Professional Documents
Culture Documents
Coby Harmon
University of California, Santa Barbara
Westmont College
4-1
Income Statement and CHAPTER 4
Related Information
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the uses and limitations 4. Explain the reporting of
of an income statement. accounting changes and
2. Describe the content and format errors.
of the income statement. 5. Describe related equity
3. Discuss how to report various statements.
income items.
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PREVIEW OF CHAPTER 4
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
4-3
LEARNING OBJECTIVE 1
Income Statement Identify the uses and limitations
of an income statement.
Usefulness
Evaluate past performance.
4-4 LO 1
Income Statement
Limitations
Companies omit items that cannot be
measured reliably.
4-5 LO 1
Income Statement
Quality of Earnings
Companies have incentives to manage income
to meet earnings targets or
to make earnings look less risky.
4-8 LO 2
Elements of the Income Statement
Expenses represent decreases in economic benefits
during the accounting period in the form of
outflows or depletions of assets or (depreciation expense,
amortization expense, cost of guds sold, prepaid expense
become expense)
incurrences of liabilities (accrued expense along with an
increase in payable)
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Elements of the Income Statement
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Income 1. Sales or Revenue
Statement 2
for discontinued
operations.
ILLUSTRATION 4.2 9
Income Statement 10
4-12
Condensed
Income
Statement
More representative of
the type found in
practice.
ILLUSTRATION 4.3
Condensed Income
Statement
Company prepares
supplementary
schedules to
support the totals. ILLUSTRATION 4.4
Sample Supporting
Schedule
4-13
Reporting Various LEARNING OBJECTIVE 3
Discuss how to report various
Income Items income items.
4-14 LO 3
Reporting Various LEARNING OBJECTIVE 3
Discuss how to report various
Income Items income items.
Gross Profit
Computed by deducting cost of goods sold from net
sales.
Provides a useful number for evaluating performance
and predicting future earnings.
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Reporting Various Income Items
4-16 LO 3
Income From Operations
Expense Classification
Nature Function
4-17 LO 3
Income From Operations
Expense Classification
Nature Function
4-18 LO 3
Income From Operations
Expense Classification
Illustration: The firm of Telaris Co. performs audit, tax, and
consulting services. It has the following revenues and expenses.
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Expense Classification
Nature-of-Expense Approach
ILLUSTRATION 4.5
4-20 LO 3
Expense Classification
Function-of-Expense Approach
ILLUSTRATION 4.6
Companies
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andsubtotals
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when
whensuch
suchpresentation
presentationisisrelevant
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anunderstanding
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performance.
4-22 LO 3
Income From Operations
Illustration 4-8
Net Income
Represents the income after all
revenues and
expenses
4-26 LO 3
Reporting Various Income Items
Income tax
Income tax is reported on the income statement right before
net income because this expense cannot be computed until all
revenues and expenses are determined. In practice, an
understanding of how the company arrived at the income tax
for the period is important. For example, some of the revenue
items may have different tax rates associated with them. In
other cases, expense items may not be deductible for income
tax purposes.
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Earnings per Share
$350,000 - $50,000
= $3.00 per share
100,000
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Reporting Various Income Items
Discontinued Operations
A component of an entity that either has been disposed of, or
is classified as held-for-sale, and:
1. Represents a major line of business or geographical area of
operations, or
4-30 LO 3
Discontinued Operations
4-31 LO 3
Discontinued Operations
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Reporting Various Income Items
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Intraperiod Tax Allocation
ILLUSTRATION 4.12
4-35 LO 3
Intraperiod Tax Allocation
ILLUSTRATION 4.13
4-36 LO 3
Intraperiod Tax Allocation
ILLUSTRATION 4.14
4-37 LO 3
Reporting Various Income Items
4-38 LO 3
Reporting Various Income Items
BE4-3: Presented below is some financial information related to
Volaire Group.
Revenues €800,000
Income from continuing operations 100,000
Comprehensive income 120,000
Net income 90,000
Income from operations 220,000
Selling and administrative expenses 500,000
Income before income tax 200,000
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Income Statement
4-42 LO 3
Accounting Changes LEARNING OBJECTIVE 4
Explain the reporting of
and Errors accounting changes and errors.
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Changes in Accounting Principle
ILLUSTRATION 4.18
Income Statement
Presentation of a Change
in Accounting Principle
(Based on 30% tax rate)
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Accounting Changes
4-45 LO 4
Change in Accounting Estimates
Questions:
Does prior years’ depreciation need to be restated?
Calculate the depreciation expense for 2019.
4-46 LO 4
After
Change in Accounting Estimates 7 years
4-47 LO 4
After
Change in Accounting Estimates 7 years
4-48 LO 4
Accounting Errors
Corrections of Errors
Result from:
► mathematical mistakes.
► mistakes in application of accounting principles.
► oversight or misuse of facts.
Corrections treated as prior period adjustments.
Adjustment to the beginning balance of retained
earnings.
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Corrections of Errors
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Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Changes in Accounting Principle
Criteria Change from one generally accepted accounting
principle to another.
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Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Changes in Accounting Estimate
Criteria Normal, recurring corrections and adjustments.
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Accounting Errors
ILLUSTRATION 4.19
Summary Summary of Accounting
Changes and Errors
Type of
Situation
Corrections of Errors
Criteria Mistake, misuse of facts.
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Do it!
E4.14 (Change in Accounting Principle) Zehms Company began
operations in 2017 and adopted weighted-average pricing for
inventory. In 2019, in accordance with other companies in its industry,
Zehms changed its inventory pricing to FIFO. The pretax income data
is reported below.
a. What is Zehms's net income in 2019? Assume a 35% tax rate in all
years.
b. Compute the cumulative effect of the change in accounting
principle from weighted-average to FIFO inventory pricing.
c. Show comparative income statements for Zehms Company,
beginning with income before income tax, as presented on the
2019 income statement.
4-54 LO 4
Related Equity LEARNING OBJECTIVE 5
Describe related equity
Statements statements.
Increase Decrease
Net income Net loss
Change in accounting Dividends
principle Change in accounting
Prior period principles
adjustments Prior period
adjustments
4-55 LO 5
Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019
Before issuing the report for the year ended December 31, 2019, you
discover a ₩50,000 error (net of tax) that caused 2018 inventory to
be overstated (overstated inventory caused COGS to be lower and
thus net income to be higher in 2018). Would this discovery have
any impact on the reporting of the Statement of Retained Earnings
for 2019?
4-56 LO 5
Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019
4-57 LO 5
Retained Earnings Statement
Comprehensive Income
All changes in equity during a period except those resulting
from investments by owners and distributions to owners.
Includes:
all revenues and gains, expenses and losses reported in
net income, and
all gains and losses that bypass net income but affect
equity.
Income in Income st. + Other comprehensive income =
Comprehensive income
4-59 LO 5
Comprehensive Income
Net Income
Income Statement (in thousands)
Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000
Operating expenses:
Unrealized gains and
Selling expenses 10,000 losses on non-trading
Administrative expenses 43,000 equity securities.
Total operating expense 53,000 Translation gains and
Income from operations 83,000
Other revenue (expense):
losses on foreign
Interest revenue 17,000 currency.
Interest expense (21,000) Plus others
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in Equity
Net income $ 55,000
4-60 LO 5
Comprehensive Income
4-61 LO 5
Comprehensive Income
4-62 LO 5
Comprehensive Income
ILLUSTRATION 4.22
Two Statement Format:
Comprehensive Income
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Related Equity Statements
4-64 LO 5
Statement of Changes in Equity
4-65 LO 5
Statement of Changes in Equity
ILLUSTRATION 4.23
Statement of Changes in Equity
4-66 LO 5
Statement of Changes in Equity
ILLUSTRATION 4.24
Presentation of Accumulated Other Comprehensive Income in the Statement of Financial Position LO 5
4-67
GLOBAL ACCOUNTING INSIGHTS
LEARNING OBJECTIVE 6
Compare the income statement under IFRS and U.S. GAAP.
Standards issued by the FASB (U.S. GAAP) are the primary global alternative
to IFRS. As in IFRS, the income statement is a required statement for U.S.
GAAP. In addition, the content and presentation of the U.S. GAAP income
statement is similar to the one used for IFRS. A number of U.S. GAAP
standards have been issued that provide guidance on issues related to income
statement presentation.
4-68 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to the income statement.
Similarities
• Both U.S. GAAP and IFRS require companies to indicate the amount of net
income attributable to non-controlling interest. Extraordinary-item reporting
is prohibited under IFRS and U.S. GAAP.
• Both U.S. GAAP and IFRS follow the same presentation guidelines for
discontinued operations, but IFRS defines a discontinued operation more
narrowly. Both standard-setters have indicated a willingness to develop a
similar definition to be used in the joint project on financial statement
presentation.
4-69 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
• Both U.S. GAAP and IFRS have items that are recognized in equity as part
of other comprehensive income but do not affect net income. Both U.S.
GAAP and IFRS allow a one statement or two statement approach to
preparing the statement of comprehensive income.
Differences
• Presentation of the income statement under U.S. GAAP follows either a
single-step or multiple-step format. IFRS does not mention a single-step or
multiple-step approach.
4-70 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• The U.S. SEC requires companies to have a functional presentation of
expenses. Under IFRS, companies must classify expenses by either nature
or function. U.S. GAAP does not have that requirement.
• U.S. GAAP has no minimum information requirements for the income
statement. However, the U.S. SEC rules have more rigorous presentation
requirements. IFRS identifies certain minimum items that should be
presented on the income statement.
• U.S. SEC regulations define many key measures and provide requirements
and limitations on companies reporting non-U.S. GAAP information. IFRS
does not define key measures like income from operations.
4-71 LO 6
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• U.S. GAAP does not permit revaluation accounting. Under IFRS,
revaluation of property, plant, and equipment, and intangible assets is
permitted and is reported as other comprehensive income. The effect of this
difference is that application of IFRS results in more transactions affecting
equity but not net income.
4-72 LO 6
GLOBAL ACCOUNTING INSIGHTS
4-73 LO 6
GLOBAL ACCOUNTING INSIGHTS
On the Horizon
The IASB and FASB are working on a project that would rework the structure
of financial statements. One stage of this project will address the issue of how
to classify various items in the income statement. A main goal of this new
approach is to provide information that better represents how businesses are
run. In addition, this approach draws attention away from just one number—
net income.
4-74 LO 6
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Homework E4-2
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Homework E4-4
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Homework E4-7
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Homework E4-9
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Homework E4-16
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