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Financial Statements I :

The Income Statement

OLFA RESHA 1110534017
YURI ANNISA 1110534006
The current financial reporting environment consists of various groups :
Security analysts

Investors in equity securities are the central focus of the financial
reporting environment.

Investment involves forgoing currents uses of resources for ownership
interest in companies. These ownership interests are claims to uncertain
future cash flows.

Investment involves giving up currents resources for future, uncertain
resources, and investors require information that will help them assess
future cash flows from securities.
The Economic Consequences of Financial Reporting
Income measurement and financial reporting also involve economic
consequences, including :
Financial information can affect the distribution of wealth among
Investors employing security analysts may be able to increase their
wealth at the expense of less informed investors.

Financial information can affect the level of risk accepted by a firm
Less risky projects may have long-term detrimental effects.

Financial information can affect the rate of capital formation in the
economy and result in a realocation of waelth between consumption
and investment within the economy

Financial information can affect how investment is allocated among
Since economic consequences may affect different users of
information differently, the selection of financial reporting
methods by the FASB and the SEC involves trade-offs. The
deliberations of accounting standard setters sholud consider
these economic consequences.
Income Statements Elements
Primary purpose of financial
reporting is to provide information
about a companys performance via
measures of earnings.

The income statement is primary
importance because of its
predictive value. Income reporting
also has value as a measure of
future cash flows, as a measure of
management efficinency, and as a
guide to the accomplishment of
managerial objectives.
The financial statement elements are
defined in SFAC No.6 AS follows :
Inflows of assets during a period from
delivering or producing goods.
Increases in net assets from incidental
transactions of an entitiy and from all
other transactions
Outflows of assets or incurrences of
liabilities during period from delivering
or producing goods
Decreases in net assets from incidental
transactions of an entity and from all
other transactions

Each of these term is defined as changes in assets and/or liabilities.
The following are some differences between the changes in assets and/or
liabilities and the inflows and outflows definition of income :
The changes in assets and/or liabilities approach determines earnings as a
measure of the change in net economic resources for a period
The inflows and outflows definition view income as a measure of effectiveness

The changes in assets and/or liabilities approach depends on the definition of
assets and liabilities to define earnings
The inflows and outflows approach depends on definition of revenues and
expenses and matching them to determine income.

The inflows and outflows approach results in the creation of deferred changes,
deffered credits, and reserves when measuring periodic income
The changes in assets and/or liablities approach recognize deffered items only
when they are economic resources or obligations.
Both approaches agree that because investors look to
financial statements to provide information from which they
can extrapolate future resource flows
The income statement is more useful to investors than is
the balance sheet.

The changes in assets and/or liabilities approach limits the
population from which the elements of financial statements
can be selected to net economic resources and to the
transactions and events that change measurable attributes of
those net resources.

Statement Format
Proponents of the current operating concept of income base their
arguments on the belief that only changes and events controllable by
management that result from current-period decisions should be included
in income.
This implies that normal and recurring items should constitute the principal
measure of enterprise performance.

Net income should reflect the day-to-day, profit-directed activities of the
enterprose, and the inclusion of other item of profit or loss distorts.

Net income should reflect all items that affect the net increase and
decrease in stockholders equity during the period, with the exception of
capital transaction.
The total net income for the life of an enterprise should be determinable by
summing the periodic net income figures.

Research indicates that investors are not influenced by where items are
reported in financial statements so long as the statements disclose the
same information.

APB Opinion No.9
The general of the overall nature of
income resulted in the release of APB
Opinion No.9, Reporting the Results
of Operations
This took a middle position between
the current operating performance
and all inclusive concepts by stating
that net income should reflect all
items of profit and loss recognized
during the period, with thw
excepetion of prior period

The APBs prescribed statement
format included two income figures:
net income from operations and net
income from operations plus
extraordinary items.
Separating the income statement
into net income from operations
and net income after
extraordinary items allowed for
the disclosure of most items of
revenue and expense and gains
and losses on the income
statement during any period.
It also gave the financial
statement users the ability to
evaluate the results of normal
operations or total income
according to their needs.
The FASB noted in SFAC No.5 that all-inclusive income statement is
intended to avoid discreationary omissions from the income statement,
even though inclusion of unsual or non-recurring gains or losses might
reduce the usefulness of an income statement for one year for predictive

The FASB has also stated because the effects of an entitys activities vari in
terms of stability, risks, and predictability, there is a need for information
about the various components of income.

The SEC requires all companies to provide three-year comparative income
statements and teo-year comparative balance sheets.
Most publicly held companies also provide similiar data in their annual

Income from Continuing Operations
The amounts disclosed to arrive at income from continuing operations are
the companys normal and recurring revenues and expenses. The resulting
income figure has the represents the amount expected to recur in the
future, often referred to as the companys sustainable income.
Suistainable income is the amount investors should use as a starting point to predict
future earnings.
Nonrecurring items of Income
Three nonrecurring items of income may also be incurred by a company.
These items are discontinued operations, extraordinary items, and
accounting changes.
Discontinued Operations
In opinion No.30, the APB concluded that additional criteria were necessary to
identify disposed segments of a business. This release required the separate
presentation of (1) the results of operations of the disposed segment, and (2)
gain or loss on the sale of assets for disposed segments including any
operating gains or losses during the disposal period.
Extraordinary Items
Were originally defined in APB
Opinion No.9 as events and
transactions of material effect
that would not be expected to
recur frequently and that would
not be considered as recurring
factors in any evaluation of the
ordinary operating processes of
the business.

Accounting Changes
The accounting standard of
consistency indicates that similar
transactions sould be reported in
the same manner each year.

3 Types of Accounting Changes :
Change in an accounting principle
occurs when an entity adopts a GAAP that differs from one previously
used for reporting purposes. Ex : change from LIFO to FIFO inventory
Change in an accounting estimate
Results from the necessary consequences of periodic presentation. Ex :
the life of depreciable assets and the estimated collectability of
Change in a reporting entity
Caused by changes in reporting units. Es : result of concolidations, change
in spesific subsidiaries
Not viewed as accounting changes. The result of mistakes or oversights
such as the use of incorrect accounting methods. Ex : mathematical

Earnings per Share
Earnings per Share (EPS) allows users to summarize the firms
performance in a single number. The use of the income
statement as the primary source of information by decision
makers has resulted in a need to disclose the amount of
earnings that accrue to fifferent classes of investors.

The basic calculation of EPS is relatively easy. The net income
available to common stockholders is divided by the weighted
average number of common shares outstanding during the
accounting periods

Basic EPS
To measure a companys performance over the reporting
period from the perspective of the common stockholder.

Diluted EPS
To measure a companys pro forma performance over the
reporting period from the perspective of the common
stockholder as if the exercise or conversion of potentially
dillutive securities had actually occured.

g outstandin shares of number average Weighted
Dividends Preferred - Income Net
EPS Basic
Usefulness of Earnings per Share
Overall the objective of EPS data is to provide investors with an indication of,
The value of the firm
Expected future dividends
Comprehensive Income
is defined as the change in equtiy [net assets] of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources