Kế toán, kiểm toán - Chapter 5: Income statement and related information

CHAPTER 5INCOME STATEMENT ANDRELATED INFORMATIONINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Understand the uses and limitations of an income statement.Prepare a single-step income statement.Prepare a multiple-step income statement.Explain how to report irregular items.Explain intraperiod tax allocation.Identify where to report earnings per share information.Prepare a retained earnings statement.Explain how to report other comprehensive income.Learning ObjectivesIncome StatementUsefulnessLimitationsQuality of earningsFormat of the Income StatementReporting Irregular ItemsSpecial Reporting IssuesIntraperiod tax allocationEarnings per shareRetained earnings statementComprehensive incomeDiscontinued operationsExtraordinary itemsUnusual gains and lossesChanges in accounting principlesChanges in estimatesCorrections of errorsIncome Statement and Related InformationElementsSingle-stepMultiple-stepCondensed income statementsEvaluate past performance.Predicting future performance.Help assess the risk or uncertainty of achieving future cash flows.Income StatementUsefulness of the Income StatementLO 1 Understand the uses and limitations of an income statement.Companies omit items that cannot be measured reliably.Income is affected by the accounting methods employed. Income measurement involves judgment.Income StatementLimitations of the Income StatementLO 1 Understand the uses and limitations of an income statement.Companies have incentives to manage income to meet or beat Wall Street expectations, so thatthe market price of stock increases andthe value of stock options 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 EarningsElements of the Income StatementLO 1 Understand the uses and limitations of an income statement.Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.SalesFee RevenueInterest RevenueDividend RevenueRent RevenueExamples of Revenue AccountsElements of the Income StatementLO 1 Understand the uses and limitations of an income statement.Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations.Cost of Goods SoldDepreciation ExpenseInterest ExpenseRent ExpenseSalary ExpenseExamples of Expense AccountsElements of the Income StatementLO 1 Understand the uses and limitations of an income statement.Gains – Increases in equity (net assets) from peripheral or incidental transactions.Losses - Decreases in equity (net assets) from peripheral or incidental transactions. Gains and losses can result fromsale of investments or plant assets, settlement of liabilities, write-offs of assets.Single-Step Income StatementLO 2 Prepare a single-step income statement.The single-step statement consists of just two groupings:RevenuesExpensesNet IncomeSingle- StepNo distinction between Operating and Non-operating categories.The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items more than it is emphasized in the multiple-step income statement. d. the various components of income from continuing operations.ReviewSingle-Step Income StatementLO 2 Prepare a single-step income statement.Separates operating transactions from nonoperating transactions.Matches costs and expenses with related revenues. Highlights certain intermediate components of income that analysts use. LO 3 Prepare a multiple-step income statement.Multiple-Step Income StatementBackgroundMultiple-Step Income StatementLO 3 Prepare a multiple-step income statement.The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax ReviewA separation of operating and non operating activities of a company exists in a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement.Multiple-Step Income StatementLO 3 Prepare a multiple-step income statement.LO 4 Explain how to report irregular items.Reporting Irregular ItemsIllustration 5-5 Number of Irregular Items Reported in a Recent Year by 600 Large CompaniesCompanies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.Irregular items fall into six categoriesDiscontinued operations.Extraordinary items.Unusual gains and losses.Changes in accounting principle.Changes in estimates.Corrections of errors.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Discontinued Operations occurs when,(a) company eliminates the results of operations and cash flows of a component.there is no significant continuing involvement in that component. Amount reported “net of tax.”Reporting Irregular ItemsLO 4 Explain how to report irregular items.Exercise: McCarthy Corporation had after tax income from continuing operations of $55,000,000 in 2008. During 2008, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in 2008. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Reporting Discontinued OperationsIncome from continuing operations $55,000,000Discontinued operations: Loss from operations, net of $135,000 tax 315,000 Loss on disposal, net of $81,000 tax 189,000Net income $54,496,000Total loss on discontinued operations 504,000LO 4 Explain how to report irregular items.Reporting Discontinued OperationsDiscontinued Operations are reported after “Income from continuing operations.”Previously labeled as “Net Income”. Moved toLO 4 Explain how to report irregular items.Extraordinary items are nonrecurring material items that differ significantly from a company’s typical business activities.Extraordinary Item must be both of an Unusual nature and Occur infrequentlyCompany must consider the environment in which it operates.Amount reported “net of tax.” Reporting Irregular ItemsLO 4 Explain how to report irregular items.Are these items Extraordinary?(a) A large portion of a tobacco manufacturer’s crops are destroyed by a hail storm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare.(b) A citrus grower's Florida crop is damaged by frost. (c) A company sells a block of common stock of a publicly traded company. The block of shares, which represents less than 10% of the publicly-held company, is the only security investment the company has ever owned.YESReporting Extraordinary ItemsNOYESLO 4 Explain how to report irregular items.Are these items Extraordinary?(d) A large diversified company sells a block of shares from its portfolio of securities which it has acquired for investment purposes. This is the first sale from its portfolio of securities.(e) An earthquake destroys one of the oil refineries owned by a large multi-national oil company. Earthquakes are rare in this geographical location.(f) A company experiences a material loss in the repurchase of a large bond issue that has been outstanding for 3 years. The company regularly repurchases bonds of this nature. NOReporting Extraordinary ItemsYESNOLO 4 Explain how to report irregular items.Exercise: McCarthy Corporation had after tax income from continuing operations of $55,000,000 in 2008. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for McCarthy Corporation beginning with income from continuing operations.Income from continuing operations $55,000,000Extraordinary loss, net of $231,000 tax 539,000Net income $54,461,000Reporting Extraordinary Items($770,000 x 30% = $231,000 tax)LO 4 Explain how to report irregular items.Extraordinary Items are reported after “Income from continuing operations.”Previously labeled as “Net Income”. Reporting Extraordinary ItemsMoved toLO 4 Explain how to report irregular items.Reporting Irregular ItemsReporting when both Discontinued Operations and Extraordinary Items are present. Discontinued OperationsExtraordinary ItemLO 4 Explain how to report irregular items.Irregular transactions such as discontinued operations and extraordinary items should be reported separately in a. both a single-step and multiple-step income statement. b. a single-step income statement only. c. a multiple-step income statement only. d. neither a single-step nor a multiple-step income statement.ReviewReporting Irregular ItemsLO 4 Explain how to report irregular items.Unusual Gains and LossesMaterial items that are unusual or infrequent, but not both, should be reported in a separate section just above “Income from continuing operations before income taxes.”Examples can include:Write-downs of inventoriesForeign exchange transaction gains and lossesThe Board prohibits net-of-tax treatment for these items.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Changes in Accounting PrinciplesRetrospective adjustmentCumulative effect adjustment to beginning retained earningsApproach preserves comparabilityExamples include:change from FIFO to average costchange from the percentage-of-completion to the completed-contract methodReporting Irregular ItemsLO 4 Explain how to report irregular items.Changes in EstimateAccounted for in the period of change and future periodsNot handled retrospectivelyNot considered errors or extraordinary itemsExamples include:Useful lives and salvage values of depreciable assetsAllowance for uncollectible receivablesInventory obsolescenceReporting Irregular ItemsLO 4 Explain how to report irregular items.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 2008 (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 2008.No Entry RequiredChange in Estimate ExampleLO 4 Explain how to report irregular items.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2007)Change in Estimate ExampleAfter 7 yearsEquipment cost $510,000Salvage 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.LO 4 Explain how to report irregular items.Change in Estimate ExampleAfter 7 yearsNet book value $160,000Salvage value (new) 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2008.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2008LO 4 Explain how to report irregular items.Corrections of ErrorsResult from:mathematical mistakesmistakes in application of accounting principlesoversight or misuse of factsCorrections treated as prior period adjustments Adjustment to the beginning balance of retained earningsReporting Irregular ItemsLO 4 Explain how to report irregular items.Relates the income tax expense to the specific items that give rise to the amount of the tax expense.Income tax is allocated to the following items:(1) Income from continuing operations before tax(2) Discontinued operations(3) Extraordinary items(4) Changes in accounting principle(5) Correction of errorsIntraperiod Tax AllocationLO 5 Explain intraperiod tax allocation.Total Tax AllocatedExample of Intraperiod Tax Allocation$24,000(135)(61)(231)$23,573Note: losses reduce the total taxLO 5 Explain intraperiod tax allocation.An important business indicator.Measures the dollars earned by each share of common stock.Must be disclosed on the the income statement.Earnings Per ShareLO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstandingCalculationExercise In 2008, Kirby Puckett Corporation reported net income of $1,200,000. It declared and paid preferred stock dividends of $250,000. During 2008, Puckett had a weighted average of 190,000 common shares outstanding. Compute Puckett’s 2008 earnings per share.Earnings Per Share- $250,000$1,200,000190,000=$5.00 per shareLO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstandingRetained Earnings StatementLO 7 Prepare a retained earnings statement.IncreaseNet incomeChange in accounting principleError correctionsDecreaseNet lossDividendsChange in accounting principlesError correctionsChanges in Retained EarningsBefore issuing the report for the year ended December 31, 2007, you discover a $50,000 error (net of tax) that caused the 2006 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2006). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007? Retained Earnings StatementLO 7 Prepare a retained earnings statement.Retained Earnings StatementLO 7 Prepare a retained earnings statement.Restricted Retained Earnings DisclosedIn notes to the financial statementsAs Appropriated Retained EarningsLO 7 Prepare a retained earnings statement.Retained Earnings StatementAll changes in equity during a period except those resulting from investments by owners and distributions to owners.Comprehensive IncomeOther Comprehensive IncomeUnrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus others+Reported in Stockholders’ EquityLO 8 Explain how to report other comprehensive income.ReviewGains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income. b. other comprehensive income. c. prior period income. d. unusual gains and losses.Comprehensive IncomeLO 8 Explain how to report other comprehensive income.Three approaches to reporting Comprehensive Income (SFAS No. 130, June 1997):A second separate income statement;A combined income statement of comprehensive income; orAs part of the statement of stockholders’ equityComprehensive IncomeLO 8 Explain how to report other comprehensive income.Two-Statement Format for Comprehensive IncomeComprehensive IncomeLO 8 Explain how to report other comprehensive income.Illustration 5-19Comprehensive IncomeLO 8 Explain how to report other comprehensive income.Statement of Stockholders’ Equity (most common)Illustration 5-20Comprehensive IncomeLO 8 Explain how to report other comprehensive income.Balance Sheet PresentationIllustration 5-21Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders’ equity section of the balance sheet.ReviewThe FASB decided that the components of other comprehensive income must be displayed a. in a second separate income statement. b. in a combined income statement of comprehensive income. c. as a part of the statement of stockholders' equity. d. Any of these options is permissible.Comprehensive IncomeLO 8 Explain how to report other comprehensive income.Copyright © 2008 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. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright