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loss transactions. Income Statement Summarizes these transactions Transaction Approach: Focused on income-related activities that have occurred during the period. Major Of the Income Statement Revenues: Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods/services or activities that constitute the entity’s ongoing major/central operations Expenses-Outflows or other using up of assets or incurrence’s of liabilities during a period from activities that constitutes entity’s ongoing major/central operations Gains-Increase in equity(net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners Losses-Decreases in equity or net assets from peripheral or incidental transactions of an entity. Forms of Revenue Sales, fees, interest, dividends, rents, etc Forms of Expenses CoGS, depreciation, interest, rent, salaries/wages, taxes, etc Forms of Gains/Losses Sale of investments or plant assets, settlement of liabilities, write-off’s of assets due to impairment or casualty. Single Step Income Statement Two Groupings Revenues Expenses Expenses deducted from revenues to calculate net income or loss Sometimes companies report income tax separately as last item before net income to show its relationship to income before income tax. Single Step Income Statement Format:
returns and other related info. Intermediate Components of the Income Statement Companies using multistep income statement may prepare some or all of the following sections: Operating Section-Report of revenues and expenses of the company’s principal operations. selling and administration. allowances.Revenues Net Sales Dividend Revenue Rent Revenue Total Revenue Expenses CoGS Selling Expenses Admin Expenses Interest Expense Income Tax Expense Total Expenses Net Income Earnings Per Share xxxx xxxx xxxx xxxx xxx xxxx xxxx xxxx yyyy NI=(xxxx-yyyy) =NI/Shares Outstanding Multi Step Income Statement Further classifications: Seperation of Operating and Non-Operating Activities of the Company Income from operations followed by sections titles “Other revenues and Gains” and “Other Expenses and Losses” Other Categories include transactions like interest revenues and expenses. and dividends received. Includes: Sales or Revenue Section Subsection presenting sales. Purpose is to arrive at net amount of sales revenue Cost of Goods Sold Section Subsection that shows CoG sold to produce sales Selling Expenses . discounts. gains or losses from sale of long term assets. Separates operating transactions from non-operating and matches costs and expenses with related revenues. Permits immediate comparison w/costs of previous years with other departments in the same year. Classification of expenses by functions like merchandising(CoGS).
earned or gains incurred Generally net of related expenses from Non Operating transactions Other Expenses and Losses List of exp. organization of material can differ Natural Expense Classification Manufacturing/Merchandising companies in wholesale trade Operating Section broken down into: Sales or Rev CoGS Selling Expenses Admin or General Expense Functional Expense Classification Retail stores Op. Section broken down to: Admin Occupancy Publicity Buying Selling Multi Step Example: . Two Main Subsections: Other Revenues and Gains Lists rev. Special Gains or Losses that are Infrequent or Unusual(BUT NOT BOTH) are generally reported here as well. Income Tax Short section reporting federal and state taxes on income from continuing operations Discontinued Operations Material Gains/Losses resulting from disposition of a segment of the business Extraordinary Items Unusual and Infrequent material gains and losses Earnings Per Share Although Content is always the same in the operating section. From secondary or auxiliary activities of the company. and exp. generally net of an related incomes. from non operating transactions. or losses incurred. Lists expenses resulting from the company’s efforts to make sales Admin or General Expenses Reports expenses of general administration Non Operating Section Report of rev.
Services Utilities Exp Insurance Exp Depr. Stationary. Of Office Equip.COMPANY NAME Income Statement For The Year Ended Month Day. On bonds and Notes Income before Income Tax Income tax Net Income for Year $xxx $aaa bbb (aaa+bbb) xxx-(aaa+bbb) yyyy Net Sales-COGS yyyy yyyy yyyy yyyy yyyy yyyy yyyy yyyy yyyy ∑(yyyy) zzzz zzzz zzzz zzzz zzzz zzzz zzzz zzzz zzzz ∑zzzz ∑(∑yyyy+∑zzzz) Gross Profit-Sum(admin and Selling exp) xxxx xxxx ∑ (xxxx) Income from Operations+Other R (tttt) Income-other expenses/losses (ddd) Income-Income Tax net income/tot shares outstandingg Earnings Per common share . Office Expenses Income from Operations Other Revenue/gains Dividend Revenue Rent Revenue Other Expenses and Losses Int. Supplies and Postage Misc. Of building Dep. Year Sales Revenue Sales Less: Sales discounts Sales Returns and Allowances Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Sales and Saleries Expense Sales Office Salaries Travel and Entertainment Advertising Expense Freight and Trans-Out Shipping Supplies and Expense Postage and Stationary Telephone and Internet Exp Depreciation of Sales Expenses Admin Expenses Officer Salaries Office Salaries Legal and Prof.
Disposing of a Product Group must be classified as a discontinued operation For example: Company has experienced losses with certain brands in a product group. Net sales Revenue. and losses). as part of net income. Gross Profit. sum(disc and allow. After the sale Company will discontinue any continuing Involvement with that group Company eliminates operations and cash flows from that group from its ongoing operations => Discontinued Operation . even irregular ones. Earnings per Common Share Net Sales useful because regular revenues reported separately from irregular/incidental revenues. principle Changes in estimates Correction of Errors Discontinued Operations Occurs when two things happen: A company eliminates the results of operations and cash flows of a component from its ongoing operations There is no significant continuing involvement in that component after the disposal transaction.. Net Income. Income before tax. statements Six Categories of Irregular Items Discontinued Operations Extraordinary Items Unusual Gains/Losses Changes in Acct. income Tax. Company decides to sell that product group.). Product Group= lowest level at which company can distinguish the operations and cash flows from the rest of the company’s operations. Sum(other exp. other revenues and gains(if more than one). other expenses and losses(if more than one) Third Column= Sales. Sales discounts and allowances. First Column of Totals=Only numbers from individual expense accounts both Operating Expense Groupings Second Column= Totals from selling and admin. from continuing operations Gross Profit also reported Can study trend to see how well company uses resources Income from operations highlights difference between regular and incidental activities Irregular Items Modified all inclusive concept Requires companies record most items. Sum(other revenues and gains). Each Product Group is a component of the company. Sum(both operating expense totals). CoGS. exp. Analysts can better understand and asses trends in rev. Income from operations. Required to highlight irregular items in the fin.
the ordinary and . Gains or losses from Discontinued operations of a COMPONENT of BUSINESS are reported in a separate category on the income statement Companies also report the results of operations of a component that has been or will be disposed of separately from continuing operations. Criteria Events and transactions that are distinguished by their unusual nature and by the infrequency of their occurance. or only incidentally related to. Operations net of Tax shown as a separate category. After Continuing Operations but Before Extraordinary Items Disc. Effects of Disc. Requires meeting both of the following criteria Unusual Nature Event or Transaction should possess high degree of abnormality and be of a type clearly unrelated to. but company decided to only discontinue the brands that are experiencing losses. Can’t differentiate between the cash flows from the brands and the cash flows of the product group as a whole Cant consider brands a component Cant classify any gains/losses from sale of brand as Discontinued operations. Operations Category Example Income from Continuing Operations Discontinued Operations Gain from operations of component (net of tax) Gain from disposal of component (net of tax) Net Income xxx xxx xxx sum (xxx+sum) Extraordinary Items Non Recurring Material Items that differ significantly from company’s typical business activities. Example: Same as before. Operations Category Example Income from Continuing Operations Discontinued Operations Loss from operations of component (net of tax) Loss from disposal of component (net of tax) Net Income xxx xxx xxx (sum) (xxx-sum) Disc.
they are combined with other items in income statement IF material. and nature/extent of government regulation. typical activities of the company. plant or equipment used in the business Effects of a strike. deferred research and dev. Gains/losses from Extraordinary Items shown on Income statement just before Net Income : XXXX + . taking into account the environment in which the company operates. including those against competitors/major suppliers Adjustment of accruals on long-term contracts. including those related to major devaluations and revaluations Gains/losses on the disposal of a component of an entity **Other gains/losses from sale or abandonment of property. the gain/loss is extraordinary. inventories. Hail damage to crop if hail damage is rare in area=Extraordinary Frost Damage to citrus crops in Florida= Not Extraordinary bc frost damage occurs normally there every few years. taking into account the environment in which it operates. Example of extraordinary item would be both of the ** above if they resulted directly from a major casualty(like an earthquake) or prohibition under a newly acted law/regulation. Costs.extraordinary Item Income before Extraordinary Items Extraordinary Items (less applicable income tax of $___) Unusual Gains/Losses Items that are: Unusual or Infrequent. geographic location. Company must consider the environment in which it operates Environment includes factors like industry characteristics. BUT NOT BOTH If items are not material. they must be disclosed separately and reported ABOVE “Income/Loss before extraordinary items” Restructuring Charge Not Extraordinary . Infrequency of Occurrence Company should not expect that the Event/Transaction to happen in the foreseeable future. Following gains/losses not extraordinary items because they are usual in nature and can be expected to occur in the future as a consequence of customary and continuing business activities: **Write-downs or write offs of recievables. equipment leased to others. if company sells only significant security investment its ever owned . Also. or other intangible assets Gains/Losses from exchange or translation of foreign currencies.
”separately disclose other items of a material amount that are of an unusual or nonrecurring nature and are not considered extraordinary. principles. after “Income from continuing operations. mistakes in application of acct. Called Intraperiod Tax Allocation Relates Income Tax expense of fiscal period to specific items that give rise to the amt. Helps users understand how much tax expense relates to “income from continuing operations” and how much relates to certain irregular transactions and events. Changes in Acct. especially when there are multiple unusual items. it should restate the prior statements for the effects of the error. For HW or school purposes. companies close all other irregular gains or losses or nonrecurring items to Income Summary and include them in the income statement. of the tax provision.” “Extraordinary items” section below “Discontinued operations. Used on the following items in the income statement: Income from continuing operations Discontinued Operations Extraordinary Items . Changes in estimates Company accounts for changes in estimates in the period of change if they affect only that period or in the period of change and future periods if the change affects both. or oversight/misuse of facts at the time statements were prepared. Correction of errors treated as prior period adjustments. principles by making retrospective adjustment to financial statements. Recasts prior years statements on a basis consistent with newly adopted principle. Intraperiod Tax Allocation Irregular Items (excapet for unusual gains/losses) on the income statement or statement of retained earnings net of tax. If comparative statements are prepared. usually report unusual gains/losses in the “Other Revenues and Gains” or “Other Expenses and Losses” section. Unusual Items usually reported in separate section just above “income from operations before income taxes” and “extraordinary items”. Changes not carried back to adjust prior years Changes in estimates not considered errors or extraordinary items Correction of Errors Result of mathematical mistakes. Record a correction of an error in the year in which it was discovered. Errors must be corrected by making proper entries in the accts and reporting the corrections in the financial statements. Company records cumulative effect of change for prior periods as an adjustment to beginning retained earnings of earliest year presented. Principles Company recognizes change in acct. Companies don’t handle changes in estimates retroactiviely. Summary of Irregular Items Except for changes in accounting principle and error corrections. discontinued operations of a component of a business as a separate item in the income statement. Report error in the statements as an adjustment to beginning balance of retained earnings. which are charged or credited directly to retained earnings.
to get net of applicable income tax reduction.00 per share EPS must be disclosed on Face of Income Statement .000 (30.000 $245. discontinued operations and extraordinary items.000 Weighted Avg. Does not consider tax of items excluded from determining income from operations Compute separate tax effect with each irregular item (i. 30% income tax rate. Subtract tax rate from loss. “Let the Tax Follow the Income” Company computes tax expense for “income from cont.000 from major casualty Tax rate of 30% Income before Income Tax and Extraordinary Item Income Tax Income before Extraordinary Item Extraordinary Loss-Major Casualty Less: Applicable Income Tax reduction Net Income $250.000 $100.000 Because it’s a loss. Shares Outstandind=100. Div= 50. Income before Income Tax and Extraordinary Item Income Tax Income before Extraordinary Item Extraordinary Gain-Condemnation Settlement Less: Applicable Income Tax reduction Net Income $250. and exp transactions used in determining this income.000 (75000) 175.000 EPS=$3.000) 70.000 (30.000 $105. its tax deductible. Operations” Find tax expense related to both rev.e.000 $100.000 Extraordinary gain of 100.000 (75000) 175.000 Extraordinary Losses Income before taxes and extraordinary gain of 250. Earnings Per Share EPS=Net Income-Preferred Dividends(Income Available to Common Stockholders) Weighted Average of Common Shares Outstanding Net income=350.) Extraordinary Gains: Income before taxes and extraordinary gain of 250.000 from condemnation settlement received on property.000 Preff.000) 70.000 Extraordinary loss of 100.
Because fair values are continually changing. some argue that recognizing these gains and losses in net income is misleading. Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Operation. Operations Income/Loss from discontinued component Net of Tax Loss/Gain on disposale of disc. or extraordinary Item: Per share amts for these items must be reported on face on income statement or in the notes to the financial statements. Companies charge/credit these adjustments(net of tax) to the opening balance of retained earnings.ss Retained Earnings Statement Net Income increases Retained Earnings Net Loss Decreases Retained Earnings Cash/Stock Dividends decrease retained earnings.zz Extraorindary Gain/Loss . Beginning.y. End Comprehensive Income Because fair values are continually changing. Changes in Acct. Unrealized gains and losses on available for sale securities.zz Income before extraordinary Item x. Some prepare statement of retained earnings. xxx +-yyy xxx yyy Xxx xxx yyy (xxx) xxx Limited number of transactions should be recorded directly to stockholders equity. Net of Tax xxx x. as adjusted Add: Net Income Less: Cash Dividends Stock Dividends Retained Earnings.yy+-z. some . These are excluded from net income Items that bypass the income statement are included in a measure called comprehensive income.xx + . Statement of Retained Earnings Example Retained Earnings.z. from the determination of net income for the current period. may increase or decrease retained earnings. Ways. Net Income Per Share of Common Stock Income from Cont. This Excludes adj. net of tax +-e. Principles(generally) and prior period adj. If company reports Discontinued Operation. Beginning as reported Adjustment Retained Earnings.xx +-y.yy +.ee Net Income s. Companies may show retained earnings info in diff .
Can Display Other Comprehensive Income 3 ways: Second Income Statement Combined Statement of comprehensive Income Part of the statement to stockholders equity. Exp. with total comprehensive income shown as a final total Statement of Stockholders Equity: Reports changes in each stockholder equity account and in total stockholders equity during the year.000. argue that recognizing these gains and losses in net income is misleading.000 Unrealized Holding Gain on AFS securities= 30. Net Income Comprehensive Income Statement Net Income Other Comprehensive Income Unrealized Holding gain.000 90.000 the traditional net income is a subtotal.000 200.000 Op.000 110. Comprehensive Income includes: All revenues and gains All expenses and losses reported in net income All gains and losses that bypass net income but affect stockholder equity. net of tax Second Income Statement Method Income Statement Sales Revenue CoGS Gross Profit Op. Exp = 90.000 CoGS= 600. Prepared in Columnar Form Columns Used for Each Account and for Stockholders Equity . Net of Tax Comprehensive Income Combined Statement of Comprehensive Income: 800.000 110.000 600. Other Comprehensive Income Items that bypass net income but affect stockholders equity Non Owner Changes in equity that bypass income statements. Comprehensive Income= Net Income + Other Comprehensive Income Example: Sales Revenue=800.000 140.000 30.
Earnings Beg. Net of Tax 30.0000 30. 140.000 End Balance 550. 60. Income 110.000 .000 Common Stock 300.000 160. Earnings 50. Other Comprehensive Inc.000 50.000 110.000 Acc. Inc.000 30. OCI 60.000 Statement of SH Equity Total Comprehensive Income Ret.000 300.000 Comp.000 Acc.000 OCI Unrealized Holding Gain. Ex: Same info as before Common Stock 300000 Ret.000 110. Balance 410.000 Comp.000 90.
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