not directly related to operations – Dividend income – Interest income – Gains (losses) from sale of assets – Interest expense © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 12. Chapter 4, Slide #12 Special Income Statement Items • Certain income statement items are either unusual or occur infrequently. They might include such items as a gain on sale of securities, write- downs of receivables, or write-downs of inventory. These items are shown with normal, recurring revenues and expenses, and gains and losses. • Unusual or Infrequent Items Disclosed Separately – Included with normal recurring revenues and expenses – If material, disclosed separately, before income taxes – Relate to operations – Treatment for analysis • Primary analysis: include • Supplementary analysis: exclude © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 13. Chapter 4, Slide #13 Special Income Statement Items (cont’d) • Equity in Earnings of Nonconsolidated Subsidiaries – The investor’s proportional share of the investee’s net income – Does not represent cash flow to the investor • Cash dividends received represent cash flow – Analysis issues: • Investor’s net income includes revenue of other entity • May distort ratios • Presented before tax; tax consequences typically immaterial © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 14. Chapter 4, Slide #14 Special Income Statement Items (cont’d) • Income Taxes Related to Operations – Federal, state, and local – Includes both paid and deferred taxes • Discontinued Operations – Reported net of income tax – Analysis issues: • Inadequate disclosure of associated assets • Lack of historical profit and loss information on the discontinued operations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 15. Chapter 4, Slide #15 Special Income Statement Items (cont’d) • Extraordinary Items – Unusual and infrequent – Reported net of income tax – Analysis issues: • Exclude from primary analysis • Include for supplementary analysis © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 16. Chapter 4, Slide #16 Special Income Statement Items (cont’d) • Cumulative Effect of a Change in Accounting Principle – For fiscal years beginning before 12/15/05 • Cumulative effect of the change shown net of tax on the income statement of the period in which change was made • Earlier statements not restated to reflect application of the new principle – Effective for fiscal years beginning after 12/15/05 • All comparative statements are retrospectively restated to reflect application of the new accounting principle • The cumulative effect on income of earlier years is shown as a net-of-tax adjustment to the beginning Retained Earnings balance of the earliest period presented © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 17. Chapter 4, Slide #17 Special Income Statement Items (cont’d) • Net Income-Noncontrolling Interest (prior to Dec. 31,2009 is was called Minority Share of Earnings) – Earnings of a partially-owned consolidated subsidiary that would accrue to the minority owners – Presentation may be either pre-tax or net-of-tax • Earnings per Share Net income ÷ Number of shares outstanding © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 18. Chapter 4, Slide #18 Reconciliation of Retained Earnings Beginning of year balance of retained earnings + Net income – Dividends = End-of-year balance of retained earnings Reported as part of the Statement of Stockholders’ Equity or combined with the Income Statement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 19. Chapter 4, Slide #19 Retained Earnings • The accumulated undistributed earnings of the corporation reported on the balance sheet • Appropriated – Restricted by law, contract, or management decision – Not available for dividends • Unappropriated – Available for dividends – Does not represent cash or any other asset © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 20. Chapter 4, Slide #20 Stock Dividends • Cash dividends – Date of declaration: create liability and reduce retained earnings – Date of payment: reduce liability and cash • Stock dividends – Small (less then 25%): capitalize the market value of the stock – Material: capitalize the par value of the stock – Total equity is unaffected by a stock dividend – Analysis issues: • Restate share quantities to reflect stock dividend activity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 21. Chapter 4, Slide #21 Stock Dividend Example 100,000 shares outstanding; $1 par; $5 market Before effect of dividend balance after effect of dividend balance after Common stock par value $1.00 $1.00 $1.00 Shares outstanding 100,000 issue 10,000 sh 110,000 issue 40,000 sh 140,000 Total par value $100,000 10,000 $110,000 40,000 $140,000 Additional paid-in capital 750,000 40,000 790,000 750,000 Total paid-in capital 850,000 900,000 890,000 Retained earnings 1,000,000 (50,000) 950,000 (40,000) 960,000 Total stockholders' equity $1,850,000 $1,850,000 $1,850,000 10% stock dividend 40% stock dividend 10% stock dividend on 100,000 shares: issue 10,000 additional shares recorded at $5 per share 40% stock dividend on 100,000 shares: issue 40,000 additional shares recorded at $1 per share © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 22. Chapter 4, Slide #22 Stock Splits • 2-for-1 split – Doubles the quantity of stock – Par or stated value is halved • No effect on retained earnings, additional paid- in capital, or capital stock accounts • Analysis issues: – Restate share quantities to reflect split activity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 23. Chapter 4, Slide #23 Legality of Distributions to Shareholders • Per various state laws – Distributions are acceptable as long as the firm has the ability to pay debts as they come due in the normal course of business – Distributions to stockholders are acceptable as long as the firm is solvent and the distributions do not exceed the fair value of the assets – Distributions consist of solvency and balance sheet test of liquidity and risk © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 24. Chapter 4, Slide #24 Comprehensive Income Net income + The period’s change in accumulated other comprehensive income = Comprehensive income • Foreign currency translation adjustments • Unrealized holding gains and losses on available-for-sale marketable securities • Changes to stockholders’ equity resulting from additional minimum pension liability adjustments • Unrealized gains and losses from derivative instruments © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 25. Chapter 4, Slide #25 Comprehensive Income (cont’d) • Required disclosures – Comprehensive income – Other comprehensive income from each category – Reclassification adjustments for each category of other comprehensive income – Tax effects for each category of other comprehensive income – Balances for each category of other comprehensive income © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 26. Chapter 4, Slide #26 Comprehensive Income – Combined with Income Statement Sales 230,000 $ Cost of goods sold 140,000 Gross profit 90,000 Operating expenses 40,000 Operating income 50,000 Other income 4,000 Income before income taxes 54,000 Income taxes 20,000 Net income 34,000 Other comprehensive income Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000) Other comprehensive income 4,000 Comprehensive income 38,000 $ Earnings per share (for net income only) 2.80 $ XYZ Corporation Statement of Income and Comprehensive Income For the Year Ended December 31, 20XX © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 27. Chapter 4, Slide #27 Comprehensive Income – Separate Statement Net income 34,000 $ Other comprehensive income Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000) Total other comprehensive income 4,000 Comprehensive income 38,000 $ XYZ Corporation Statement of Comprehensive Income For the Year Ended December 31, 20XX © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 28. Chapter 4, Slide #28 Comprehensive Income (cont’d) • Presentation – In a separate financial statement – Combined with the income statement – As part of the schedule of changes in stockholders’ equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 29. Chapter 4, Slide #29 Comprehensive Income – As Part of the Statement of Stockholders’ Equity Retained Accumulated Other Comprehensive Total Earnings Income Amount Shares Beginning Balance $180,000 $60,000 $10,000 $110,000 55,000 Net Income 34,000 34,000 Available-for-sale security adjustment, net of tax 5,500 5,500 Minimum pension liability adjustment, net of tax 3,500 3,500 Foreign currency transaction adjustment, net of tax (5,000) (5,000) Comprehensive income 38,000 Ending Balance $218,000 $94,000 $14,000 $110,000 55,000 XYZ Corporation Statement of Changes in Stockholders' Equity For the Year Ended December 31, 20XX Common Stock © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 30. Chapter 4, Slide #30 Comprehensive Income (cont’d) • Analysis issues: – Typically more volatile than net income – A better indication of long-run profitability © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 31. Chapter 4, Slide #31 Income Statement IFRS vs GAAP • Income Statements are similar with some presentation differences -IFRS has no required format of the Income Statement. -IFRS equipment may be revalued which has impact on depreciation expense -IFRS allows for alternative performance measures to be presented in Income Statement. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.