Chapter 4 The Income Statement and Comprehensive Income PDF

Chapter 4 The Income Statement and Comprehensive Income Haidan Li Income Statement Example McAllister’s Manufacturing Year Ended Income Statement December 31 ($ in millions, except per share data...

Chapter 4 The Income Statement and Comprehensive Income Haidan Li Income Statement Example McAllister’s Manufacturing Year Ended Income Statement December 31 ($ in millions, except per share data) 2021 2020 Income from Sales revenue $1,450.6 $1,380.0 Continuing Cost of goods sold 832.6 800.4 Operations Gross profit Operating expenses: 618.0 579.6 An income Selling expense General and administrative expense 123.5 147.8 110.5 139.1 statement for a Research and development expense 55.0 65.0 Restructuring costs 125.0 – hypothetical Total operating expenses 451.3 314.6 Operating income Other income (expense): 166.7 265.0 manufacturing Interest revenue Interest expense 12.4 (25.9) 11.1 (24.8) company that you Gain on sale of investments 18.0 19.0 Income from continuing operations before income taxes 171.2 270.3 can refer to as we Income tax expense Income from continuing operations 59.9 111.3 94.6 175.7 proceed through Discontinued Discontinued operations: the chapter. Operations Loss from operations of discontinued component (including gain on disposal in 2021 of $47) (7.6) (45.7) Income tax benefit 2.0 13.0 Loss on discontinued operations (5.6) (32.7) Net income $ 105.7 $ 143.0 Earnings per Earnings per common share—basic: Share Income from continuing operations $ 2.14 $ 3.38 Discontinued operations (0.11) (0.63) Net income $ 2.03 $ 2.75 Earnings per common share—diluted: Income from continuing operations $ 2.06 $ 3.25 Discontinued operations (0.10) (0.61) Net income $ 1.96 $ 2.64  Income from Continuing Operations Revenues Expenses Gains and Income Tax Losses Expense Inflows of Outflows of resources resources Increases or Because of its resulting from incurred in decreases in importance providing generating equity from and size, goods or revenues. peripheral or income tax services to incidental expense is a customers. transactions separate item. of an entity. Income from Continuing Operations McAllister’s Manufacturing Income Statement Year Ended December 31 ($ in millions, except per share data) 2021 2020 Income from Sales revenue $1,450.6 $1,380.0 Continuing Cost of goods sold 832.6 800.4 Operations Gross profit 618.0 579.6 Operating expenses: Selling 123.5 110.5 General and administrative 147.8 139.1 Research and development 55.0 65.0 Restructuring costs 125.0 – Total operating expenses 451.3 314.6 Operating income 166.7 265.0 Other income (expense): Interest income 12.4 11.1 Interest expense (25.9) (24.8) Gain on sale of investments 18.0 19.0 Income from continuing operations before income taxes 171.2 270.3 Income tax expense 59.9 94.6 Income from continuing operations 111.3 175.7  Income Statement (Multiple-Step) Proper MAXWELL GEAR CORPORATION Income Statement Heading For the Year Ended December 31, 2021 Gross Sales revenue $573,522 Cost of goods sold $302,371 Profit Gross profit 271,151 Operating expenses: Selling expense $47,341 Operating General and administrative expense 24,888 Research and development expense 16,300 Expenses Total operating expenses 88,529 Operating Income 182,622 Other income (expense): Interest revenue 5,500 Non- Gain on sale of investments 26,400 operating Interest expense (14,522) Total other income, net 17,378 Items Income before income taxes 200,000 Income tax expense 50,000 Net income $150,000  Income Statement (Single-Step) Proper Heading Revenues & Gains Expenses & Losses Operating versus Nonoperating Income Operating Nonoperating Income Income Includes revenues Includes certain and expenses gains and losses directly related to and revenues and the principal expenses related revenue- to peripheral or generating incidental activities of the activities of the company company  LO4-4 Discontinued Operations Discontinued Operations are reported separately, net of taxes, below Income from Continuing Operations Income from continuing operations before income taxes $1,000 Income tax expense (25%) 250 Income from continuing operations 750 Income from discontinued Discontinued operations,operations, net of $xx$200tax net(expense)/ of $50 tax expense benefit 150 Net income $900  Intraperiod Income Tax Allocation Income Tax Expense must be associated with each component of income that causes it. Show Income Tax Expense Report effects of Discontinued related to Income from Operations net of related income Continuing Operations. tax effect.  Discontinued Operations In 2014, the FASB issued an ASU that defines a discontinued operation as a “component” of an entity that has been sold, disposed of, or is considered held for sale, and that the disposal represents a strategic shift that has, or will have, a major effect on a company’s operations and financial results. A component is any part of the company that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.  Reporting Discontinued Operations Reporting for Components Sold 1. Income or loss from the component from 2. Gain or loss on the the beginning of the disposal of the reporting period to the component’s assets. disposal date. Reporting for Components Held For Sale 1. Income or loss from 2. An “impairment loss” the component from if the book value of the the beginning of the component is more reporting period to the than the fair value end of the reporting minus cost to sell. period. Earnings Quality Earnings quality refers to the ability of reported earnings to predict a company’s future earnings. Transitory Earnings versus Permanent Earnings  Operating Income and Earnings Quality Costs associated with management’s plans to materially change the scope of business Restructuring Costs operations; Recognized in the period the exit or disposal cost obligation actually is incurred Goodwill Impairment Involves asset impairment losses and Long-lived Asset or charges. Impairment Partial Income Statement – GameStop Corp  Nonoperating Income and Earnings Quality Gains and losses generated from the sale of investments often can significantly inflate or deflate current earnings. Example How should those As the stock market boom reached gains be interpreted its height late in the year 2000, in terms of their many companies recorded large relationship to gains from sale of investments future earnings? that had appreciated significantly Are they transitory in value. or permanent? Income Statement (in part) – Intel Corporation Income Smoothing and Classification Shifting “Most executives prefer to report earnings that follow a smooth, regular, upward path.” ~Ford S. Worthy, “Manipulating Profits: How It’s Done”, Fortune Two ways to manipulate income: 1. Income Smoothing 2. Income statement classification shifting  Non-GAAP Earnings  Companies are required to report earnings based on GAAP  Most companies voluntarily provide non-GAAP earnings, which exclude certain revenues and expenses – Examples: Restructuring costs, acquisition costs, write-downs of impaired assets, and stock-based compensation  Non-GAAP earnings are controversial since the expenses to exclude are at the discretion of management  The Sarbanes-Oxley Act requires reconciliation between non- GAAP earnings and earnings determined according to GAAP  Earnings per Share Disclosure One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis. Basic EPS Diluted EPS Reflects the potential dilution that could Net income less preferred dividends occur for companies that have certain Weighted-average number of securities outstanding that are convertible common shares outstanding for the into common shares, or stock options that period could create additional common shares if the options were exercised.  Earnings per Share Disclosure Report EPS data separately for: 1. Income or Loss from Continuing Operations 2. Discontinued Operations 3. Net Income or Loss  LO4-5 EPS Disclosures—Big Lots, Inc. Abbott Laboratories Statements of Earnings For the Year Ended December 31 (in part) ($ in millions, except per share amounts) 2016 2015 Income from continuing operations $ 1,063 $ 2,606 Income from discontinued operations, net of tax 337 1,817 Net income $ 1,400 $ 4,423 Earnings per common share—basic: Continuing operations $ 0.71 $ 1.73 Discontinued operations 0.23 1.21 Net income $ 0.94 $ 2.94 Earnings per common share—diluted: Continuing operations $ 0.71 $ 1.72 Discontinued operations 0.23 1.20 Net income $ 0.94 $ 2.92  Comprehensive Income  An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.  These gains and losses are reported as Other Comprehensive Income (OCI) or Loss  Comprehensive income is the total change in equity other than from transactions with owners. Comprehensive Net Other = + Comprehensive Income Income Income  Other Comprehensive Income Comprehensive income includes traditional net income as well as four additional gains and losses that change shareholders’ equity.  LO4-6 Flexibility in Reporting Information in the income statement and other comprehensive income items can be presented as: Single, continuous Two separate, but statement of comprehensive consecutive statements income Statement of Income Statement of comprehensive statement comprehensive income income  LO4-6 Comprehensive Income Presented as a Separate Statement ASTRONOVA, INC. Consolidated Statements of Comprehensive Income For the Years Ended January 31 ($ in thousands) 2017 2016 Net income $4,228 $4,525 Other comprehensive income, net of taxes Foreign currency translation adjustments (65) (269) Unrealized gain (loss) on securities available for sale (16) (7) Other comprehensive income (81) (276) Comprehensive income $4,147 $4,249  Accumulated Other Comprehensive Income In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity. ASTRONOVA, INC. Consolidated Balance Sheets (in part) For the Years ended January 31 ($ in thousands) 2017 2016 Shareholders’ equity: Common stock 492 483 Additional paid-in capital 47,524 45,675 Retained earnings 44,358 42,212 Treasury stock, at cost (20,781) (20,022) Accumulated other comprehensive income (1,056) (975) Total shareholders’ equity $70,537 $67,373  LO4-9 International Financial Reporting Standards U.S. GAAP IFRS Income Statement Presentation No minimum requirements. Require certain minimum information to be reported on the face of the income statement. SEC regulations require expenses be classified by Allow expenses to be classified either by function or function. by natural description. “Bottom line” of the income statement usually is called Description of the bottom line of the income statement either net income or net loss. is either profit or loss. Comprehensive Income Companies are allowed to report comprehensive Same as under U.S GAAP. Other comprehensive income in either a single statement of comprehensive income items are similar under both standards. income or in two separate, but consecutive However, an additional OCI item, changes in statements. revaluation surplus, is possible under IFRS. Accounting Changes Type of Accounting Change Definition Change in Accounting Change from one GAAP method Principle to another GAAP method Change in Accounting Revision of an estimate Estimate because of new information or new experience Change in Reporting Preparation of financial Entity statements for an accounting entity other than the entity that existed in the previous period  Change in Accounting Principle  Occurs when changing from one GAAP method to another GAAP method  GAAP requires that most voluntary accounting changes be accounted for retrospectively by revising prior years’ financial statements.  For mandated changes in accounting principles, the FASB often allows companies to choose to account for the change retrospectively or prospectively.  Change in Accounting Estimate Revision of a previous accounting estimate as new information comes to light Accounted prospectively: Use new estimate in current and future periods If the effect of the change is material, a disclosure note is needed to describe the change and its effect on both income and earnings per share Change in Depreciation, Amortization, or Depletion Method A change in depreciation, amortization, or depletion method is treated the same as a change in accounting estimate.  Correction of Accounting Errors Errors occur when transactions are either recorded incorrectly or not recorded at all. Errors Discovered in Reverse original erroneous journal entry and Same Year record the appropriate journal entry. Record a prior period adjustment to the beginning retained earnings balance in a Material Errors statement of shareholders’ equity. Discovered in Subsequent Year Previous years’ financial statements that are incorrect as a result of the error are retrospectively restated to reflect the correction.