Kế toán, kiểm toán - Chương 4: Income statement and related information

C H A P T E R 4INCOME STATEMENT AND RELATED INFORMATIONIntermediate Accounting13th EditionKieso, Weygandt, and Warfield 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 ObjectivesElementsSingle-stepMultiple-stepCondensed income statementsIncome StatementFormat of the Income StatementReporting Irregular ItemsSpecial Reporting IssuesUsefulnessLimitationsQuality of EarningsDiscontinued operationsExtraordinary itemsUnusual gains and lossesChanges in accounting principlesChanges in estimatesCorrections of errorsIntraperiod tax allocationEarnings per shareRetained earnings statementComprehensive incomeIncome 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 Wall Street expectations, so thatmarket price of stock increases andvalue 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 EarningsFormat 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 StatementFormat 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 StatementFormat 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.Elements of the Income StatementSingle-Step FormatLO 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.Single-Step FormatLO 2 Prepare a single-step income statement.E4-4: Prepare an income statement from the data below.Solution on notes pageThe 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 FormatLO 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 FormatBackgroundOperating section Nonoperating sectionIncome taxDiscontinued operationsExtraordinary itemsEarnings per shareLO 3 Prepare a multiple-step income statement.Multiple-Step FormatIncome Statement SectionsMultiple-Step FormatLO 3 Prepare a multiple-step income statement.The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax Multiple-Step FormatIllustration (E4-4): Prepare an income statement from the data below.Solution on notes pageReviewA 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 FormatLO 3 Prepare a multiple-step income statement.Companies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.LO 4 Explain how to report irregular items.Reporting Irregular ItemsIllustration 4-5 Number of Irregular Items Reported in a Recent Year by 600 Large CompaniesIrregular 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.Illustration: KC 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 KC. 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.Illustration: KC Corporation had after tax income from continuing operations of $55,000,000 in 2007. 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 KC 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.Unusual Gains and LossesReporting Irregular ItemsLO 4 Explain how to report irregular items.Illustration 4-9Income Statement Presentation of Unusual ChargesChanges 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.Reporting Irregular ItemsLO 4 Explain how to report irregular items.Change in Accounting Principle: Gaubert Inc. decided in March 2010 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2010, is $30,000. Illustration 4-10Calculation of a Change inAccounting PrincipleIllustration 4-11Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Pretax Income DataSolution on notes pageChanges 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.Change 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 2010 (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 2010.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, 2009)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 2010.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2010LO 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.Corrections of Errors: To illustrate, in 2011, Hillsboro Co. determined that it incorrectly overstated its accountsreceivable and sales revenue by $100,000 in 2010. In 2011, Hillboro makes the following entry to correct for this error (ignore income taxes).Reporting Irregular ItemsLO 4 Explain how to report irregular items.Retained earnings 100,000 Accounts receivable 100,000Relates 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 errorsSpecial Reporting IssuesLO 5 Explain intraperiod tax allocation.Intraperiod Tax AllocationExtraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation settlement received on one its properties. Assuming a 30 percent income tax rate.Special Reporting IssuesLO 5 Explain intraperiod tax allocation.Intraperiod Tax AllocationIllustration 4-13Extraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate.Special Reporting IssuesLO 5 Explain intraperiod tax allocation.Intraperiod Tax AllocationIllustration 4-14Calculation of Total TaxExample of Intraperiod Tax Allocation$24,000(135)(61)(231)$23,573LO 5 Explain intraperiod tax allocation.Note: losses reduce the total taxAn important business indicator.Measures the dollars earned by each share of common stock.Must be disclosed on the the income statement.Special Reporting IssuesLO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstandingEarnings Per ShareEarnings Per Share (BE4-8): In 2010, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2010, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis’s 2010 earnings per share.Special Reporting Issues- $250,000$1,000,000190,000=$3.95 per shareLO 6 Identify where to report earnings per share information. Net income - Preferred dividends Weighted average number of shares outstandingSpecial Reporting IssuesLO 6EPSDivide by weighted-average shares outstanding LO 7 Prepare a retained earnings statement.IncreaseNet incomeChange in accounting principleError correctionsDecreaseNet lossDividendsChange in accounting principlesError correctionsRetained Earnings StatementSpecial Reporting IssuesBefore issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011? Special Reporting IssuesLO 7 Prepare a retained earnings statement.Special Reporting IssuesLO 7 Prepare a retained earnings statement.Solution on notes pageRestricted Retained Earnings DisclosedIn notes to the financial statementsAs Appropriated Retained EarningsLO 7 Prepare a retained earnings statement.Special Reporting IssuesComprehensive Income 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 stockholders’ equity.LO 7 Prepare a retained earnings statement.Special Reporting IssuesSpecial Reporting IssuesOther Comprehensive IncomeUnrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus others+Reported in Stockholders’ EquityComprehensive IncomeLO 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.Special Reporting IssuesLO 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’ equitySpecial Reporting IssuesLO 8 Explain how to report other comprehensive income.Special Reporting IssuesLO 8 Explain how to report other comprehensive income.Illustration 4-19Comprehensive IncomeSecond income statementSpecial Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehensive IncomeCombined income statementSpecial Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehensive Income - Statement of Stockholder’s EquityIllustration 4-20Special Reporting IssuesLO 8 Explain how to report other comprehensive income.Comprehensive Income - Balance Sheet PresentationIllustration 4-21Regardless 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.Special Reporting IssuesLO 8 Explain how to report other comprehensive income.Under iGAAP, companies must classify expenses by either nature or function. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements.Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. iGAAP 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 iGAAP.Under iGAAP, companies are required to prepare as a primary financial statement either a statement of stockholders’ equity similar to the one prepared under U.S. GAAP or a statement of recognized income and expense (called a SoRIE ).Both iGAAP and U.S. GAAP 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. iGAAP allows either the statement of stockholders’ equity approach or the SoRIE format. Under iGAAP revaluation of land, buildings, and intangible assets is permitted. Copyright © 2009 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. 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