Kế toán, kiểm toán - Chapter 04: Income statement and related information

C H A P T E R 4INCOME STATEMENT AND RELATED INFORMATIONIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield Understand the uses and limitations of an income statement.Understand the content and format of the income statement. Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information. Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.Learning ObjectivesElementsMinimum disclosureIntermediate componentsIllustrationCondensed income statementsIncome StatementFormat of Income StatementReporting Within the Income StatementOther Reporting IssuesUsefulnessLimitationsQuality of EarningsGross profit Income from operationsIncome before income taxNet incomeNon-controlling interestsEarnings per shareDiscontinued operationsIntraperiod tax allocationSummaryAccounting changes and errors Retained earnings statementComprehensive incomeChanges in equity statementIncome Statement and Related InformationEvaluate past performance.Income StatementLO 1 Understand the uses and limitations of an income statement.Help assess the risk or uncertainty of achieving future cash flows.Predicting future performance.UsefulnessCompanies omit items that cannot be measured reliably.Income StatementLimitationsLO 1 Understand the uses and limitations of an income statement.Income measurement involves judgment.Income is affected by the accounting methods employed. Companies have incentives to manage income to meet or beat market expectations, so thatmarket price of stock increases andvalue of management’s compensation increase. Income StatementLO 1 Understand the uses and limitations of an income statement.Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.Quality of EarningsFormat of the Income StatementLO 1 Understand the uses and limitations of an income statement.Income – Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from shareholders.Elements of the Income StatementFormat of the Income StatementLO 2 Understand the content and format of the income statement.Revenue AccountsElements of the Income StatementSalesFee revenueInterest revenueDividend revenueRent revenueIncome includes both revenues and gains. Revenues - ordinary activities of a company Gains - may or may not arise from ordinary activities.Gain AccountsGains on the sale of long-term assetsUnrealized gains on available-for-sale securities.Format of the Income StatementLO 1 Understand the uses and limitations of an income statement.Expenses – Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to shareholders.Cost of goods soldDepreciation expenseInterest expenseExamples of Expense AccountsElements of the Income StatementRent expenseSalary expenseFormat of the Income StatementLO 2 Understand the content and format of the income statement.Expense AccountsElements of the Income StatementCost of goods soldDepreciation expenseInterest expenseRent expenseSalary expenseExpenses includes both expenses and losses. Expenses - ordinary activities of a company Losses - may or may not arise from ordinary activities.Loss AccountsLosses on restructuring chargesLosses on to sale of long-term assetsUnrealized losses on available-for-sale securities.Format of the Income StatementElements of the Income StatementIFRS requires, at a minimum, the following be presented on the income statement.LO 2 Understand the content and format of the income statement.Format of the Income StatementIntermediate ComponentsCommon for companies to present some or all of these sections and totals within the income statement.Illustration 4-1Income Statement FormatLO 2IllustrationFormatLO 3Illustration 4-2Income StatementIncludes all of the major items in the list above, except for discontinued operations.Format of the Income StatementLO 3 Prepare an income statement.CondensedMore representative of the type found in practice.Illustration 4-3Condensed Income StatementReporting Within the Income StatementGross ProfitLO 4 Explain how to report items in the income statement.Computed by deducting cost of goods sold from net sales revenue. Disclosure of net sales revenue is useful. Unusual or incidental revenue is disclosed in other income and expense. Analysts can more easily understand and assess trends in revenue from continuing operations.Reporting Within the Income StatementIncome from OperationsLO 4 Explain how to report items in the income statement.Determined by deducting selling and administrative expenses as well as other income and expense from gross profit. Highlights items that affect regular business activities. Used to predict the amount, timing, and uncertainty of future cash flows.Reporting Within the Income StatementIncome from OperationsLO 4 Explain how to report items in the income statement.Reported byNature, orFunctionExpense ClassificationReporting Within the Income StatementLO 4 Explain how to report items in the income statement.Illustration: Assume that the accounting firm of Telaris Co. provides audit, tax, and consulting services. It has the following revenues and expenses.Expense ClassificationReporting Within the Income StatementLO 4 Explain how to report items in the income statement.Expense Classification (Nature-of-Expense Approach)Illustration 4-5Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Expense Classification (Function-of-Expense Approach)Illustration 4-6The function-of-expense method is generally used in practice although many companies believe both approaches have merit.Illustration 4-7 Number of Unusual Items Reported in a Recent Year by 600 Large CompaniesLO 4 Explain how to report items in the income statement.Reporting Within the Income StatementGains and LossesReporting Within the Income StatementLO 4 Explain how to report items in the income statement.Gains and LossesIASB takes the position that both revenues and expenses andother income and expense should be reported as part of income from operations.Companies can provide additional line items, headings, and subtotals when such presentation is relevant to an understanding of the entity’s financial performance.Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Gains and LossesAdditional items that may need disclosure: Losses on write-downs of inventories to net realizable value or of property, plant, and equipment to recoverable amount, as well as reversals of such write-downs.Losses on restructurings of the activities and reversals of any provisions for the costs of restructuring.Gains or losses on the disposal of items of property, plant, and, equipment or investments.Litigation settlements.Other reversals of liabilities.Reporting Within the Income StatementIncome before Income TaxLO 4 Explain how to report items in the income statement.Financing costs must be reported on the income statement.Illustration 4-8Reporting Within the Income StatementNet IncomeLO 4 Explain how to report items in the income statement.Represents the income after all revenues and expenses for the period are considered. Viewed by many as the most important measure of a company’s success or failure for a given period of time.Reporting Within the Income StatementAllocation to Non-Controlling InterestLO 4 Explain how to report items in the income statement.If a company prepares a consolidated income statement that includes a partially own subsidiary. IFRS requires that net income of the subsidiary be allocated to the controlling and non-controlling interest. This allocation is reported at the bottom of the income statement after net income. Illustration 4-9(amounts given) €800,000 100,000 120,000 90,000 - 220,000 - 500,000 200,000Reporting Within the Income StatementBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:LO 4 Explain how to report items in the income statement.Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Other Income and Expense €80,000Solution on notes page €800,000 100,000 120,000 90,000 220,000 500,000 - 200,000 €20,000Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Financing CostsSolution on notes pageBE4-3: Presented below is some financial information related to Volaire Group. Compute the following: €100,000 €800,000 - 100,000 120,000 90,000 220,000 500,000 200,000Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Income TaxSolution on notes pageBE4-3: Presented below is some financial information related to Volaire Group. Compute the following: - €10,000 €800,000 100,000 120,000 - 90,000 220,000 500,000 200,000Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Discontinued OperationsSolution on notes pageBE4-3: Presented below is some financial information related to Volaire Group. Compute the following: €30,000 €800,000 100,000 120,000 - 90,000 220,000 500,000 200,000Reporting Within the Income StatementLO 4 Explain how to report items in the income statement.Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Other Comprehensive IncomeSolution on notes pageBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:Important business indicator.Measures the dollars earned by each ordinary share.Must be disclosed on the income statement.LO 5 Identify where to report earnings per share information. Net income - Preference dividends Weighted average of ordinary shares outstandingEarnings Per ShareReporting Within the Income StatementEarnings Per Share (BE4-10): In 2010, Hollis Corporation reported net income of $1,000,000. It declared and paid preference share dividends of $250,000. During 2010, Hollis had a weighted average of 190,000 ordinary shares outstanding. Compute Hollis’s 2010 earnings per share.- $250,000$1,000,000190,000=$3.95 per shareLO 5 Identify where to report earnings per share information. Net income - Preference dividends Weighted average number of ordinary sharesReporting Within the Income StatementLO 5 Identify where to report earnings per share information.Discontinued OperationsReporting Within the Income StatementA component of an entity that either has been disposed of, or is classified as held-for-sale, and:Represents a major line of business or geographical area of operations, orIs part of a single, co-coordinated plan to dispose of a major line of business or geographical area of operations, orIs a subsidiary acquired exclusively with a view to resell. LO 5 Identify where to report earnings per share information.Discontinued OperationsReporting Within the Income StatementCompanies report as discontinued operations (in a separate income statement category) the gain or loss from disposal of a component of a business. The results of operations of a component that has been or will be disposed of separately from continuing operations. The effects of discontinued operations net of tax, as a separate category after continuing operations.Total loss on discontinued operations 800,000Illustration: Multiplex Products, a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost $300,000 (net of tax). Multiplex sold the division at the end of the year at a loss of $500,000 (net of tax).Income from continuing operations $20,000,000Discontinued operations: Loss from operations, net of tax 300,000 Loss on disposal, net of tax 500,000Net income $19,200,000LO 5 Identify where to report earnings per share information.Reporting Within the Income StatementA company that reports a discontinued operation must report per share amounts for the line item either on the face of the income statement or in the notes to the financial statements.LO 5 Identify where to report earnings per share information.Illustration 4-12Reporting Within the Income StatementRelates the income tax expense to the specific items that give rise to the amount of the tax expense.On the income statement, income tax is allocated to:(1) Income from continuing operations before tax(2) Discontinued operationsLO 6 Explain intraperiod tax allocation.Intraperiod Tax AllocationReporting Within the Income Statement“let the tax follow the income”Illustration: Schindler Co. has income before income tax of $250,000. It has a gain of $100,000 from a discontinuedoperation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.Intraperiod Tax AllocationReporting Within the Income StatementLO 6 Explain intraperiod tax allocation.Illustration 4-13Illustration: Schindler Co. has income before income tax of $250,000. It has a loss of $100,000 from a discontinuedoperation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.Intraperiod Tax AllocationReporting Within the Income StatementLO 6 Explain intraperiod tax allocation.Illustration 4-14SummaryReporting Within the Income StatementLO 6 Explain intraperiod tax allocation.Reporting Within the Income StatementLO 6 Explain intraperiod tax allocation.SummaryDifferent Income ConceptsReporting Within the Income StatementLO 6 Explain intraperiod tax allocation.Users and preparers look at more than just the bottom lineincome number, which supports the IFRS requirement to provide subtotals within the income statement.Company adopts a different accounting principle.Retrospective adjustment.Cumulative effect adjustment to beginning retained earnings.Approach preserves comparability.Examples include:Change from FIFO to average cost.Change from the percentage-of-completion to the completed-contract method.Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.Accounting Changes and ErrorsChanges in Accounting PrincipleChange in Accounting Principle: Gaubert Inc. decided in March 2011 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2011, is $30,000. Illustration 4-17Calculation of a Change inAccounting PrincipleIllustration 4-18Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Pretax Income DataLO 7 Understand the reporting of accounting changes and errors.Solution on notes pageOther Reporting IssuesAccounted for in the period of change and future periods.Not handled retrospectively.Not considered errors.Examples include:Useful lives and residual values of depreciable assets.Allowance for uncollectible receivables.Inventory obsolescence.Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.Changes in EstimateChange in Estimate: Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2011 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Questions:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2011.No Entry RequiredOther Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2010)After 7 yearsEquipment cost $510,000Residual value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.After 7 yearsNet book value $160,000Residual value (new) - 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2011.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2011Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.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.Corrections of ErrorsOther Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.Corrections of Errors: To illustrate, in 2012, Hillsboro Co. determined that it incorrectly overstated its accountsreceivable and sales revenue by $100,000 in 2011. In 2012, Hillsboro makes the following entry to correct for this error (ignore income taxes).Retained earnings 100,000 Accounts receivable 100,000Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.Other Reporting IssuesLO 7 Understand the reporting of accounting changes and errors.LO 8 Prepare a retained earnings statement.IncreaseNet incomeChange in accounting principlePrior period adjustmentDecreaseNet lossDividendsChange in accounting principlePrior period adjustmentRetained Earnings StatementOther Reporting IssuesLO 8 Prepare a retained earnings statement.Retained Earnings StatementOther Reporting IssuesIllustration 4-20Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? LO 8 Prepare a retained earnings statement.Other Reporting IssuesIllustrationSolution on notes pageLO 8 Prepare a retained earnings statement.Other Reporting IssuesIllustration DisclosedIn notes to the financial statements.As Appropriated Retained Earnings.LO 8 Prepare a retained earnings statement.Other Reporting IssuesRestrictions of Retained Earnings All changes in equity during a period except those resulting from investments by owners and distributions to owners. Includes: all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect equity.Other Reporting IssuesComprehensive IncomeLO 9 Explain how to report other comprehensive income.Other Comprehensive IncomeUnrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus others+Reported in EquityComprehensive IncomeOther Reporting IssuesLO 9 Explain how to report other comprehensive income.Income StatementReview QuestionGains and losses that bypass net income but affect equity are referred to as a. comprehensive income. b. other comprehensive income. c. prior period income. d. unusual gains and losses.LO 9 Explain how to report other comprehensive income.Gains and losses that bypass net income but affect equity are referred to as a. comprehensive income. b. other comprehensive income. c. prior period income. d. unusual gains and losses.Other Reporting IssuesTwo approaches to reporting Comprehensive Income:A second income statement.A combined statement of comprehensive income.LO 9 Explain how to report other comprehensive income.Other Reporting IssuesOther Reporting IssuesIllustration 4-21Comprehensive IncomeTwo-statement format: Comprehensive Income LO 9 Explain how to report other comprehensive income.Other Reporting IssuesLO 9 Explain how to report other comprehensive income.Illustration 4-22Comprehensive IncomeCombined statement format: Comprehensive IncomeOther Reporting IssuesStatement of Changes in EquityLO 9 Explain how to report other comprehensive income.Required, in addition to a statement of comprehensive income. Generally comprised of share capital—ordinary, share premium—ordinary, retained earnings, and the accumulated balances in other comprehensive items.Other Reporting IssuesStatement of Changes in EquityLO 9 Explain how to report other comprehensive income.Reports the change in each equity account and in total equity for the period. Comprehensive income for the period.Contributions (issuances of shares) and distributions (dividends) to owners.Reconciliation of the carrying amount of each component of equity from the beginning to the end of the period.Other Reporting IssuesIllustration 4-23LO 9 Explain how to report other comprehensive income.Statement of Changes in EquityOther Reporting IssuesIllustration 4-24LO 9 Explain how to report other comprehensive income.Statement of Changes in EquityRegardless of the display format used, V. Gill reports the accumulated other comprehensive income of $90,000 in the equity section of the statement of financial position as follows.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. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under IFRS. Under IFRS, companies must classify expenses by either nature or function. U.S. 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. U.S. GAAP has no minimum information requirements. However, the SEC rules have more rigorous presentation requirements. 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-U.S. GAAP/IFRS information.U.S. GAAP does not require companies to indicate the amount of net income attributable to non-controlling interest.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. Both U.S. GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information: single income statement, combined income statement of comprehensive income, in the statement of shareholders’ equity. Most companies that follow U.S. GAAP present this information in the statement of shareholders’ 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.The terminology used in the IFRS literature is sometimes different than what is used in U.S. GAAP. Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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