Kế toán, kiểm toán - Chapter 4: The income statement and statement of cash flows

THE INCOME STATEMENT AND STATEMENT OF CASH FLOWSChapter 4An income statement for a hypothetical manufacturing company that you can refer to as we proceed through the chapter.ExpensesOutflows of resources incurred in generating revenues.RevenuesInflows of resources resulting from providing goods or services to customers.Gains and LossesIncreases or decreases in equity from peripheral or incidental transactions of an entity.Income from Continuing OperationsIncome Tax ExpenseBecause of its importance and size, income tax expense is a separate item. Operating IncomeNonoperating IncomeOperating versus Nonoperating IncomeIncludes revenues and expenses directly related to the principal revenue-generating activities of the companyIncludes gains and losses and revenues and expenses related to peripheral or incidental activities of the companyIncome Statement (Single-Step)Expenses & LossesRevenues & GainsProperHeadingIncome Statement (Multiple-Step)Non- operating ItemsGross ProfitOperating ExpensesProper HeadingU. S. GAAP vs. IFRSHas no minimum requirements. SEC requires that expenses be classified by function. “Bottom line” called net income or net loss.Report extraordinary items separately.There are more similarities than differences between income statements prepared according to IFRS and those prepared according to U.S. GAAP. Some differences are highlighted below. Specifies certain minimum information to be reported on the face of the income statement. Allows expenses classified by function or natural description.“Bottom line” called profit or loss. Prohibits reporting extraordinary items. Earnings QualityEarnings quality refers to the ability of reported earnings to predict a company’s future earnings.Transitory EarningsversusPermanent EarningsManipulating Income and Income SmoothingTwo ways to manipulate income:Income shiftingIncome statement classification“Most executives prefer to report earnings that follow a smooth, regular, upward path.”~Ford S. Worthy, “Manipulating Profits: How It’s Done”, Fortune Operating Income and Earnings QualityRestructuring CostsCosts associated with shutdown or relocation of facilities or downsizing of operations are recognized in the period incurred.Goodwill Impairment and Long-lived Asset ImpairmentInvolves asset impairment losses or charges.Nonoperating Income and Earnings QualityGains and losses generated from the sale of investments often can significantly inflate or deflate current earnings.ExampleAs the stock market boom reached its height late in the year 2000, many companies recorded large gains from sale of investments that had appreciated significantly in value. How should those gains be interpreted in terms of their relationship to future earnings? Are they transitory or permanent?Separately Reported ItemsReported separately, net of taxes:Discontinued operationsExtraordinary items (under U.S. GAAP, but not IFRS) Intraperiod Income Tax AllocationIncome Tax Expense must be associated with each component of income that causes it.Show Income Tax Expense related to Income from Continuing Operations.Report effects of Discontinued Operations net of related income tax effect.Reporting Discontinued OperationsThe IASB and FASB have been working together to develop a common definition and a common set of disclosures for discontinued operations.The proposed standard defines a discontinued operation as a “component” that either:Has been disposed ofIs classified as held for saleReporting Discontinued OperationsReporting for Components SoldIncome or loss from operations of the component from the beginning of the reporting period to the disposal date Gain or loss on the disposal of the component’s assets.Reporting for Components Held For SaleIncome or loss from operations (revenues, expenses, gains, and losses) of the component from the beginning of the reporting period to the end of the reporting period An “impairment loss” if the carrying value of the assets of the component is more than the fair value minus cost to sell.Unusual or Infrequent ItemsUnusual or infrequent items that are material are included as separate component of continuing operations or disclosed in notes to financial statementsAccounting ChangesChange in Accounting PoliciesA change in accounting policy refers to a change from one acceptable accounting method to another.IFRS requires that voluntary changes in accounting policy be accounted for retrospectively by revising prior years’ financial statements.For mandated changes in accounting policies, companies are required to account for the change according to the requirements in that new or updated standard. If not specified, companies are required to account for the change retrospectively.Change in Depreciation or Amortization MethodA change in depreciation, or amortization method is treated the same as a change in accounting estimate. Change in Accounting EstimateRevision of a previous accounting estimateUse new estimate in current and future periodsIncludes changes in depreciation or amortization methodsCorrection of Accounting ErrorsErrors occur when transactions are either recorded incorrectly or not recorded at all. Errors Discovered in Same YearReverse original erroneous journal entry and record the appropriate journal entry.Record a prior period adjustment to the beginning retained earnings balance in a statement of changes in shareholders’ equity.Previous years’ financial statements that are incorrect as a result of the error are retrospectively restated to reflect the correction. Material Errors Discovered in Subsequent YearEarnings per Share DisclosureOne of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis.Basic EPSNet income less preference dividendsWeighted-average number of ordinary shares outstanding for the periodDiluted EPSReflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into ordinary shares or share options that could create additional ordinary shares if the options were exercised.Earnings per Share DisclosureReport EPS data separately for:Income (loss) from continuing operations Income (loss) from discontinued operationsNet Income (loss)Comprehensive IncomeAn expanded version of income that includes gains and losses that traditionally have not been included in income statements.Other Comprehensive IncomeComprehensive income includes traditional net income as well as additional gains and losses that change shareholders’ equity.Net unrealized gains (losses) from investments (net of tax).Gains and losses due to reviewing assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan.When a derivative designated as a hedging instrument for a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction.Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity. (This item is discussed elsewhere in your accounting curriculum).U. S. GAAP vs. IFRSSimilar OCI items as IFRS.Both IFRS and U.S. GAAP allow companies to report income and other comprehensive income items in either a single, continuous statement of comprehensive income or in two separate, but consecutive statements (an income statement and a statement of comprehensive income). Similar OCI items as U.S. GAAPAdditional OCI item: changes in revaluation surplus, from the optional revaluation of property, plant, and equipment and intangible assets.Accumulated Other Comprehensive IncomeIn addition to reporting OCI that occurs in the current reporting period, U.S. GAAP requires companies to report OCI on a cumulative basis in the statement of financial position. IFRS does not require companies to report accumulated other comprehensive income (AOCI).Flexibility in ReportingThe information in the income statement and other comprehensive income items can be presented either: 1) in a single, continuous statement of comprehensive income or2) in two separate, but consecutive statements, an income statement and a statement of comprehensive incomeThe Statement of Cash FlowsProvides relevant information about a company’s cash receipts and cash disbursements.Helps investors and creditors to assessfuture net cash flowsliquiditylong-term solvency.Required for each income statement period reported.Operating ActivitiesCash Flows from Operating ActivitiesInflows from:sales to customers.interest and dividends received from investments.+Outflows for:purchase of inventory.salaries, wages, and other operating expenses.interest on debt.income taxes.dividends paid._Direct and Indirect Methods of ReportingTwo Formats for Reporting Operating ActivitiesReports the cash effects of each operating activityDirect MethodStarts with accrual net income and converts to cash basisIndirect MethodDirect MethodUnder the direct method, the cash effect of each operating activity is reported directly in the statement.Indirect MethodBy the indirect method, we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.Cash Flows from Investing Activities+Investing ActivitiesInflows from:sale of long-lived assets used in the business.sale of investment securities (shares and bonds).collection of nontrade receivables.interest or dividends received from investments._Outflows for:purchase of long-lived assets used in the business.purchase of investment securities (shares and bonds).loans to other entities.Cash Flows from Financing Activities+_Financing ActivitiesInflows from:sale of shares to owners.borrowing from creditors through notes, loans, mortgages, and bonds.Outflows for:owners for the repurchase or reacquisition of shares previously sold.owners in the form of dividends or other distributions .creditors for the repayment of the principal amounts of debt.creditors for the payment of interest on debtALC’s Statement of Cash FlowsNoncash Investing and Financing ActivitiesSignificant investing and financing transactions not involving cash also are reported.Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).Both U.S. GAAP and IFRS require a statement of cash flows and classify cash flows as operating, investing, or financing. U. S. GAAP vs. IFRSOperating ActivitiesDividends ReceivedInterest ReceivedInterest PaidInvesting ActivitiesFinancing ActivitiesDividends PaidOperating ActivitiesInvesting ActivitiesDividends ReceivedInterest ReceivedFinancing ActivitiesDividends PaidInterest PaidTypical Classification of Cash Flows from Interest and DividendsU. S. GAAP vs. IFRSThe FASB and IASB are working together on a project, Financial Statement Presentation, to establish a common standard for presenting information in the financial statements.End of Chapter 4