Income Statement

1
CHAPTER 4
Income Statement and Related Information
.....
Income and expenses for a given period of time.
Usefulness of the Income Statement

• evaluate past performance
• predict future performance
• assess uncertainty of future cash flows

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Limitations of the Income Statement
Reliable measures not always available.
Not every relevant item is included.
Numbers not always comparable.
Differences in methods are allowed.
Numbers not completely reliable.
Judgment is frequently involved.
3
Transaction approach

• Income calculated based on summary information of
  revenue, expense, gain, and loss transactions

4
Elements
5
Single-Step Income Statement
Revenues
Net Income
6
Multiple-Step Income Statement
Sales Revenues
Other Rev. Gains
Income before income tax
Net Income
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ALL-INCLUSIVE APPROACH most items are recorded in
current period income
CURRENT OPERATING APPROACH income from regular
and recurrent items is reported
MODIFIED ALL-INCLUSIVE APPROACH irregular items
are highlighted
8
Discontinued Operations
Assets Operating Results Activities of the
segment
Clearly distinguishable

• Not discontinued operations
• disposal of a part of a business line
• shifting production locations
• phasing out a product line

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Income from continuing operations 20,000,000 Dis
continued operations Loss from operation of
discontinued division (net of
tax) 300,000 Loss from disposal of division
(net of tax) 500,000 800,000 Net
Income 19,200,000
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Extraordinary Items

• Unusual (unrelated to ordinary activities)
• Infrequent

• Not extraordinary
• write-down of receivables, inventories, etc.
• gains or losses from sale of PPE
• effects of a strike

Question 27, p. 151 450,000 gain on forced
condemnation sale of facility.
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Unusual Gains and Losses

• unusual or infrequent but not both
• report in Other Gains and Losses
• before income tax

12
Changes in Accounting Principle

• e.g. change in inventory or depreciation method
• report the retroactive impact as of the beginning
  of the year
• report as an adjustment to beginning R/E not on
  the income statement

Brief Exercise 4-7, p. 153 Change in estimate of
bad debt expense.
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Changes in Estimates

• e.g. change in estimate of the useful life of an
  asset or bad debts expense
• do not handle retroactively
• include in ordinary income

Prior Period Adjustments

• record as an adjustment to the beginning balance
  of retained earnings
• does not affect net income

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Earnings per Share
perhaps the most widely followed number in all of
the financial statements

• break-down EPS for extraordinary items