Income Statement

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4-1

4

Income Statement
Usefulness



Predicting future performance.



4-2

Evaluate past performance.

Help assess the risk or uncertainty of
achieving future cash flows.

Income Statement
Limitations


Companies omit items that cannot be
measured reliably.





4-3

Income is affected by the accounting
methods employed.

Income measurement involves
judgment.

Income Statement
Quality of Earnings
Companies have incentives to manage income to meet or
beat Wall Street expectations, so that


market price of stock increases and



value of stock options increase.

Quality of earnings is reduced if earnings management

results in information that is less useful for predicting future earnings and cash flows.

4-4

Format of the Income Statement
Elements of the Income Statement
Revenues – Inflows or other enhancements of assets or
settlements of its liabilities that constitute the entity’s ongoing major or central operations.
Examples of Revenue Accounts




Dividend



Fee



Rent



4-5

Sales

Interest

Format of the Income Statement
Elements of the Income Statement
Expenses – Outflows or other using-up of assets or
incurrences of liabilities that constitute the entity’s ongoing major or central operations.
Examples of Expense Accounts




Rent



Depreciation



Salaries and wages



4-6

Cost of goods sold

Interest



Taxes

Format of the Income Statement
Elements of the Income Statement
Gains – Increases in equity (net assets) from peripheral or incidental transactions.
Losses - Decreases in equity (net assets) from peripheral or incidental transactions.
Gains and losses can result from




settlement of liabilities,



4-7

sale of investments or plant assets,

write-offs of assets.

Intermediate Components
Common for companies to present some or all of the
following sections and totals within the income statement.
1. Operating section
2. Nonoperating section

3. Income tax
4. Discontinued operations
5. Extraordinary items
6. Noncontrolling interest
7. Earnings per share
4-8

Format of the Income Statement
Single-Step Income
Statements
Revenues

Expenses

SingleStep

Net Income
No implication that one
type of revenue or
expense item has priority
over another.
4-9

Multiple-Step
CABRERA COMPANY
Income Statement
For The Year Ended December 31, 2014

1. Operating Section

2. Nonoperating
Section
3. Income tax
4-10

Reporting Various Income Items
Companies are required to report unusual and irregular items as part of net income so users can better determine the longrun earning power of the company. These income items fall into four general categories:

1. Unusual gains and losses.
2. Discontinued operations.
3. Extraordinary items.

4. Noncontrolling interest.

4-11

Reporting Various Income Items
Unusual Gains and Losses – unusual OR infrequent
The following items may need separate disclosure in the income statement.
1. Losses on the write-down or write-off of assets.

2. Gains or losses from exchange or translation of foreign
currencies.
3. Restructuring charges.
4. Other gains or losses from sale or abandonment of property, plant, or equipment used in the business.
5. Effects of a strike.
6. Adjustment of accruals on long-term contracts.
4-12

Reporting Various Income Items
Discontinued Operations
Occurs when,
(1) company eliminates the results of operations of a

component (not product) of the business, and
(2) there is no significant involvement in that component

after the disposal transaction.
Amounts reported “net of tax.”

4-13

Discontinued Operations
Intraperiod Tax Allocation
► The allocation of tax within a period.
► Helps users understand the impact of income taxes on

the various components of net income.
► Intraperiod tax allocation is...
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