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

The Income Statement, Comprehensive Income, and the 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 certain gains and losses and revenues and expenses related to peripheral or incidental activities of the companyEarnings QualityEarnings quality refers to the ability of reported earnings to predict a company’s future earnings.Transitory EarningsversusPermanent EarningsSeparately Reported ItemsReported separately, net of taxes:Discontinued operationsExtraordinary items 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 and Extraordinary Items net of related income tax effect.Reporting 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 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.An extraordinary item is a material event or transaction that is both:Unusual in nature, andInfrequent in occurrenceExtraordinary items are reported net of related taxesExtraordinary ItemsUnusual or Infrequent ItemsItems that are material and are either unusual or infrequent—but not both—are included as separate items in continuing operations.Accounting ChangesCorrection 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 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 preferred dividendsWeighted-average number of common shares outstanding for the periodDiluted EPSReflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised.Earnings Per Share DisclosureReport EPS data separately for:Income or Loss from Continuing Operations Separately Reported Itemsdiscontinued operationsextraordinary ItemsNet Income or LossComprehensive IncomeAn expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.The 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.+Outflows for:purchase of inventory.salaries, wages, and other operating expenses.interest on debt.income taxes._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 MethodCash Flows from Investing Activities+Investing ActivitiesInflows from:sale of long-lived assets used in the business.sale of investment securities (stocks and bonds).collection of nontrade receivables._Outflows for:purchase of long-lived assets used in the business.purchase of investment securities (stocks 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 in the form of dividends or other distributions.owners for the reacquisition of shares previously sold.creditors as repayment of the principal amounts of debt.Noncash 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).End of Chapter 4