C H A P T E RC H A P T E R 44
INCOME STATEMENT AND RELATED INCOME STATEMENT AND RELATED INFORMATIONINFORMATION
Slide 4-2
INFORMATIONINFORMATION
Intermediate AccountingIFRS Edition
Kieso, Weygandt, and Warfield
1.1. Understand the uses and limitations of an income statement.Understand the uses and limitations of an income statement.
2.2. Understand the content and format of the income statement. Understand the content and format of the income statement.
3.3. Prepare an income statement.Prepare an income statement.
4.4. Explain how to report items in the income statement.Explain how to report items in the income statement.
Learning ObjectivesLearning Objectives
Slide 4-3
5.5. Identify where to report earnings per share information. Identify where to report earnings per share information.
6.6. Explain intraperiod tax allocation.Explain intraperiod tax allocation.
7.7. Understand the reporting of accounting changes and errors.Understand the reporting of accounting changes and errors.
8.8. Prepare a retained earnings statement.Prepare a retained earnings statement.
9.9. Explain how to report other comprehensive income.Explain how to report other comprehensive income.
ElementsElements
Minimum Minimum
Income StatementIncome StatementFormat of Income Format of Income
StatementStatement
Reporting Within Reporting Within the Income the Income StatementStatement
Other Reporting Other Reporting IssuesIssues
UsefulnessUsefulness
LimitationsLimitations
Gross profit Gross profit
Income from Income from
Accounting changes Accounting changes and errors and errors
Income Statement and Related InformationIncome Statement and Related Information
Slide 4-4
Minimum Minimum disclosuredisclosure
Intermediate Intermediate componentscomponents
IllustrationIllustration
Condensed income Condensed income statementsstatements
LimitationsLimitations
Quality of Quality of EarningsEarnings
Income from Income from operationsoperations
Income before Income before income taxincome tax
Net incomeNet income
NonNon--controlling controlling interestsinterests
Earnings per shareEarnings per share
Discontinued Discontinued operationsoperations
Intraperiod tax Intraperiod tax allocationallocation
SummarySummary
Retained earnings Retained earnings statementstatement
Comprehensive Comprehensive incomeincome
Changes in equity Changes in equity statementstatement
Evaluate past performance.Evaluate past performance.
Income StatementIncome Statement
UsefulnessUsefulness
Slide 4-5 LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Help assess the risk or uncertainty Help assess the risk or uncertainty of achieving future cash flows.of achieving future cash flows.
Predicting future performance.Predicting future performance.
Companies omit items that cannot Companies omit items that cannot be measured reliably.be measured reliably.
Income StatementIncome Statement
LimitationsLimitations
Slide 4-6 LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Income measurement involves Income measurement involves judgment.judgment.
Income is affected by the accounting Income is affected by the accounting methods employed. methods employed.
Companies have incentives to Companies have incentives to manage incomemanage income to meet to meet
or beat market expectations, so thator beat market expectations, so that
market price of stock increases andmarket price of stock increases and
Income StatementIncome Statement
Quality of EarningsQuality of Earnings
Slide 4-7
market price of stock increases andmarket price of stock increases and
value of management’s compensation increase. value of management’s compensation increase.
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Quality of earningsQuality of earnings is reduced if earnings management is reduced if earnings management
results in information that is less useful for predicting results in information that is less useful for predicting
future earnings and cash flows.future earnings and cash flows.
Format of the Income StatementFormat of the Income Statement
Income Income –– Increases in economic benefits during the accounting Increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other decreases of liabilities that result in increases in equity, other
Elements of the Income StatementElements of the Income Statement
Slide 4-8 LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
than those relating to contributions from shareholders.than those relating to contributions from shareholders.
Format of the Income StatementFormat of the Income Statement
Elements of the Income StatementElements of the Income Statement
IncomeIncome includes both revenues and gains.includes both revenues and gains.
RevenuesRevenues -- ordinary activities of a company ordinary activities of a company
GainsGains -- may or may not arise from ordinary activities.may or may not arise from ordinary activities.
Slide 4-9 LO 2 Understand the content and format of the income statement.
Revenue AccountsRevenue Accounts
SalesSales
Fee revenueFee revenue
Interest revenueInterest revenue
Dividend revenueDividend revenue
Rent revenueRent revenue
GainsGains -- may or may not arise from ordinary activities.may or may not arise from ordinary activities.
Gain AccountsGain Accounts
Gains on the sale of longGains on the sale of long--term term assetsassets
Unrealized gains on availableUnrealized gains on available--forfor--sale securities.sale securities.
Format of the Income StatementFormat of the Income Statement
ExpensesExpenses –– Decreases in economic benefits during the Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to shareholders.other than those relating to distributions to shareholders.
Elements of the Income Statement
Slide 4-10 LO 1 Understand the uses and limitations of an income statement.
other than those relating to distributions to shareholders.other than those relating to distributions to shareholders.
Cost of goods soldCost of goods sold
Depreciation expenseDepreciation expense
Interest expenseInterest expense
Examples of Expense AccountsExamples of Expense Accounts
Rent expenseRent expense
Salary expenseSalary expense
Format of the Income StatementFormat of the Income Statement
Elements of the Income StatementElements of the Income Statement
ExpensesExpenses includes both expenses and losses. includes both expenses and losses.
ExpensesExpenses -- ordinary activities of a company ordinary activities of a company
LossesLosses -- may or may not arise from ordinary activities.may or may not arise from ordinary activities.
Slide 4-11 LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.
Expense AccountsExpense Accounts
Cost of goods soldCost of goods sold
Depreciation expenseDepreciation expense
Interest expenseInterest expense
Rent expenseRent expense
Salary expenseSalary expense
LossesLosses -- may or may not arise from ordinary activities.may or may not arise from ordinary activities.
Loss AccountsLoss Accounts
Losses on restructuring chargesLosses on restructuring charges
Losses on to sale of longLosses on to sale of long--term term assetsassets
Unrealized losses on availableUnrealized losses on available--forfor--sale securities.sale securities.
Format of the Income StatementFormat of the Income Statement
Elements of the Income StatementElements of the Income Statement
IFRS requires, IFRS requires, at a minimumat a minimum, the following be presented on , the following be presented on the income statement.the income statement.
Slide 4-12 LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.
Format of the Income StatementFormat of the Income Statement
Intermediate Intermediate ComponentsComponents
Common for Common for companies to companies to present some or all present some or all
Slide 4-13
present some or all present some or all of these sections of these sections and totals within the and totals within the income statement.income statement.
Illustration 4-1Income Statement Format LO 2LO 2
IllustrationIllustration
FormatFormat
Includes all of the Includes all of the major items in the list major items in the list above, except for above, except for discontinued discontinued
Slide 4-14 LO 3LO 3
Illustration 4-2Income Statement
discontinued discontinued operations.operations.
Format of the Income StatementFormat of the Income Statement
CondensedCondensed
More More representative representative of the type of the type found in found in
Slide 4-15 LO 3 Prepare an income statement.LO 3 Prepare an income statement.
found in found in practice.practice.
Illustration 4-3Condensed Income Statement
Reporting Within the Income StatementReporting Within the Income Statement
Gross ProfitGross Profit
Computed by deducting cost of goods sold from net sales Computed by deducting cost of goods sold from net sales
revenue. revenue.
Disclosure of net sales revenue is useful. Disclosure of net sales revenue is useful.
Slide 4-16 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Disclosure of net sales revenue is useful. Disclosure of net sales revenue is useful.
Unusual or incidental revenue is disclosed in other income Unusual or incidental revenue is disclosed in other income
and expense. and expense.
Analysts can more easily understand and assess trends in Analysts can more easily understand and assess trends in
revenue from continuing operations.revenue from continuing operations.
Reporting Within the Income StatementReporting Within the Income Statement
Income from OperationsIncome from Operations
Determined by deducting selling and administrative Determined by deducting selling and administrative
expenses as well as other income and expense from gross expenses as well as other income and expense from gross
profit. profit.
Slide 4-17 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Highlights items that affect regular business activities. Highlights items that affect regular business activities.
Used to predict the amount, timing, and uncertainty of Used to predict the amount, timing, and uncertainty of
future cash flows.future cash flows.
Reporting Within the Income StatementReporting Within the Income Statement
Income from OperationsIncome from Operations
Reported byReported by
Expense ClassificationExpense Classification
Slide 4-18 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Nature, orNature, or
FunctionFunction
Reporting Within the Income StatementReporting Within the Income Statement
Illustration:Illustration: Assume that the accounting firm of Telaris Co. Assume that the accounting firm of Telaris Co. provides audit, tax, and consulting services. It has the provides audit, tax, and consulting services. It has the following revenues and expenses.following revenues and expenses.
Expense ClassificationExpense Classification
Slide 4-19 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Reporting Within the Income StatementReporting Within the Income Statement
Expense Classification (Expense Classification (NatureNature--ofof--Expense Expense Approach)Approach)
Illustration 4Illustration 4--55
Slide 4-20 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Reporting Within the Income StatementReporting Within the Income Statement
Expense Classification (Expense Classification (FunctionFunction--ofof--Expense Expense Approach)Approach)
Illustration 4Illustration 4--66
Slide 4-21 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
The functionThe function--ofof--expense method is generally used in practice although many expense method is generally used in practice although many companies believe both approaches have merit.companies believe both approaches have merit.
Illustration 4Illustration 4--77Number of Unusual Items Number of Unusual Items Reported in a Recent Year Reported in a Recent Year by 600 Large Companiesby 600 Large Companies
Reporting Within the Income StatementReporting Within the Income Statement
Gains and LossesGains and Losses
Slide 4-22 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Reporting Within the Income StatementReporting Within the Income Statement
Gains and LossesGains and Losses
IASBIASB takes the position that both takes the position that both
revenues and expenses andrevenues and expenses and
other income and expense other income and expense
Slide 4-23 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
other income and expense other income and expense
should be reported as part of income from operations.should be reported as part of income from operations.
Companies can provide additional line items, headings, and subtotals when Companies can provide additional line items, headings, and subtotals when
such presentation is relevant to an understanding of the entity’s financial such presentation is relevant to an understanding of the entity’s financial
performance.performance.
Reporting Within the Income StatementReporting Within the Income Statement
Gains and LossesGains and Losses
Additional items that may need disclosure: Additional items that may need disclosure:
Losses on writeLosses on write--downs of inventories to net realizable value or of downs of inventories to net realizable value or of
property, plant, and equipment to recoverable amount, as well as property, plant, and equipment to recoverable amount, as well as
reversals of such writereversals of such write--downs.downs.
Slide 4-24 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
reversals of such writereversals of such write--downs.downs.
Losses on restructurings of the activities and reversals of any Losses on restructurings of the activities and reversals of any
provisions for the costs of restructuring.provisions for the costs of restructuring.
Gains or losses on the disposal of items of property, plant, and, Gains or losses on the disposal of items of property, plant, and,
equipment or investments.equipment or investments.
Litigation settlements.Litigation settlements.
Other reversals of liabilities.Other reversals of liabilities.
Reporting Within the Income StatementReporting Within the Income Statement
Income before Income TaxIncome before Income Tax
Financing costs must be reported on the income statement.Financing costs must be reported on the income statement.
Illustration 4-8
Slide 4-25 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Reporting Within the Income StatementReporting Within the Income Statement
Net IncomeNet Income
Represents the income after Represents the income after allall
revenues and revenues and
expenses expenses
Slide 4-26 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
for the period are considered. for the period are considered.
Viewed by many as the most important measure of a Viewed by many as the most important measure of a
company’s success or failure for a given period of time.company’s success or failure for a given period of time.
Reporting Within the Income StatementReporting Within the Income Statement
Allocation to NonAllocation to Non--Controlling InterestControlling Interest
If a company prepares a consolidated income statement that If a company prepares a consolidated income statement that
includes a partially own subsidiary. IFRS requires that net income includes a partially own subsidiary. IFRS requires that net income
of the subsidiary be allocated to the controlling and nonof the subsidiary be allocated to the controlling and non--
controlling interest. This allocation is reported at the bottom of the controlling interest. This allocation is reported at the bottom of the
Slide 4-27 LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
controlling interest. This allocation is reported at the bottom of the controlling interest. This allocation is reported at the bottom of the
income statement after net income. income statement after net income.
Illustration 4-9
(amounts given)
€€800,000800,000
100,000100,000
Reporting Within the Income StatementReporting Within the Income Statement
BE4BE4--3:3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:
Revenues Revenues €€800,000800,000
Income from continuing operations Income from continuing operations 100,000100,000
Other Income Other Income and Expenseand Expense
Slide 4-28
100,000100,000
120,000120,000
90,00090,000
-- 220,000220,000
-- 500,000500,000
200,000200,000
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Income from continuing operations Income from continuing operations 100,000100,000
Comprehensive income Comprehensive income 120,000120,000
Net income Net income 90,00090,000
Income from operations Income from operations 220,000220,000
Selling and administrative expenses Selling and administrative expenses 500,000500,000
Income before income tax Income before income tax 200,000200,000
€€80,00080,000Solution on notes page
€€800,000800,000
100,000100,000
Reporting Within the Income StatementReporting Within the Income Statement
Revenues Revenues €€800,000800,000
Income from continuing operations Income from continuing operations 100,000100,000
Financing Financing CostsCosts
BE4BE4--3:3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:
Slide 4-29
100,000100,000
120,000120,000
90,00090,000
220,000220,000
500,000500,000
-- 200,000200,000
€€20,00020,000
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Income from continuing operations Income from continuing operations 100,000100,000
Comprehensive income Comprehensive income 120,000120,000
Net income Net income 90,00090,000
Income from operations Income from operations 220,000220,000
Selling and administrative expenses Selling and administrative expenses 500,000500,000
Income before income tax Income before income tax 200,000200,000
Solution on notes page
€€800,000800,000
-- 100,000100,000
Reporting Within the Income StatementReporting Within the Income Statement
Revenues Revenues €€800,000800,000
Income from continuing operations Income from continuing operations 100,000100,000
Income TaxIncome Tax
BE4BE4--3:3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:
Slide 4-30
€€100,000100,000
-- 100,000100,000
120,000120,000
90,00090,000
220,000220,000
500,000500,000
200,000200,000
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Income from continuing operations Income from continuing operations 100,000100,000
Comprehensive income Comprehensive income 120,000120,000
Net income Net income 90,00090,000
Income from operations Income from operations 220,000220,000
Selling and administrative expenses Selling and administrative expenses 500,000500,000
Income before income tax Income before income tax 200,000200,000
Solution on notes page
€€800,000800,000
100,000100,000
Reporting Within the Income StatementReporting Within the Income Statement
Revenues Revenues €€800,000800,000
Income from continuing operations Income from continuing operations 100,000100,000
Discontinued Discontinued OperationsOperations
BE4BE4--3:3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:
Slide 4-31
-- €€10,00010,000
100,000100,000
120,000120,000
-- 90,00090,000
220,000220,000
500,000500,000
200,000200,000
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Income from continuing operations Income from continuing operations 100,000100,000
Comprehensive income Comprehensive income 120,000120,000
Net income Net income 90,00090,000
Income from operations Income from operations 220,000220,000
Selling and administrative expenses Selling and administrative expenses 500,000500,000
Income before income tax Income before income tax 200,000200,000
Solution on notes page
€€800,000800,000
100,000100,000
Reporting Within the Income StatementReporting Within the Income Statement
Revenues Revenues €€800,000800,000
Income from continuing operations Income from continuing operations 100,000100,000
Other Other Comprehensive Comprehensive
IncomeIncome
BE4BE4--3:3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:
Slide 4-32
€€30,00030,000
100,000100,000
120,000120,000
-- 90,00090,000
220,000220,000
500,000500,000
200,000200,000
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Income from continuing operations Income from continuing operations 100,000100,000
Comprehensive income Comprehensive income 120,000120,000
Net income Net income 90,00090,000
Income from operations Income from operations 220,000220,000
Selling and administrative expenses Selling and administrative expenses 500,000500,000
Income before income tax Income before income tax 200,000200,000
Solution on notes page
Net income Net income -- Preference dividends Preference dividends
Weighted average of ordinary shares outstandingWeighted average of ordinary shares outstanding
Earnings Per ShareEarnings Per Share
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-33
Important business indicator.Important business indicator.
Measures the dollars earned by each ordinary share.Measures the dollars earned by each ordinary share.
Must be disclosed on the income statement.Must be disclosed on the income statement.
LO 5 LO 5 Identify where to report earnings per share information.Identify where to report earnings per share information.
Earnings Per Share (BE4Earnings Per Share (BE4--10): 10): In 2010, Hollis Corporation In 2010, Hollis Corporation reported net income of $1,000,000. It declared and paid reported net income of $1,000,000. It declared and paid preference share dividends of $250,000. During 2010, Hollis had preference share dividends of $250,000. During 2010, Hollis had a weighted average of 190,000 ordinary shares outstanding. a weighted average of 190,000 ordinary shares outstanding. Compute Hollis’s 2010 earnings per share.Compute Hollis’s 2010 earnings per share.
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-34
-- $250,000$250,000$1,000,000$1,000,000
190,000190,000= $3.95$3.95 per shareper share
LO 5 LO 5 Identify where to report earnings per share information.Identify where to report earnings per share information.
Net income Net income -- Preference dividends Preference dividends
Weighted average number of ordinary sharesWeighted average number of ordinary shares
Discontinued OperationsDiscontinued Operations
Reporting Within the Income StatementReporting Within the Income Statement
A component of an entity that either has been disposed of, or is A component of an entity that either has been disposed of, or is
classified as heldclassified as held--forfor--sale, and:sale, and:
1.1. Represents a major line of business or geographical area of Represents a major line of business or geographical area of
Slide 4-35 LO 5 LO 5 Identify where to report earnings per share information.Identify where to report earnings per share information.
1.1. Represents a major line of business or geographical area of Represents a major line of business or geographical area of
operations, oroperations, or
2.2. Is part of a single, coIs part of a single, co--coordinated plan to dispose of a major coordinated plan to dispose of a major
line of business or geographical area of operations, orline of business or geographical area of operations, or
3.3. Is a subsidiary acquired exclusively with a view to resell. Is a subsidiary acquired exclusively with a view to resell.
Discontinued OperationsDiscontinued Operations
Reporting Within the Income StatementReporting Within the Income Statement
Companies report as discontinued operations Companies report as discontinued operations
1.1. (in a separate income statement category) the gain or loss (in a separate income statement category) the gain or loss
from disposal of a component of a business. from disposal of a component of a business.
Slide 4-36 LO 5 LO 5 Identify where to report earnings per share information.Identify where to report earnings per share information.
from disposal of a component of a business. from disposal of a component of a business.
2.2. The results of operations of a component that has been or The results of operations of a component that has been or
will be disposed of separately from continuing operations. will be disposed of separately from continuing operations.
3.3. The effects of discontinued operations net of tax, as a The effects of discontinued operations net of tax, as a
separate category after continuing operations.separate category after continuing operations.
Illustration: Multiplex Products, a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost $300,000 (net of tax). Multiplex sold the division at the end of the year at a loss of $500,000 (net of tax).
Income from continuing operations $20,000,000
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-37
Total loss on discontinued operations 800,000
Income from continuing operations $20,000,000
Discontinued operations:
Loss from operations, net of tax 300,000
Loss on disposal, net of tax 500,000
Net income $19,200,000
LO 5 Identify where to report earnings per share information.
A company that A company that reports a reports a discontinued discontinued operation must operation must report per share report per share
Illustration 4Illustration 4--1212
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-38
amounts for the amounts for the line item either on line item either on the face of the the face of the income statement income statement or in the notes to or in the notes to the financial the financial statements.statements.
LO 5 LO 5 Identify where to report earnings per share information.Identify where to report earnings per share information.
Relates the income tax expense to the specific items that give Relates the income tax expense to the specific items that give
rise to the amount of the tax expense.rise to the amount of the tax expense.
On the income statement, income tax is allocated to:On the income statement, income tax is allocated to:
Intraperiod Tax AllocationIntraperiod Tax Allocation
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-39
(1)(1) Income from continuing operations before taxIncome from continuing operations before tax
(2)(2) Discontinued operationsDiscontinued operations
LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
““let the tax follow the incomelet the tax follow the income””
Illustration:Illustration: Schindler Co. has income before income tax of Schindler Co. has income before income tax of $250,000. It has a $250,000. It has a gaingain of $100,000 from a discontinuedof $100,000 from a discontinuedoperation. Assuming a 30 percent income tax rate, Schindler operation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.presents the following information on the income statement.
Intraperiod Tax AllocationIntraperiod Tax Allocation
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-40
presents the following information on the income statement.presents the following information on the income statement.
LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
Illustration 4-13
Illustration:Illustration: Schindler Co. has income before income tax of Schindler Co. has income before income tax of $250,000. It has a $250,000. It has a lossloss of $100,000 from a discontinuedof $100,000 from a discontinuedoperation. Assuming a 30 percent income tax rate, Schindler operation. Assuming a 30 percent income tax rate, Schindler presents the following information on the income statement.presents the following information on the income statement.
Intraperiod Tax AllocationIntraperiod Tax Allocation
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-41
presents the following information on the income statement.presents the following information on the income statement.
LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
Illustration 4-14
SummarySummary
Reporting Within the Income StatementReporting Within the Income Statement
Slide 4-42 LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
Reporting Within the Income StatementReporting Within the Income Statement
SummarySummary
Slide 4-43 LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
Different Income ConceptsDifferent Income Concepts
Reporting Within the Income StatementReporting Within the Income Statement
Users and Users and
preparers look at preparers look at
more than just more than just
the bottom linethe bottom line
Slide 4-44 LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.
the bottom linethe bottom line
income number, income number,
which supports which supports
the IFRS the IFRS
requirement to requirement to
provide subtotals provide subtotals
within the income within the income
statement.statement.
Company adopts a different accounting principle.Company adopts a different accounting principle.
Retrospective adjustment.Retrospective adjustment.
Other Reporting IssuesOther Reporting Issues
Accounting Changes and ErrorsAccounting Changes and Errors
Changes in Accounting PrincipleChanges in Accounting Principle
Slide 4-45
Retrospective adjustment.Retrospective adjustment.
Cumulative effect adjustment to beginning retained earnings.Cumulative effect adjustment to beginning retained earnings.
Approach preserves comparability.Approach preserves comparability.
Examples include:Examples include:
Change from FIFO to average cost.Change from FIFO to average cost.
Change from the percentageChange from the percentage--ofof--completion to the completion to the completedcompleted--contract method.contract method.
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Change in Accounting Principle:Change in Accounting Principle: Gaubert Inc. decided in Gaubert Inc. decided in March 2011 to change from FIFO to weightedMarch 2011 to change from FIFO to weighted--average inventory average inventory pricing. Gaubert’s income before taxes, using the new weightedpricing. Gaubert’s income before taxes, using the new weighted--average method in 2011, is $30,000. average method in 2011, is $30,000.
Illustration 4Illustration 4--1717Calculation of a Change inCalculation of a Change in
Pretax Income Data
Other Reporting IssuesOther Reporting Issues
Slide 4-46
Calculation of a Change inCalculation of a Change inAccounting PrincipleAccounting Principle
Illustration 4Illustration 4--1818Income StatementIncome StatementPresentation of a ChangePresentation of a Changein Accounting Principle in Accounting Principle (Based on 30% tax rate)(Based on 30% tax rate)
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.Solution on notes page
Accounted for in the period of change and future periods.Accounted for in the period of change and future periods.
Not handled retrospectively.Not handled retrospectively.
Not considered errors.Not considered errors.
Other Reporting IssuesOther Reporting Issues
Changes in EstimateChanges in Estimate
Slide 4-47
Examples include:Examples include:
Useful lives and residual values of depreciable assets.Useful lives and residual values of depreciable assets.
Allowance for uncollectible receivables.Allowance for uncollectible receivables.
Inventory obsolescence.Inventory obsolescence.
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Change in Estimate:Change in Estimate: Arcadia HS, purchased equipment for Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straightDepreciation has been recorded for 7 years on a straight--line line basis. In 2011 (year 8), it is determined that the total estimated basis. In 2011 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the life should be 15 years with a salvage value of $5,000 at the
Other Reporting IssuesOther Reporting Issues
Slide 4-48
life should be 15 years with a salvage value of $5,000 at the life should be 15 years with a salvage value of $5,000 at the end of that time.end of that time.
Questions:Questions:
What is the journal entry to correct What is the journal entry to correct the prior years’ depreciation?the prior years’ depreciation?
Calculate the depreciation expense Calculate the depreciation expense for 2011.for 2011.
No Entry No Entry RequiredRequired
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
After 7 yearsAfter 7 years
Equipment cost $510,000
Residual value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = x 7 years = $350,000$350,000
First, establish NBV First, establish NBV at date of change in at date of change in
estimate.estimate.
Other Reporting IssuesOther Reporting Issues
Slide 4-49
EquipmentEquipment $510,000$510,000
Fixed Assets:Fixed Assets:
Accumulated depreciationAccumulated depreciation 350,000350,000
Net book value (NBV)Net book value (NBV) $160,000$160,000
Balance SheetBalance Sheet (Dec. 31, 2010)(Dec. 31, 2010)
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
After 7 yearsAfter 7 years
Net book value $160,000
Residual value (new) - 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375
Depreciation Depreciation Expense calculation Expense calculation
for 2011.for 2011.
Other Reporting IssuesOther Reporting Issues
Slide 4-50
Annual depreciation $ 19,375
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2011
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Result from:Result from:
mathematical mistakes.mathematical mistakes.
mistakes in application of accounting principles.mistakes in application of accounting principles.
Corrections of ErrorsCorrections of Errors
Other Reporting IssuesOther Reporting Issues
Slide 4-51
oversight or misuse of facts.oversight or misuse of facts.
Corrections treated as Corrections treated as prior period adjustments.prior period adjustments.
Adjustment to the beginning balance of retained Adjustment to the beginning balance of retained
earnings.earnings.
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Corrections of Errors:Corrections of Errors: To illustrate, in 2012, Hillsboro Co. To illustrate, in 2012, Hillsboro Co.
determined that it incorrectly overstated its accountsdetermined that it incorrectly overstated its accounts
receivable and sales revenue by $100,000 in 2011. In 2012, receivable and sales revenue by $100,000 in 2011. In 2012,
Hillsboro makes the following entry to correct for this error Hillsboro makes the following entry to correct for this error
(ignore income taxes).(ignore income taxes).
Other Reporting IssuesOther Reporting Issues
Slide 4-52
Retained earningsRetained earnings 100,000100,000
Accounts receivableAccounts receivable 100,000100,000
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Other Reporting IssuesOther Reporting Issues
Slide 4-53 LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
IncreaseIncrease
Net incomeNet income
DecreaseDecrease
Net lossNet loss
Retained Earnings StatementRetained Earnings Statement
Other Reporting IssuesOther Reporting Issues
Slide 4-54 LO 8 LO 8 Prepare a retained earnings statement.Prepare a retained earnings statement.
Net incomeNet income
Change in Change in accounting principleaccounting principle
Prior period Prior period adjustmentadjustment
Net lossNet loss
DividendsDividends
Change in Change in accounting principleaccounting principle
Prior period Prior period adjustmentadjustment
Retained Earnings StatementRetained Earnings Statement
Other Reporting IssuesOther Reporting Issues
Illustration 4Illustration 4--2020
Slide 4-55 LO 8 LO 8 Prepare a retained earnings statement.Prepare a retained earnings statement.
Woods, Inc.Retained Earnings Statement
For the Year Ended December 31, 2012
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000)
Other Reporting IssuesOther Reporting Issues
IllustrationIllustration
Slide 4-56
Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2012, you Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused 2011 inventory to be discover a $50,000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? the reporting of the Statement of Retained Earnings for 2012?
LO 8 LO 8 Prepare a retained earnings statement.Prepare a retained earnings statement.
Woods, Inc.Retained Earnings Statement
For the Year Ended December 31, 2012
Balance, January 1 1,050,000$ Prior period adjustment - error correction (50,000)
Other Reporting IssuesOther Reporting Issues
IllustrationIllustration
Slide 4-57
Balance, January 1 (restated) 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
Solution on notes page LO 8 LO 8 Prepare a retained earnings statement.Prepare a retained earnings statement.
DisclosedDisclosed
In notes to the financial statements.In notes to the financial statements.
As Appropriated Retained Earnings.As Appropriated Retained Earnings.
Other Reporting IssuesOther Reporting Issues
Restrictions of Retained EarningsRestrictions of Retained Earnings
Slide 4-58
As Appropriated Retained Earnings.As Appropriated Retained Earnings.
LO 8 LO 8 Prepare a retained earnings statement.Prepare a retained earnings statement.
All changes in equity during a period except those All changes in equity during a period except those
resulting from investments by owners and distributions resulting from investments by owners and distributions to owners. to owners.
Other Reporting IssuesOther Reporting Issues
Comprehensive IncomeComprehensive Income
Slide 4-59
IncludesIncludes: :
all revenues and gains, expenses and losses all revenues and gains, expenses and losses reported in net income, and reported in net income, and
all gains and losses that bypass net income but affect all gains and losses that bypass net income but affect equity.equity.
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Other Comprehensive Other Comprehensive IncomeIncome
Unrealized gains and Unrealized gains and losses on availablelosses on available--forfor--
+
Comprehensive IncomeComprehensive Income
Other Reporting IssuesOther Reporting Issues
Income Statement
Slide 4-60
losses on availablelosses on available--forfor--sale securities.sale securities.
Translation gains and Translation gains and losses on foreign losses on foreign currency.currency.
Plus othersPlus others
Reported in EquityReported in Equity
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Review QuestionReview Question
Gains and losses that bypass net income but affect equity Gains and losses that bypass net income but affect equity are referred to as are referred to as
a. a. comprehensive income.comprehensive income.
Gains and losses that bypass net income but affect equity Gains and losses that bypass net income but affect equity are referred to as are referred to as
a. a. comprehensive income.comprehensive income.
Other Reporting IssuesOther Reporting Issues
Slide 4-61
a. a. comprehensive income.comprehensive income.
b. b. other comprehensive incomeother comprehensive income..
c. c. prior period incomeprior period income..
d. d. unusual gains and lossesunusual gains and losses..
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
a. a. comprehensive income.comprehensive income.
b. b. other comprehensive incomeother comprehensive income..
c. c. prior period incomeprior period income..
d. d. unusual gains and lossesunusual gains and losses..
Two approaches to reporting Comprehensive Two approaches to reporting Comprehensive Income:Income:
1.1. A second income statement.A second income statement.
2.2. A combined statement of comprehensive A combined statement of comprehensive
Other Reporting IssuesOther Reporting Issues
Slide 4-62
2.2. A combined statement of comprehensive A combined statement of comprehensive income.income.
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Other Reporting IssuesOther Reporting Issues
Illustration 4Illustration 4--2121
Comprehensive Comprehensive IncomeIncome
TwoTwo--statement statement format: format: Comprehensive Comprehensive
Slide 4-63
Comprehensive Comprehensive Income Income
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Other Reporting IssuesOther Reporting Issues
Illustration 4Illustration 4--2222
Comprehensive Comprehensive IncomeIncome
Combined Combined statement statement format: format:
Slide 4-64 LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
format: format: Comprehensive Comprehensive IncomeIncome
Other Reporting IssuesOther Reporting Issues
Statement of Changes in EquityStatement of Changes in Equity
Required,Required, in additionin addition to a statement of comprehensive to a statement of comprehensive
income. income.
Generally comprised of Generally comprised of
Slide 4-65 LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Generally comprised of Generally comprised of
share capitalshare capital——ordinary, ordinary,
share premiumshare premium——ordinary, ordinary,
retained earnings, and the retained earnings, and the
accumulated balances in other comprehensive accumulated balances in other comprehensive
items.items.
Other Reporting IssuesOther Reporting Issues
Statement of Changes in EquityStatement of Changes in Equity
Reports the change in each equity account and in total Reports the change in each equity account and in total
equity for the period. equity for the period.
1.1. Comprehensive income for the period.Comprehensive income for the period.
Slide 4-66 LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
1.1. Comprehensive income for the period.Comprehensive income for the period.
2.2. Contributions (issuances of shares) and distributions Contributions (issuances of shares) and distributions
(dividends) to owners.(dividends) to owners.
3.3. Reconciliation of the carrying amount of each component Reconciliation of the carrying amount of each component
of equity from the beginning to the end of the period.of equity from the beginning to the end of the period.
Other Reporting IssuesOther Reporting Issues
Illustration 4Illustration 4--2323
Statement of Changes in EquityStatement of Changes in Equity
Slide 4-67 LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Other Reporting IssuesOther Reporting Issues
Illustration 4Illustration 4--2424
Statement of Changes in EquityStatement of Changes in Equity
Regardless of the display format used, V. Gill reports the Regardless of the display format used, V. Gill reports the accumulated accumulated other comprehensive income other comprehensive income of $90,000 in the equity section of the of $90,000 in the equity section of the statement of financial position as follows.statement of financial position as follows.
Slide 4-68
Illustration 4Illustration 4--2424
LO 9 LO 9 Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Presentation of the income statement under U.S. GAAP follows either a Presentation of the income statement under U.S. GAAP follows either a singlesingle--step or multiplestep or multiple--step format. IFRS does not mention a singlestep format. IFRS does not mention a single--step step
Slide 4-69
singlesingle--step or multiplestep or multiple--step format. IFRS does not mention a singlestep format. IFRS does not mention a single--step step or multipleor multiple--step approach. In addition, under U.S. GAAP, companies step approach. In addition, under U.S. GAAP, companies must report an item as extraordinary if it is unusual in nature and must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under infrequent in occurrence. Extraordinary items are prohibited under IFRS. IFRS.
Under IFRS, companies must classify expenses by either nature or Under IFRS, companies must classify expenses by either nature or function. U.S. GAAP does not have that requirement, but the U.S. SEC function. U.S. GAAP does not have that requirement, but the U.S. SEC requires a functional presentation.requires a functional presentation.
IFRS identifies certain minimum items that should be presented on the IFRS identifies certain minimum items that should be presented on the income statement. U.S. GAAP has no minimum information income statement. U.S. GAAP has no minimum information requirements. However, the SEC rules have more rigorous presentation requirements. However, the SEC rules have more rigorous presentation requirements. requirements.
IFRS does not define key measures like income from operations. SEC IFRS does not define key measures like income from operations. SEC regulations define many key measures and provide requirements and regulations define many key measures and provide requirements and limitations on companies reporting nonlimitations on companies reporting non--U.S. GAAP/IFRS information.U.S. GAAP/IFRS information.
Slide 4-70
limitations on companies reporting nonlimitations on companies reporting non--U.S. GAAP/IFRS information.U.S. GAAP/IFRS information.
U.S. GAAP does not require companies to indicate the amount of net U.S. GAAP does not require companies to indicate the amount of net income attributable to nonincome attributable to non--controlling interest.controlling interest.
U.S. GAAP and IFRS follow the same presentation guidelines for U.S. GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standardmore narrowly. Both standard--setters have indicated a willingness to setters have indicated a willingness to develop a similar definition to be used in the joint project on financial develop a similar definition to be used in the joint project on financial statement presentation. statement presentation.
Both U.S. GAAP and IFRS have items that are recognized in equity as Both U.S. GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. U.S. GAAP part of comprehensive income but do not affect net income. U.S. GAAP provides three possible formats for presenting this information: single provides three possible formats for presenting this information: single income statement, combined income statement of comprehensive income statement, combined income statement of comprehensive income, in the statement of shareholders’ equity. Most companies that income, in the statement of shareholders’ equity. Most companies that follow U.S. GAAP present this information in the statement of follow U.S. GAAP present this information in the statement of shareholders’ equity. IFRS allows a separate statement of shareholders’ equity. IFRS allows a separate statement of comprehensive income or a combined statement. comprehensive income or a combined statement.
Slide 4-71
comprehensive income or a combined statement. comprehensive income or a combined statement.
Under IFRS, revaluation of property, plant, and equipment, and Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.more transactions affecting equity but not net income.
The terminology used in the IFRS literature is sometimes different than The terminology used in the IFRS literature is sometimes different than what is used in U.S. GAAP. what is used in U.S. GAAP.
Slide 4-72
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Slide 4-73
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