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Chapter 4

Chapter 4. The Income Statement and Related Information. 1. Big Picture. Quality of earnings Ability of reported earnings to predict future earnings permanent earnings transitory earnings Management of earnings shifting income between periods

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Chapter 4

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  1. Chapter 4 The Income Statement and Related Information

  2. 1. Big Picture • Quality of earnings • Ability of reported earnings to predict future earnings • permanent earnings • transitory earnings • Management of earnings • shifting income between periods • manipulating I/S classifications (e.g., restructuring charges) • reserves • pro forma reporting • All revenue and expense transactions include a change in an asset or liability account • How should those transactions be reported on I/S to best reflect the quality of earnings information users need?

  3. 1a. Big Picture • Two I/S approaches • Current operating approach • income should only reflect normal, current operations • non-current operating revenues, expenses, gains, and losses should go directly to RE • All inclusive approach • income should include all non-owner changes in net assets • What is GAAP?

  4. 1b. Big Picture • Comprehensive income • all changes in equity of an entity from transactions and other events from non-owner sources • includes net income and other items • How reported?

  5. 2. Income Statement Basics • Form of income statement • single-step • multi-step • Income from continuing operations • Special items

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

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

  8. 3. Continuing Operations • Purpose • Items included • operating income • includes: revenue, cost of good sold, operating expenses (selling & general and administrative expenses) • other income (expense) • sometimes called nonoperating section • includes: other revenue, gains, other expenses (interest expense), losses • income tax expense

  9. Income Statement (Lower portion)

  10. 4. Intraperiod Tax Allocation • Each section of the I/S m/b shown net of tax • Could be tax expense or tax benefit • Interperiod tax allocation complex topic • Examples

  11. 5. Discontinued Operations • Disposal of a component of an entity • Location on IS • Must disclose separately • income or loss from operating component from beginning of period • gain or loss on disposal of component’s assets • Sold v. Held for Sale • Items reported net of tax

  12. 6. Extraordinary Items • Material unusual and infrequent gains and losses • most meet both criteria • unusual in nature • infrequent in occurrence • if only meets one – goes in regular section • Location on I/S • Reported net of tax • Fairly rare items • Consider in particular circumstances • BE 4-5

  13. 7. Accounting Changes • Change in accounting principle • change from one GAAP to another GAAP • examples • accounting • Change in accounting estimate • revision of an estimate used in implementing an accounting principle • examples • accounting

  14. 7a. Accounting Changes • Change in reporting entity • current accounting entity differs from accounting entity in previous reporting period • Change in depreciation or depletion method • Change from unacceptable GAAP to acceptable GAAP

  15. 8. Prior Period Adjustments • Correction of a material mistake in net income in a prior year not discovered until current year • Only item that qualifies • correction of an error • Reported as an adjustment to the beginning balance of RE

  16. 9. EPS • Shown for each section of I/S • Complex topic • Basic formula NI - PS DivEPS = ——————— WAS

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