Mata kuliah : Akuntansi Keuangan Menengah 1

Kelompok 2
1. Faradiba Azzahra 220503169
2. Febiola T Purba 220503170
3. Ida Paulina Purba 220503175
4. Tisha Zahra 220503200

Chapter 4
Income Statement and Related Information

The income statement is useful for evaluating past performance, predicting future
performance, and assessing risks or uncertainties in achieving future cash flows. The income
statement has several limitations such as eliminating items that cannot be reliably measured,
revenue being influenced by accounting methods used, and revenue measurement involving
judgments.

 Quality of earnings in the income statement:

Companies have an incentive to manage earnings to meet or beat market expectations, leading to
increased stock prices and management compensation. Earnings quality is reduced when earnings
management produces less useful information for predicting future earnings and cash flows.

 Elements of the income statement:

Income includes revenue and gains.
Income Account:
• Sales Other Income Accounts:
• Revenue from fees • Gains from the sale of long-term assets
• Interest income • Unrealized gains on available-for-sale
• Dividend income securities
• Rental income

 Elements of the income statement:

Expenses encompass costs and losses.
Expense Accounts:
• Cost of goods sold
• Depreciation expense
• Interest expense
• Rent expense
• Salary expense

Loss Accounts:
• Losses from restructuring costs
• Losses from the sale of long-term assets
• Unrealized losses on available-for-sale securities

Income Statement Format:

IFRS requires at a minimum the following to be presented on the income statement:
 Revenue
 Tax expenses
 Financial expenses
 Share of profit or loss of associates and joint ventures accounted for using the equity method
 An amount comprising the total of:
  Post-tax profit or loss from discontinued operations
 Post-tax gain or loss from measuring fair value less costs to sell or dispose of assets or
disposal groups constituting discontinued operations
 Net profit or loss (sometimes referred to as net income or net loss)

Intermediate Components:
It is common for companies to present some or all of these sections and totals in the income
statement:
1. Sales or Revenue Section
2. Cost of Goods Sold Section
3. Selling Expenses
4. Administrative or General Expenses
5. Other Revenues and Expenses (Including most other transactions not classified as revenues or
expenses above)
6. Financing Costs (a separate line item identifying the company's financing costs, referred to as
interest expense)
7. Income Tax
8. Discontinued Operations
9. Non-controlling Interest
10. Earnings Per Share

Reporting in the Income Statement:

1. Gross Profit:
Calculated by subtracting the cost of goods sold from net sales revenue.
Unusual or incidental items disclosed in other income and expenses.
2. Operating Income:
Determined by subtracting selling and administrative expenses as well as other income and expenses
from gross profit.
Used to predict the amount, timing, and uncertainty of future cash flows.
Cost classification, reported by nature or function.
3. Gains and Losses:
IASB asserts that both revenue and expenses, as well as other income and expenses, should be
reported as part of operating income.
Additional items that may need to be disclosed:
• Impairment losses on inventory to net realizable value or on fixed assets to recoverable amount
and reversals of such impairment losses.
• Restructuring charges and reversals of any provisions for restructuring costs.
• Gains or losses on the disposal of property, plant, and equipment or investments.
• Litigation settlements.
• Reversal of other provisions.
4. Bottom Line:
This is the income after considering all revenues and expenses for the period. It is widely viewed as
the most important measure of a company's success or failure for a given period.
5. Non-controlling Interest Allocation:
If a company prepares a consolidated income statement that includes a portion of subsidiary
companies, IFRS requires that net income of subsidiaries be allocated to controlling and non-
controlling interests. This allocation is reported at the bottom of the income statement after net
income.
6. Earnings Per Share (EPS):
Net Income - Preferred Dividends
Weighted Average Outstanding Common Shares
• A significant business indicator.
• Measures the dollar amount earned per common share.
• Must be disclosed in the income statement.

7. Discontinued Operations:
a. (In a separate income statement category) gains or losses from the disposal of business segments.
b. Results of operations of a component that has been or will be disposed of separately from
continuing operations.
c. Impact of discontinued operations after tax, as a separate category after continuing operations.

8. Intraperiod Tax Allocation:

Associates income tax expense with specific items that give rise to the income tax expense.
In the income statement, income tax is allocated to:
1. Income from continuing operations before tax
2. Discontinued operations

9. Accounting Changes and Errors:

Changes in accounting principles:
• Company adopts a different accounting principle.
• Retrospective adjustments.
• Cumulative effect adjustments to beginning retained earnings.
• Retained comparability approach.
• Examples:
- Change from FIFO to average cost
- Change from percentage of completion to completed contract method

10. Change in Estimate:

• Recognized in the period of change and in future periods.
• Not handled retrospectively.
• Not considered an error.
• Examples:
- Useful life and residual value of depreciable assets
- Allowance for uncollectible accounts
- Obsolescence of inventory

11. Correction of Errors:

• Result from:
- Mathematical mistakes
- Misapplication of accounting principles
- Oversight or misuse of facts
• Correction treated as prior period adjustment.
• Adjustment to beginning balance of retained earnings.