Kế toán, kiểm toán - Chapter 13: The complete income statement

2Chapter 13:The Complete Income Statement3Learning Objective 1Briefly describe how net income is used and why it is considered so important.4The Economic Consequences Associated with Income Measurement and DisclosureIncome is the most common measure of a company’s performance.Relate to stock prices – investors use income in their decisions to buy and sell equity securitiesRelate to bond prices – debt investors use income in their decisions to buy and sell corporate bondsUsed by credit ratings agencies in determining credit ratingsEarnings announcements focus on incomeMeasures of income often found in contracts written with shareholders, creditors and managers5Learning Objective 2Define and distinguish ten key concepts referred to as the elements of the financial statements.6The Measurement of Income: Different Measures for Different ObjectivesAccording to Statement of Financial Accounting Concepts No. 1 objectives of financial reporting are (paraphrased) to provide information that is:Useful to those making investment and credit decisionsHelpful in assessing amounts, timing and uncertainty of future cash flowsAbout economic resource claims and changes in them7The Measurement of Income: Different Measures for Different Objectives (cont’d)Figure 13-1 (partial) Elements of the financial statements8The Measurement of Income: Different Measures for Different Objectives (cont’d)Figure 13-1 (partial) Elements of the financial statements9The Measurement of Income: Different Measures for Different Objectives (cont’d)Figure 13-1 (partial) Elements of the financial statements10The Measurement of Income: Different Measures for Different Objectives (cont’d)Comprehensive income – broad definition including any changes in the company’s equity from all nonowner transactions:Net Income: consisting of Revenues and expenses – ongoing core businessGains and losses – peripheral or incidental to operationsOther comprehensive income Foreign translation adjustmentsUnrealized gains and lossesCampbell’s Soup 2014 partial statement of shareholders’ equity11Concept Practice 2 12Concept Practice 2 (cont.) 13Concept Practice 2 (cont.) 14Learning Objective 3Define, compare, and contrast the two basic ways to measure income.15Two Different Concepts of Income: Matching and Fair Market ValueThe Matching Process:Revenues - Expenses = Net IncomeFair Market Value approach:FMV Net Assets (end) - FMV Net Assets (beginning) = Net Income16Concept Practice 3 17Concept Practice 3 (cont.) 18Learning Objective 4Distinguish operating transactions from nonoperating transactions.19Financing, Investing, and Operating Transactions: A FrameworkFinancing and Investing transactions:Involve setting up a company so it can conduct operationsOperating transactions:Entail the actual conduct of operations (normal everyday core activities)20Financing, Investing, and Operating Transactions: A FrameworkFigure 13-2 Classifying financing, investing, and operating transactions21Classifying Operating TransactionsFigure 13-3 Classifying operating transactions22Which of the following events is an operating transaction?a. Purchase of equipment b. Payment for rental equipmentc. Purchase of landd. Issuing bonds for cash23Which of the following events is an operating transaction?a. Payment of office supplies b. Change in depreciation accounting principlec. Purchase of another company for stockd. Disposal of a business segment24Learning Objective 5List, describe, and organize the primary sections of a complete income statement.25A Complete Income Statement: Disclosure and PresentationSee Figure 13-4 for sample format: Gross sales- Sales discounts and returns= Net Sales- COGS= Gross profit- Operating expenses= Net operating income+ Other revenues and gains- Other expenses and losses= Income from continuing operations +/- Discontinued operations+/- Income effect due to change in accounting principle= Net income Earnings per Share26(1) Operating Revenues and Expenses: Usual and FrequentLooking at Figure 13-4 A Complete Income StatementAsset and liability inflows and outflows related to the delivery of goods or services provided by a company They are usual and frequent and therefore are likely to represent ongoing activity27(2) Other Revenues and Expenses: Unusual and/or InfrequentRelated to secondary or auxiliary activities:Interest Income – from financingInterest Expense – from financingDividend IncomeGains and losses on foreign currency transactionsGains and losses from price changes in trading securitiesGains and losses from sale of investments and long-lived assetsLong term asset and goodwill impairmentsReceivable and inventory write-downsEmployee strikes Rental of space Gains and losses on litigationRestructuringDivesture of subsidiary These activities may be unusual or infrequent – for example, interest payments may be recurring, but are not a part of the core business operations and therefore are considered unusual28(3) Disposal of a Business SegmentDiscontinued operations relate to the disposal of a segment of a company. Because the disposal means that the segment activity will be discontinued, separate disclosures are required so that investors can distinguish between ongoing activity and nonrecurring activity.A segment is defined as an entire line of business or a separately identifiable segment. For example, General Motors would need to discontinue Chevrolet (not just a manufacturing plant).Financial statement presentation includes any operating income or loss from the previous balance sheet date until the date that the segment is actually disposed of, as well as any gain or loss on the actual sale.29(4) Mandatory Changes in Accounting PrincipleConsistency requires the use of the same accounting method from year to year.However, a company may on occasion choose to change to an alternative accounting method (ex: depreciation method or FIFO to average cost for inventory).A company may be required to change to a new accounting technique by the issue of a new accounting standard.Changes may require retrospective application or involve adjustments to retained earnings. They may require disclosure on the income statement. For mandatory changes the method is dictated in the new standardFor discretionary changes, retroactive treatment with disclosure is required.30(4) Mandatory Changes in Accounting Principle (cont.)Figure 13-5 Starbucks excerpts from the annual report31On the income statement, a gain from the sale of stock is reported asa. operating revenues and expenses.b. other revenues and expenses.c. a disposal of a business segment.d. a cumulative effect of a change in accounting principle. 32On the income statement, the loss from selling an independent business component of the company is reports as a(n)a. operating revenues and expenses.b. other revenues and expenses.c. a disposal of a business segment.d. a cumulative effect of a change in accounting principle. 33Learning Objective 6Describe the concept of intraperiod tax allocation and how it relates to the complete income statement.34Intraperiod Tax AllocationAccounting standards require certain items to be presented on the income statement net of taxes to better determine and isolate the true impact of the events. Disposal of a business segmentChanges in accounting principlesAll of these items are presented net of tax on the income statementAllows users to assess the total financial impact of these special transactions as well as the tax benefit or cost.35Concept Practice 6 36Learning Objective 7Compute earnings per share and discuss income statement categories.37 Earnings-Per-Share DisclosureGAAP requires separate disclosure on the face of the income statement and specific dollar amounts associated with Net income from continuing operations (after tax)Disposals of business segmentsChanges in accounting principle Calculation of EPS = Dollar amount of the gain or loss from the associated category Common shares outstanding38 Earnings-Per-Share DisclosureGAAP requires an additional disclosure for diluted earnings per share – if the company has significant potential for dilutionDilution occurs when common shares could be increased because of outstanding stock options or convertible debt securities (i.e. convertible bonds) thereby decrease earnings-per-share39Income Statement Categories: Useful For Decisions but SubjectiveEarning persistence is the concept that some earnings dollar are likely to continue in the future, but others are not. Those that do provide future cash flow and are valued higher by external users of financial statements. Categorizing may be used subjectively by companies to ‘manage earnings’ and public perception of the financial outcomes.40International Perspective: Investments and Income Statement DisclosureStrong international presence increases the number of transactions that require special disclosureGains and losses in foreign currencyUnique risks with high inflation and volatile economies Financial statement users must be aware of and carefully interpret these special gains and losses on the financial statements. 41Wiley © 2018