Session 3

1. Accounting Assumptions and PrinciplesBalance Sheet Wrap-up The Complete Income Statement Separately Reported Items Session 3 Intermediate Accounting I - Spring 2013

2. The Balance Sheet • Book value does not equal market value • …but it does help determine market value • Major classifications Intermediate Accounting I - Spring 2013

3. Financial Position • Overview • Contents • Additional disclosure Intermediate Accounting I - Spring 2013

4. Balance Sheet Overview • Statement of financial position • B/S does not always portray FMV Intermediate Accounting I - Spring 2013

5. Balance Sheet Content • Tour of the balance sheet • Electronic Arts p. 114 • Consider Sepia Paint Co. p. 124 Intermediate Accounting I - Spring 2013

6. Additional Disclosures • Footnotes • Accounting Policies • Subsequent Events • Noteworthy Transactions • Management Discussion and Analysis (MD&A) • Management’s Responsibilities • Auditors’ Report • Compensation in the Proxy Statement Intermediate Accounting I - Spring 2013

7. The Complete Income Statement • Single or multiple step • Major components • Income from continuing operations • Gross margin • Operating income • Other income and expense • Separately reported items • Discontinued operations • Extraordinary items • Earnings per share • Basic • Diluted Intermediate Accounting I - Spring 2013

8. Earnings Quality Issues • Income shifting • One time gains and losses • Operating versus non-operating income • Specific topics • Restructuring costs—ASC 420-10-20 or FAS 146, when incurred • Transitory or routine • Investment gains and losses • Pro-forma reporting, reconciliation required Intermediate Accounting I - Spring 2013

9. Comprehensive Income • Net income • Other Comprehensive Income* • Unrealized gains & losses on available for sale securities • Translation gains and losses • Deferred gains & losses from derivatives • Post retirement benefit plan adjustments (*all net of tax) Intermediate Accounting I - Spring 2013

10. Comprehensive Income--Reporting • Flexible • Extension to the P&L (p.194) • Separate statement (p.195) • Often in footnotes Intermediate Accounting I - Spring 2013

11. Balance Sheet Presentation • Accumulated Other Comprehensive Income • Note that the “accumulated” net income is included in Retained Earnings (Astro-Med Inc. p. 196) Intermediate Accounting I - Spring 2013

12. Separately Reported Items • Discontinued Operations • Extraordinary Items • Mandated Changes in Accounting Principles Intermediate Accounting I - Spring 2013

13. Reporting Format Income from continuing operations before income taxes and extraordinary items Income tax expense Income from continuing operations before extraordinary items Discontinued operations, net of tax Extraordinary items, net of tax Net Income Intermediate Accounting I - Spring 2013

14. Intraperiod Income Tax Allocation • Associate tax on a pro-rata basis with continuing operations and separately reported items Intermediate Accounting I - Spring 2013

15. Discontinued Operations • What is an operation? • Component of an entity • Two key requirements • Operations and cash flows will be eliminated (generally this means separate internal reporting), and • No further significant involvement Intermediate Accounting I - Spring 2013

16. Reporting Discontinued Operations • Footnote disclosure, as appropriate • Sale before the end of the reporting period • Operating income and loss thru the disposal date • Gain or loss on disposal (clearly presented) • Held for sale (sale after the end of the reporting period) • Operating income and loss thru the end of the reporting period • Impairment loss (clearly presented) • B/S assets valued at lower of BV or FV less cost to sell • B/S assets reported separately • Additional gain or loss on sale reported when sold Intermediate Accounting I - Spring 2013

17. Held for Sale Definition • See ASC 360-10-45-9 or FAS 144 • Likely to be sold within a year Intermediate Accounting I - Spring 2013

18. Impairment on Held for Sale • Selling price versus FV less cost to sell • Footnote disclosure, as appropriate (p. 185) Intermediate Accounting I - Spring 2013

19. Extraordinary Items • Unusual and infrequent • Unusual or infrequent • Separate item in operating income • Footnote disclosure as appropriate Intermediate Accounting I - Spring 2013

20. Accounting Changes • Change in accounting principle • Change in estimate • Change in reporting entity • Correction of errors (not an accounting change) Intermediate Accounting I - Spring 2013

21. Change in Actg. Principle • Footnote disclosure, as necessary • Voluntary • Retrospective: apply historically • Journal entry in current year, impacts R/E • Mandated • FASB may allow voluntary treatment • Cumulative effect as Separately Reported Item Intermediate Accounting I - Spring 2013

22. Change in Estimate • Prospective • Footnote disclosure, if material • Includes depreciation with mandated footnote disclosure Intermediate Accounting I - Spring 2013

23. Change in Entity • Not comparative; therefore, restate prior F/S • Footnote disclosure, as appropriate Intermediate Accounting I - Spring 2013

24. Correction of Errors • If not material, just correct • If material • Prior period adjustment and restatement of prior financial statements • Adjust Retained earnings and Statement of R/E Intermediate Accounting I - Spring 2013

25. Earnings Per Share • Basic • Income to common shareholders / weighted average of common shares outstanding • Diluted • Adjusted income to common shareholders / weighted average of total common share outstanding • Disclose for continuing operations, discontinued operations and extraordinary items Intermediate Accounting I - Spring 2013