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Coby Harmon
University of California, Santa Barbara
Westmont College
4-1
Income Statement and CHAPTER 4
Related Information
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the uses and limitations 4. Explain the reporting of
of an income statement. accounting changes and
errors.
2. Describe the content and format
of the income statement. 5. Describe related equity
statements.
3. Discuss how to report various
income items.
4-2
PREVIEW OF CHAPTER 4
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
4-3
LEARNING OBJECTIVE 1
Income Statement Identify the uses and limitations
of an income statement.
Usefulness
Evaluate past performance.
4-4 LO 1
Income Statement
Limitations
Companies omit items that cannot be
measured reliably.
4-5 LO 1
Income Statement
Quality of Earnings
Companies have incentives to manage income
4-6 LO 1
Content and Format of LEARNING OBJECTIVE 2
Describe the content and format
the Income Statement of the income statement.
decreases of liabilities
4-7 LO 2
Elements of the Income Statement
4-8 LO 2
Elements of the Income Statement
incurrences of liabilities
4-9 LO 2
Elements of the Income Statement
4-10 LO 2
1. Sales or Revenue
Income
2. Cost of Goods Sold
Statement
Gross Profit
3. Selling Expenses
Intermediate
4. Administrative or General Expenses
Components
5. Other Income and Expense
Companies generally Income from Operations
present some or all of 6. Financing costs
these sections and totals
Income before Income Tax
within the income
7. Income Tax
statement.
Income from Continuing Operations
8. Discontinued Operations
Net Income
9. Non-Controlling Interest
10. Earnings Per Share
4-11
Format of the
Income 1
Statement 2
ILLUSTRATION 4.2 9
Income Statement 10
4-12
Condensed
Income
Statement
More representative of
the type found in
practice.
ILLUSTRATION 4.3
Condensed Income
Statement
Company prepares
supplementary
schedules to
support the totals. ILLUSTRATION 4.4
Sample Supporting
Schedule
4-13
Reporting Various LEARNING OBJECTIVE 3
Discuss how to report various
Income Items income items.
Gross Profit
Computed by deducting cost of goods sold from net
sales.
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Reporting Various Income Items
4-15 LO 3
Income From Operations
Expense Classification
Nature Function
4-16 LO 3
Income From Operations
Expense Classification
Nature Function
4-17 LO 3
Income From Operations
Expense Classification
Illustration: The firm of Telaris Co. performs audit, tax, and
consulting services. It has the following revenues and expenses.
4-18 LO 3
Expense Classification
Nature-of-Expense Approach
ILLUSTRATION 4.5
4-19 LO 3
Expense Classification
Function-of-Expense Approach
ILLUSTRATION 4.6
4-21 LO 3
Income From Operations
4-22 LO 3
Income From Operations
4-23 LO 3
Reporting Various Income Items
ILLUSTRATION 4.8
Income before Income Tax Presentation of
Finance Costs
Illustration 4-8
Net Income
Represents the income after all
revenues and
expenses
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Reporting Various Income Items
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Earnings per Share
$350,000 - $50,000
= $3.00 per share
100,000
4-27 LO 3
Reporting Various Income Items
Discontinued Operations
A component of an entity that either has been disposed of, or
is classified as held-for-sale, and:
4-28 LO 3
Discontinued Operations
4-29 LO 3
Discontinued Operations
4-31
ILLUSTRATION 4.11
Income Statement
Divide by
weighted-
average
shares
outstanding
EPS
4-33 LO 3
Intraperiod Tax Allocation
ILLUSTRATION 4.12
4-34 LO 3
Intraperiod Tax Allocation
ILLUSTRATION 4.13
4-35 LO 3
Intraperiod Tax Allocation
ILLUSTRATION 4.14
4-36 LO 3
Reporting Various Income Items
4-37 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following: Other
Income and
Expense
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 90,000
Income from operations 220,000 - 220,000
Selling and administrative expenses 500,000 - 500,000
Income before income tax 200,000 200,000
€80,000
4-38 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Financing
Costs
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 - 200,000
€20,000
4-39 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Income Tax
4-40 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Discontinued
Operations
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
- €10,000
4-41 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following: Other
Comprehensive
Income
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
€30,000
4-42 LO 3
Income Statement
4-43 LO 3
Income Statement
4-44 LO 3
Accounting Changes LEARNING OBJECTIVE 4
Explain the reporting of
and Errors accounting changes and errors.
Examples include:
► Change from FIFO to average-cost.
4-45 LO 4
Changes in Accounting Principle
ILLUSTRATION 4.18
Income Statement
Presentation of a Change
in Accounting Principle
(Based on 30% tax rate)
4-46 LO 4
Accounting Changes
4-47 LO 4
Change in Accounting Estimates
Questions:
4-48 LO 4
After
Change in Accounting Estimates 7 years
4-49 LO 4
After
Change in Accounting Estimates 7 years
4-50 LO 4
Accounting Errors
Corrections of Errors
Result from:
► mathematical mistakes.
4-51 LO 4
Corrections of Errors
4-52 LO 4
Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Changes in Accounting Principle
Criteria Change from one generally accepted accounting
principle to another.
4-53 LO 4
Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Changes in Accounting Estimate
Criteria Normal, recurring corrections and adjustments.
4-54 LO 4
Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Corrections of Errors
Criteria Mistake, misuse of facts.
4-55 LO 4
Related Equity LEARNING OBJECTIVE 5
Describe related equity
Statements statements.
Increase Decrease
Net income Net loss
Change in accounting Dividends
principle Change in accounting
Prior period principles
adjustments Prior period
adjustments
4-56 LO 5
Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019
Before issuing the report for the year ended December 31, 2019, you
discover a ₩50,000 error (net of tax) that caused 2018 inventory to
be overstated (overstated inventory caused COGS to be lower and
thus net income to be higher in 2018). Would this discovery have
any impact on the reporting of the Statement of Retained Earnings for
2019?
4-57 LO 5
Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019
4-58 LO 5
Retained Earnings Statement
4-59 LO 5
Related Equity Statements
Comprehensive Income
All changes in equity during a period except those resulting
from investments by owners and distributions to owners.
Includes:
all gains and losses that bypass net income but affect
equity.
4-60 LO 5
Comprehensive Income
Net Income
Income Statement (in thousands)
Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000
+ Income
Gross profit 136,000
Unrealized gains and
Operating expenses:
Selling expenses 10,000
losses on non-trading
Administrative expenses 43,000 equity securities.
Total operating expense 53,000
Translation gains and
Income from operations 83,000
Other revenue (expense):
losses on foreign
Interest revenue 17,000 currency.
Interest expense (21,000) Plus others
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in Equity
Net income $ 55,000
4-61 LO 5
Comprehensive Income
4-62 LO 5
Comprehensive Income
ILLUSTRATION 4.21
One Statement Approach One Statement Format:
Comprehensive Income
Advantage –
does not require
the creation of a
new financial
statement.
Disadvantage -
net income buried
as a subtotal on
the statement.
4-63 LO 5
Comprehensive Income
ILLUSTRATION 4.22
Two Statement Format:
Comprehensive Income
4-64
Related Equity Statements
4-65 LO 5
Statement of Changes in Equity
4-66 LO 5
Statement of Changes in Equity
ILLUSTRATION 4.23
Statement of Changes in Equity
4-67 LO 5
Statement of Changes in Equity
ILLUSTRATION 4.24
Presentation of Accumulated Other Comprehensive Income in the Statement of Financial Position LO 5
4-68
GLOBAL ACCOUNTING INSIGHTS
LEARNING OBJECTIVE 6
Compare the income statement under IFRS and U.S. GAAP.
Standards issued by the FASB (U.S. GAAP) are the primary global alternative
to IFRS. As in IFRS, the income statement is a required statement for U.S.
GAAP. In addition, the content and presentation of the U.S. GAAP income
statement is similar to the one used for IFRS. A number of U.S. GAAP
standards have been issued that provide guidance on issues related to income
statement presentation.
4-69 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to the income statement.
Similarities
• Both U.S. GAAP and IFRS require companies to indicate the amount of net
income attributable to non-controlling interest. Extraordinary-item reporting
is prohibited under IFRS and U.S. GAAP.
• Both U.S. 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.
4-70 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
• Both U.S. GAAP and IFRS have items that are recognized in equity as part
of other comprehensive income but do not affect net income. Both U.S.
GAAP and IFRS allow a one statement or two statement approach to
preparing the statement of comprehensive income.
Differences
• Presentation of the income statement under U.S. GAAP follows either a
single-step or multiple-step format. IFRS does not mention a single-step or
multiple-step approach.
4-71 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• The U.S. SEC requires companies to have a functional presentation of
expenses. Under IFRS, companies must classify expenses by either nature
or function. U.S. GAAP does not have that requirement.
• U.S. GAAP has no minimum information requirements for the income
statement. However, the U.S. SEC rules have more rigorous presentation
requirements. IFRS identifies certain minimum items that should be
presented on the income statement.
• U.S. SEC regulations define many key measures and provide requirements
and limitations on companies reporting non-U.S. GAAP information. IFRS
does not define key measures like income from operations.
4-72 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• U.S. GAAP does not permit revaluation accounting. 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.
4-73 LO 6
GLOBAL ACCOUNTING INSIGHTS
4-74 LO 6
GLOBAL ACCOUNTING INSIGHTS
On the Horizon
The IASB and FASB are working on a project that would rework the structure
of financial statements. One stage of this project will address the issue of how
to classify various items in the income statement. A main goal of this new
approach is to provide information that better represents how businesses are
run. In addition, this approach draws attention away from just one number—
net income.
4-75 LO 6
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4-76