Income Statement & Related Issues

1. Income Statement & Related Issues

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”

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

4. 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

5. Income Statement (Multiple-Step) Operations Other Special items

6. 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”

7. Reporting Unusual OR Infrequent Items • Some events are unusual orinfrequent, but not both. • For example: • restructuring charges. • gain or loss from the sale of assets. I wonder how I should report these items.

8. Reporting Unusual OR Infrequent Items I wonder how I should report these items. Psst! Why don’t you try reporting them in Income from Operations? NOT reported net of tax!

9. Extraordinary ItemsAPB Opinion No. 30 • Material in amount. • Gains or losses that are both unusual in nature and infrequent in occurrence. • Considering the “environment”

10. APB OPINION NO. 30 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 related taxes.

11. Extraordinary Items • 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.

12. Extraordinary ItemsExample 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?

13. Extraordinary ItemsExample Income Statement Presentation:

14. Reporting Accounting Changes • Change in estimates • Change in accounting principle • Change in reporting entity

15. 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.

16. Change in EstimatesExample Record depreciation expense of $4,200 for 19X8 and subsequent years.

17. 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.

18. Let’s move on to a few final topics.

19. Other Topics • Earnings Per Share. • Statement of Retained Earnings. • Prior Period Adjustments.

20. Earnings Per ShareAPB Opinion No. 15 Generally computed as follows: • Report per share data on: • Income before extraordinary items • Net income

21. Prior Period Adjustments • Corrections of errors from a previous period. • Appear on the Statement of Retained Earningsas an adjustment to beginning retained earnings. • Must show the adjustment net of income taxes.

22. 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.

23. Prior Period Adjustments Example To correct this entry, can we just reverse it? Why or why not?

24. We can debit Accumulated Depreciation since it is a permanent account. Prior Period Adjustments Example

25. Prior Period Adjustments Example We can’t credit Depreciation Expense since it was closed to Income Summary and then to Retained Earnings.

26. Prior Period Adjustments Example Remember to consider the tax effects: $25,000 × 30% = $7,500 taxes payable

27. Retained Earnings Statement Example

28. Whose Idea was this? OH NO! YOURS...

29. 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

30. 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

31. 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

32. 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

33. 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