HIGHLIGHTS OF CHAPTER 4: Income Statement

1
HIGHLIGHTS OF CHAPTER 4 Income Statement

• February 2004

2
SIGNIFICANT ISSUES

• Comprehensive income
• Continuing operations
• Single-step v. Multiple-step
• Quality of earnings
• Operating v. Nonoperating income

3
SIGNIFICANT ISSUES

• Discontinued operations
• Intraperiod tax allocation
• Extraordinary items
• Cumulative effect of change in accounting
• Changes in estimates errors
• Earnings per share
• Statement of retained earnings

4
USES LIMITATIONS

• Evaluate past performance
• Predict future performance
• Predict cash flows
• Shortcomings in current model
• Methods chosen
• Role of judgment

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COMPREHENSIVE INCOME

• Items excluded from computation of net income
• Three methods of presentation
• Concept of other comprehensive income
• Impact on equity in balance sheet

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CONTINUING OPERATIONS

• Operating v.
• Nonoperating . . . ?

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FORMAT

• Single v.
• multiple-step . . . ?

8
QUALITY OF EARNINGS

• Increased earnings from higher sales or lower
  costs v. artificial profits from holding gains
  in inventory, etc.
• Quality of earnings impacts confidence of
  investors in financial markets
• US controls 40 of world capital markets
• Earnings can be reported differently still
  respect GAAP
• Conservative v. aggressive earnings

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COOKIE JAR ACCOUNTING

• Establish generous reserves against losses
  incurred in good years and reverse the reserves
  in bad years
• Income smoothing results with earnings
  understated in good years and overstated in bad
  years

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EARNINGS MANAGEMENT

• Preparers must understand reflect economic
  substance of transactions
• Accounting rules are not simply black white
• Nature of transactions is more complex
• Managing the business v. managing the earnings v.
  cooking the books

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OPERATING V. NONOPERATING

• Operating
• Restructuring charges
• Impairment charges
• Nonoperating gains losses
• Sales of assets investments

12
REPORTING IRREGULAR ITEMS

• Modified all-inclusive approach
• Discontinued operations
• Extraordinary items
• Cumulative effect of change in accounting
  principle
• Changes in estimates
• Earnings per share

13
DISCONTINUED OPERATIONS

• SFAS 144 supersedes SFAS 121 and APB Opinion 30
• Component of entity v. segment of business
• Six conditions to qualify
• Sale within one year (with exceptions)
• Lower of carrying amount or fair value less cost
  to sell v. Net realizable value
• Anticipated future losses not recorded

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INTRAPERIOD TAX ALLOCATION

• Tax follows the income . . . !

15
EXTRAORDINARY ITEMS

• Unusual
• Infrequent
• Tax effect

16
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

• Cumulative effect on prior years
• Effect on current year
• Tax effect

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CHANGES IN ESTIMATES ERRORS

• Change in estimate in period of change
• Prior year restatement for errors
• Tax effect

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EARNINGS PER SHARE

• Public companies
• Basic diluted
• Disclosure by category

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STATEMENT OF RETAINED EARNINGS

• Retained earnings v. stockholders equity
• Changes in retained earnings
• Cumulative other comprehensive income
• Appropriated retained earnings