Kế toán, kiểm toán - Income statement and related information

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 4Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Income Statement and Related Information4LEARNING OBJECTIVESEvaluate past performance.Help assess the risk or uncertainty of achieving future cash flows.Predict future performance.UsefulnessINCOME STATEMENTLO 1LimitationsCompanies omit items that cannot be measured reliably.Income numbers are affected by the accounting methods employed.Income measurement involves judgment.INCOME STATEMENTLO 1Companies have incentives to manage incometo meet earnings targets or to make earnings look less risky. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out earnings.Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.Quality of EarningsINCOME STATEMENTLO 1Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Income Statement and Related Information4LEARNING OBJECTIVESFORMAT OF THE INCOME STATEMENTINCOME – Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from shareholders.Elements of the Income StatementLO 2INCOME includes both revenues and gains. Revenues - ordinary activities of a company Gains - may or may not arise from ordinary activities.FORMAT OF THE INCOME STATEMENTElements of the Income StatementRevenue AccountsSales revenueFee revenueInterest revenueDividend revenueRent revenueGain AccountsGains on the sale of long-term assetsUnrealized gains on trading securities.LO 2FORMAT OF THE INCOME STATEMENTEXPENSES – Decreases in economic benefits during the accounting period in the form ofoutflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to shareholders.Elements of the Income StatementLO 2Expense AccountsCost of goods soldDepreciation expenseInterest expenseRent expenseSalary expenseEXPENSES include both expenses and losses. Expenses - ordinary activities of a company Losses - may or may not arise from ordinary activities.Loss AccountsLosses on restructuring chargesLosses on the sale of long-term assetsUnrealized losses on trading securities.FORMAT OF THE INCOME STATEMENTElements of the Income StatementLO 2Intermediate ComponentsCompanies generally present some or all of these sections and totals within the income statement.FORMAT OF THE INCOME STATEMENTSales or RevenueCost of Goods SoldGross ProfitSelling ExpensesAdministrative or General ExpensesOther Income and ExpenseIncome from OperationsFinancing costsIncome before Income TaxIncome TaxIncome from Continuing OperationsDiscontinued OperationsNet IncomeNon-Controlling InterestEarnings Per ShareUnderstand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESILLUSTRATION 4-2Income StatementIncludes all of the major items in previous list, except for discontinued operations.IllustrationFORMAT OF THE INCOME STATEMENTCONDENSEDINCOME STATEMENTILLUSTRATION 4-3Condensed Income StatementMore representative of the type found in practice.ILLUSTRATION 4-4Sample SupportingScheduleCompany prepares supplementary schedules to support the totals.Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESREPORTING WITHIN THE INCOME STATEMENTGross ProfitComputed by deducting cost of goods sold from net sales. Provides a useful number for evaluating performance and predicting future earnings.Unusual or incidental revenues are disclosed in other income and expense. LO 4Income from OperationsDetermined by deducting selling and administrative expenses as well as other income and expense from gross profit. Highlights items that affect regular business activities. Used to predict the amount, timing, and uncertainty of future cash flows.REPORTING WITHIN THE INCOME STATEMENTLO 4Cost of materials used Direct labor incurred Delivery expenseAdvertising expenseFunctionExpense Classification NatureINCOME FROM OPERATIONSEmployee benefitsDepreciation expenseAmortization expenseLO 4Cost of goods soldSelling expensesAdministrative expensesFunctionExpense Classification NatureINCOME FROM OPERATIONSLO 4Illustration: The firm of Telaris Co. performs audit, tax, and consulting services. It has the following revenues and expenses.Expense ClassificationINCOME FROM OPERATIONSLO 4Nature-of-Expense ApproachILLUSTRATION 4-5Expense ClassificationLO 4Function-of-Expense ApproachILLUSTRATION 4-6Expense ClassificationThe function-of-expense method is generally used in practice although many companies believe both approaches have merit.LO 4ILLUSTRATION 4-7 Number of Unusual Items Reported in a Recent Year by 500 Large CompaniesGains and LossesINCOME FROM OPERATIONSLO 4IASB takes the position that both revenues and expenses andother income and expense should be reported as part of income from operations.Companies can provide additional line items, headings, and subtotals when such presentation is relevant to an understanding of the entity’s financial performance.INCOME FROM OPERATIONSGains and LossesLO 4Additional items that may need disclosure: Losses on write-downs of inventories to net realizable value or of property, plant, and equipment to recoverable amount, as well as reversals of such write-downs.Losses on restructurings of the activities and reversals of any provisions for the costs of restructuring.Gains or losses on the disposal of items of property, plant, and, equipment or investments.Litigation settlements.Other reversals of liabilities.INCOME FROM OPERATIONSGains and LossesLO 4Financing costs must be reported on the income statement.Illustration 4-8INCOME STATEMENT REPORTINGIncome before Income TaxLO 4ILLUSTRATION 4-8Presentation of Finance CostsRepresents the income after all revenues and expenses for the period are considered. Viewed by many as the most important measure of a company’s success or failure for a given period of time.Net IncomeINCOME STATEMENT REPORTINGLO 4Allocation to Non-Controlling InterestWhen a company prepares a consolidated income statement, IFRS requires that net income be allocated to the controlling and non-controlling interest. This allocation is reported at the bottom of the income statement, after net income.(amounts given)ILLUSTRATION 4-9Presentation of Non-Controlling InterestINCOME STATEMENT REPORTINGLO 4 €800,000 100,000 120,000 90,000 - 220,000 - 500,000 200,000BE4-3: Presented below is some financial information related to Volaire Group. Compute the following:Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Other Income and Expense €80,000Advance slide in presentation mode to reveal answers.INCOME STATEMENT REPORTINGLO 4 €800,000 100,000 120,000 90,000 220,000 500,000 - 200,000 €20,000Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Financing CostsBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:INCOME STATEMENT REPORTINGAdvance slide in presentation mode to reveal answers.LO 4 €100,000 €800,000 - 100,000 120,000 90,000 220,000 500,000 200,000Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Income TaxBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:INCOME STATEMENT REPORTINGAdvance slide in presentation mode to reveal answers.LO 4 - €10,000 €800,000 100,000 120,000 - 90,000 220,000 500,000 200,000Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Discontinued OperationsBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:INCOME STATEMENT REPORTINGAdvance slide in presentation mode to reveal answers.LO 4 €30,000 €800,000 100,000 120,000 - 90,000 220,000 500,000 200,000Revenues €800,000Income from continuing operations 100,000Comprehensive income 120,000Net income 90,000Income from operations 220,000Selling and administrative expenses 500,000Income before income tax 200,000Other Comprehensive IncomeBE4-3: Presented below is some financial information related to Volaire Group. Compute the following:INCOME STATEMENT REPORTINGAdvance slide in presentation mode to reveal answers.LO 4Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESA significant business indicator.Measures the dollars earned by each ordinary share.Must be disclosed on the face of the income statement. Net Income - Preferred Dividends Weighted Average of Ordinary Shares OutstandingEarnings per ShareINCOME STATEMENT REPORTINGLO 5Illustration: Lancer, Inc. reports net income of $350,000. It declares and pays preferred dividends of $50,000 for the year. The weighted-average number of ordinary shares outstanding during the year is 100,000 shares. Lancer computes earnings per share as follows:Earnings per Share- $50,000$350,000100,000=$3.00 per share Net Income - Preferred Dividends Weighted Average of Ordinary Shares OutstandingILLUSTRATION 4-10LO 5EPSDivide by weighted-average shares outstanding ILLUSTRATION 4-12Income StatementEarnings per ShareLO 5Discontinued OperationsA component of an entity that either has been disposed of, or is classified as held-for-sale, and:Represents a major line of business or geographical area of operations, orIs part of a single, co-coordinated plan to dispose of a major line of business or geographical area of operations, orIs a subsidiary acquired exclusively with a view to resell. INCOME STATEMENT REPORTINGLO 5Companies report as discontinued operations (in a separate income statement category) the gain or loss from disposal of a component of a business. The results of operations of a component that has been or will be disposed of separately from continuing operations. The effects of discontinued operations net of tax as a separate category, after continuing operations.INCOME STATEMENT REPORTINGDiscontinued OperationsLO 5Total loss on discontinued operations 800,000Illustration: Multiplex Inc., a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost £300,000 (net of tax). Multiplex sold the division at the end of the year at a loss of £500,000 (net of tax).Income from continuing operations £20,000,000Discontinued operations: Loss from operations, net of tax 300,000 Loss on disposal, net of tax 500,000Net income £19,200,000ILLUSTRATION 4-11Income Statement Presentation of Discontinued OperationsDISCONTINUED OPERATIONSLO 5A company that reports a discontinued operation must report per share amounts for the line item either on the face of the income statement or in the notes to the financial statements.ILLUSTRATION 4-12DISCONTINUED OPERATIONSUnderstand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESRelates the income tax expense to the specific items that give rise to the amount of the tax provision.On the income statement, income tax is allocated to:(1) Income from continuing operations(2) Discontinued operationsIntraperiod Tax Allocation“let the tax follow the income”INCOME STATEMENT REPORTINGLO 6Illustration: Schindler Co. has income before income tax of €250,000. It has a gain of €100,000 from a discontinued operation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.Discontinued Operations (Gain)ILLUSTRATION 4-13INTRAPERIOD TAX ALLOCATIONLO 6Illustration: Schindler Co. has income before income tax of €250,000. It has a loss of €100,000 from a discontinued operation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.Discontinued Operations (Loss)ILLUSTRATION 4-14INTRAPERIOD TAX ALLOCATIONLO 6Companies may also report the tax effect of a discontinued item by means of a note disclosure.Discontinued Operations (Loss)ILLUSTRATION 4-15INTRAPERIOD TAX ALLOCATIONLO 6SummaryINCOME STATEMENT REPORTINGILLUSTRATION 4-16Summary of Income ItemsLO 6SummaryINCOME STATEMENT REPORTINGILLUSTRATION 4-16Summary of Income ItemsLO 6Users and preparers look at more than just the bottom lineincome number, which supports the IFRS requirement to provide subtotals within the income statement.INCOME STATEMENT REPORTINGDIFFERENT INCOME CONCEPTSLO 6Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESRetrospective adjustment.Cumulative effect adjustment to beginning retained earnings.Approach preserves comparability across years.Examples include:Change from FIFO to average-cost.Change from the percentage-of-completion to the completed-contract method.OTHER REPORTING ISSUESAccounting Changes and ErrorsChanges in Accounting PrincipleLO 7Change in Accounting Principle: Gaubert Inc. decided in March 2015 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-average method in 2015, is $30,000. ILLUSTRATION 4-17Calculation of a Change inAccounting PrincipleILLUSTRATION 4-18Income StatementPresentation of a Changein Accounting Principle (Based on 30% tax rate)Pretax Income DataAccounting ChangesAdvance slide in presentation mode to reveal answers.LO 7Accounted for in the period of change or the period of and the future periods if the change affects both.Not handled retrospectively.Not considered errors.Examples include:Useful lives and residual values of depreciable assets.Uncollectible receivables.Inventory obsolescence.Change in Accounting EstimatesAccounting ChangesLO 7Change in Estimate: Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a residual value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2015 (year 8), it is determined that the total estimated life should be 15 years with a residual value of $5,000 at the end of that time.Questions:Does prior years’ depreciation need to be restated?Calculate the depreciation expense for 2015.Change in Accounting Estimates LO 7Equipment cost $510,000Residual value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2014)After 7 yearsx 7 years = $350,000 First, establish NBV at date of change in estimate.Change in Accounting Estimates LO 7Net book value $160,000Residual value (new) 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2015.Depreciation Expense 19,375 Accumulated Depreciation 19,375Journal entry for 2015After 7 yearsChange in Accounting Estimates LO 7Result from:mathematical mistakes.mistakes in application of accounting principles.oversight or misuse of facts.Corrections treated as prior period adjustments.Adjustment to the beginning balance of retained earnings.Corrections of ErrorsAccounting Changes and ErrorsLO 7Corrections of Errors: In 2015, Tsang Co. determined that it incorrectly overstated its accounts receivable and sales revenue by NT$100,000 in 2014. In 2015, Tsang makes the following entry to correct for this error (ignore income taxes).Retained Earnings 100,000 Accounts Receivable 100,000Accounting Changes and ErrorsLO 7SummaryAccounting Changes and ErrorsType of SituationChanges in Accounting PrincipleCriteriaChange from one generally accepted accounting principle to another.ExamplesChange in the basis of inventory pricing from FIFO to average-cost.Placement on Income StatementRecast prior years’ income statements on the same basis as the newly adopted principle.ILLUSTRATION 4-19Summary of AccountingChanges and ErrorsLO 7SummaryAccounting Changes and ErrorsType of SituationChanges in Accounting EstimateCriteriaNormal, recurring corrections and adjustments.ExamplesChanges in the realizability of receivables and inventories; changes in estimated lives of equipment, intangible assets; changes in estimated liability for warranty costs, income taxes, and salary payments.Placement on Income StatementShow change only in the affected accounts (not shown net of tax) and disclose the nature of the change.ILLUSTRATION 4-19Summary of AccountingChanges and ErrorsLO 7SummaryAccounting Changes and ErrorsType of SituationCorrections of ErrorsCriteriaMistake, misuse of facts.ExamplesError in reporting income and expense.Placement on Income StatementRestate prior years’ income statements to correct for error.ILLUSTRATION 4-19Summary of AccountingChanges and ErrorsLO 7Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESIncreaseNet incomeChange in accounting principlePrior period adjustmentsDecreaseNet lossDividendsChange in accounting principlesPrior period adjustmentsRetained Earnings StatementOTHER REPORTING ISSUESLO 8OTHER REPORTING ISSUESRetained Earnings StatementILLUSTRATION 4-20Retained EarningsStatementLO 8Before issuing the report for the year ended December 31, 2015, you discover a ₩50,000 error (net of tax) that caused 2014 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2014). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2015? Retained Earnings StatementLO 8Retained Earnings StatementAdvance slide in presentation mode to reveal answers.LO 8Restrictions on Retained Earnings DisclosedIn notes to the financial statements.As Appropriated Retained Earnings.Retained Earnings StatementLO 8Understand the uses and limitations of an income statement.Understand the content and format of the income statement.Prepare an income statement.Explain how to report items in the income statement.Identify where to report earnings per share information.Explain intraperiod tax allocation.Understand the reporting of accounting changes and errors.Prepare a retained earnings statement.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Conceptual Frameworkfor Financial Reporting4LEARNING OBJECTIVESAll 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 equity.Comprehensive IncomeOTHER REPORTING ISSUESLO 9Other Comprehensive IncomeUnrealized gains and losses on non-trading equity securities.Translation gains and losses on foreign currency.Plus others+Reported in EquityNet IncomeComprehensive IncomeLO 9Gains and losses that bypass net income but affect equity are referred to as comprehensive income. other comprehensive income.prior period income.unusual gains and losses.QuestionComprehensive IncomeLO 9Companies must display the components of other comprehensive income in one of two ways:A single continuous statement (one statement approach) or two separate, but consecutive statements of net income and other comprehensive income (two statement approach).Comprehensive IncomeLO 9One Statement ApproachComprehensive IncomeAdvantage – does not require the creation of a new financial statement.Disadvantage - net income buried as a subtotal on the statement.ILLUSTRATION 4-21One Statement Format:Comprehensive IncomeLO 9Illustration 4-19Two Statement ApproachComprehensive IncomeILLUSTRATION 4-22Two Statement Format:Comprehensive IncomeStatement of Changes in EquityRequired, in addition to a statement of comprehensive income. Generally comprised of Share capital—ordinary,Share premium—ordinary,Retained earnings, and the Accumulated balances in other comprehensive income.OTHER REPORTING ISSUESLO 9Reports the change in each equity account and in total equity for the period. Includes the following:Accumulated other comprehensive income for the period.Contributions (issuances of shares) and distributions (dividends) to owners.Reconciliation of the carrying amount of each component of equity from the beginning to the end of the period.Statement of Changes in EquityLO 9Statement of Changes in EquityILLUSTRATION 4-23Statement of Changes in EquityLO 9Regardless of the display format used, V. Gill reports the accumulated other comprehensive income of €90,000 in the equity section of the statement of financial position as follows.Statement of Changes in EquityILLUSTRATION 4-24Presentation of Accumulated Other Comprehensive Income in the Statement of Financial PositionLO 9INCOME STATEMENTStandards issued by the FASB (U.S. GAAP) are the primary global alternative to IFRS. As in IFRS, the income statement is a required statement for U.S. GAAP. In addition, the content and presentation of the U.S. GAAP income statement is similar to the one used for IFRS.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to the income statement. SimilaritiesBoth U.S. GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest. Both U.S. GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard-setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesBoth U.S. GAAP and IFRS have items that are recognized in equity as part of other comprehensive income but do not affect net income. Both U.S. GAAP and IFRS allow a one statement or two statement approach to preparing the statement of comprehensive income.DifferencesPresentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. IFRS 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-item reporting is prohibited under IFRS.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesThe U.S. SEC requires companies to have a functional presentation of expenses. Under IFRS, companies must classify expenses by either nature or function. U.S. GAAP does not have that requirement. U.S. GAAP has no minimum information requirements for the income statement. However, the U.S. SEC rules have more rigorous presentation requirements. IFRS identifies certain minimum items that should be presented on the income statement. U.S. SEC regulations define many key measures and provide requirements and limitations on companies reporting non-U.S. GAAP information. IFRS does not define key measures like income from operations.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesU.S. GAAP does not permit revaluation accounting. Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.GLOBAL ACCOUNTING INSIGHTSAbout The NumbersThe terminology used in the IFRS literature is sometimes different than what is used in U.S. GAAP. For example, here are some of the differences.GLOBAL ACCOUNTING INSIGHTSOn the HorizonThe IASB and FASB are working on a project that would rework the structure of financial statements. One stage of this project will address the issue of how to classify various items in the income statement. A main goal of this new approach is to provide information that better represents how businesses are run. In addition, this approach draws attention away from just one number—net income.GLOBAL ACCOUNTING INSIGHTSCopyright © 2014 John Wiley & Sons, Inc. All rights reserved. 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