Chapter 4 The Income Statement and Statement of Cash Flows

1. Chapter 4 • The Income Statement and Statement of Cash Flows

2. Comprehensive income • Statement of Financial Accounting Standards No. 130 • Comprehensive income includes traditional net income and changes in equity from nonowner transactions • Examples of nonowner transactions: • Foreign currency translation adjustment, net of tax • Unrealized gains (losses) on investment securities, net of tax • Minimum pension liability adjustment, net of tax

3. Income from Continuing Operations Revenues Inflows of resources resulting from providing goods or services to customers. Expenses Outflows of resources incurred in generating revenues. Gains and Losses Increases or decreases in equity from peripheral or incidental transactions of an entity. Income Tax Expense Because of its importance and size, income tax expense is a separate item.

4. { Proper Heading Revenues & Gains { { Expenses & Losses Income Statement (Single-Step)

5. { Proper Heading { Gross Margin { Operating Expenses { Non- operating Items Income Statement (Multiple-Step)

6. Earnings Quality • Earnings quality refers to the ability of reported earnings to predict a company’s future. • The relevance of any historical-based financial statement hinges on its predictive value. • “Most managers prefer to report earnings that follow a smooth, regular, upward path.” • Two ways to manipulate income: • Income shifting Income statement classification

7. Separately Reported Items • Two types of events require separate reporting and disclosure if they are material in nature • Discontinued operations • Extraordinary items • Although a company has some flexibility in reporting income from continuing operations, the presentation order of these two items are mandated by GAAP • Exhibit on Page 182

8. Intraperiod Income Tax Allocation Income Tax Expense must be associated with each component of income that causes it. Show Income Tax Expense related to Income from Continuing Operations. Report effects of Discontinued Operations, Extraordinary Items, NET OF INCOME TAXES.

9. Discontinued Operations • Reports results related to sale or disposal of a component of an entity. • A component includes: • Reportable segments • Operating segments • Reporting units • Subsidiaries • Asset groups

10. Discontinued Operations • Report results of operations separately if two conditions are met: • The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations. • The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

11. Discontinued Operations • Results of operations include two items (reported net of tax): • The income or loss stream for the period from the identifiable discontinued operation. • The actual gain or loss from disposal of the component • or • an “impairment loss” (carrying value is greater than fair value minus cost to sell) if the component is held for resale.

12. Extraordinary Items • Gains or losses that are unusual in nature and • infrequent in occurrence • If material, must be reported separately, net of related taxes • Items that are material and are either unusual or infrequent—but not both—are included as a separate item in continuing operations.

13. Earnings Per Share Disclosure • Basic earning per share (EPS) = Income available to common shareholders/Weighted average number of common shares outstanding • Report EPS data separately for: • Income from Continuing Operations • Discontinued Operations • Extraordinary Items • Net Income

14. Accounting Changes • Chapter 21 • Refer to slides from Chapter 21

15. Statement of Cash Flows • Chapter 22 • Refer to slides from Chapter 22