Inc. stat - 1 Income Statement & Related Issues. Inc. stat - 2 INCOME STATEMENT “Single-Step” ...
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Transcript of Inc. stat - 1 Income Statement & Related Issues. Inc. stat - 2 INCOME STATEMENT “Single-Step” ...
Inc. stat - 2
INCOME STATEMENT“Single-Step”
Two broad sections– Revenues and Gains– Expenses and Losses
Net income Earnings per share Only one major step involved in
computing “Income from Continuing Operations”
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INCOME STATEMENT“Multiple-Step”
Operations section– Gross margin (Sales - Cost of goods
sold)– Operating expenses
Other items (nonoperating)= Income from continuing operaions
“Special items” Net income - “the bottom line” Earnings per share
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INCOME STATEMENT“Multiple-Step”
Items governed by specific accounting standards– Within “Income from continuing
operations”• Unusual OR infrequent gains and losses
– Below “Income from continuing operations”
• Discontinued Operations• Extraordinary items• Cumulative effect of “Changes in Accounting
Principles”
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Some events are unusual or infrequent, but not bothbut not both.– For example:
• restructuring charges.•gain or loss from the sale of assets.
I wonder how I should report these items.
Reporting Unusual OR Infrequent Items
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I wonder how I should report these items.
Reporting Unusual OR Infrequent Items
Psst! Why don’t you try reporting them in Income from
Operations?
NOT reported net of tax!
Inc. stat - 9
Extraordinary ItemsAPB Opinion No. 30
Material in amount.
Gains or losses that are both unusual in unusual in nature nature and infrequent in infrequent in occurrenceoccurrence.– Considering the
“environment”
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Extraordinary gains and losses, discontinued operations and cumulative effect of changes in accounting principle
are . . . Reported separately on the income statement.Shown net of any net of any related taxesrelated taxes.
APB OPINION NO. 30
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Specific extraordinary items identified in the pronouncement– The direct result of a major
casualty (such as an earthquake).– An expropriation.– A prohibition under a newly
enacted law or regulation that clearly meets both criteria.
Extraordinary Items
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During 19X8, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its
manufacturing plants in Nashville. This was considered an extraordinary item. The
company reported income from continuing operations of $128,387. All gains and losses
are subject to a 30% tax rate.
How would this item appear on the 19X8 income statement?
Extraordinary ItemsExample
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Reporting Accounting Changes
Change in estimates
Change in accounting principle
Change in reporting entity
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Change in Estimates
Revision of a previous accounting estimate.
The new estimate should be used in the current and future periods.
The prior accounting results should not be disturbed - per APB Opinion No. 20.
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Asset cost 30,000$ Accumulated depreciation 12/31/X7 - ($3,000 × 3 years) (9,000) Remaining to be depreciated 21,000 Remaining useful life ÷ 5 yearsRevised annual depreciation 4,200$
Record depreciation expense of $4,200 for19X8 and subsequent years.
Change in EstimatesExample
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Change in Accounting Principle
Occurs when changing from one GAAP method to another GAAP method– For example, a change from LIFO to
FIFO
Voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ comparative financial statements.
Changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in accounting estimate.
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Other Topics
Earnings Per Share.
Statement of Retained Earnings.
Prior Period Adjustments.
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Earnings Per ShareAPB Opinion No. 15
Generally computed as follows:
Report per share data on:
•Income before extraordinary items•Net income
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Corrections of errors from a previous period.
Appear on the Statement Statement of Retained Earningsof Retained Earnings as an adjustment to beginning retained earnings.
Must show the adjustment net of income taxesnet of income taxes.
Prior Period Adjustments
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Prior Period Adjustments Example
While reviewing the depreciation entries for 19X5-19X8, the controller found that in 19X7
depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. Net income for 19X8 was $128,387 and dividends were $50,000. All
items are taxed at 30%. The 1/1/X8 balance in retained earning was $575,000.
Prepare the necessary journal entry in 19X8 to correct this prior period error.
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GENERAL JOURNAL Page: 1Date Description PR Debit Credit
19X7 Depreciation Expense 150,000
Accumulated Depreciation 150,000
To correct this entry, can we just reverse it?
Why or why not?
To correct this entry, can we just reverse it?
Why or why not?
Prior Period Adjustments Example
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GENERAL JOURNAL Page: 9Date Description PR Debit Credit
19X8 Entry
19X8 Accumulated Depreciation 25,000
We can debit Accumulated Depreciation since it is a permanent account.
We can debit Accumulated Depreciation since it is a permanent account.
Prior Period Adjustments Example
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GENERAL JOURNAL Page: 9Date Description PR Debit Credit
19X8 Entry
19X8 Accumulated Depreciation 25,000
Retained Earnings
We can’t credit Depreciation Expensesince it was closed to Income Summary
and then to Retained Earnings.
We can’t credit Depreciation Expensesince it was closed to Income Summary
and then to Retained Earnings.
Prior Period Adjustments Example
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GENERAL JOURNAL Page: 9Date Description PR Debit Credit
19X8 Entry
19X8 Accumulated Depreciation 25,000
Income Taxes 7,500
Retained Earnings 17,500
Remember to consider the tax effects:$25,000 × 30% = $7,500 taxes payable
Prior Period Adjustments Example
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Retained Earnings Statement Example
Retained Earnings, 1/1/X8, as previously reported 575,000$ Prior period adjustment, correction of error (Net of income taxes of $7,500) 17,500 Retained Earnings, 1/1/X8, after adjustment 592,500$ Net income 128,387 Dividends (50,000) Retained earnings, 12/31/X8 670,887$
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DISCONTINUED OPERATIONS
SFAS No. 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets”
Long-Lived Assets to Be Disposed Of by Sale– Criteria for recognition– Measurement– Reporting – Disclosures
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LONG-LIVED ASSETS TO BE DISPOSED OF BY SALE
“Component” of an entity– Operations and cash flows clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity
– Reportable segment, operating segment, reporting unit, subsidiary, or an asset group
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LONG-LIVED ASSETS TO BE DISPOSED OF BY SALEPeriod of Recognition
Management commits to sell Assets are available for immediate sale in
present condition Active program to locate buyer Sale is probable within one year Assets being marketed at reasonable
price Unlikely significant changes to selling
plan will be made, or plan withdrawn
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LONG-LIVED ASSETS TO BE DISPOSED OF BY SALEMeasurement of Assets
Assets (or group) valued at lower of carrying amount or (FMV – Costs to sell) – Loss - recognized in current period– Gains - recognized in subsequent
period (only to extent of previous losses – until realized)
Long-Lived assets no longer depreciated or amortized
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DISCONTINUED OPERATIONSReporting Requirements
Results of operations for component reported as “Discontinued Operations” if:– Operations and cash flows have been eliminated
from ongoing operations– Entity will not have significant continuing
involvement after disposal transaction
Discontinued Operations includes:– Results of operations (Component) in current period– Gain or loss on disposal of segment based on
valuation of component
In subsequent periods, adjustments to previously recorded amounts