Week 1

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Chapter 4

Income Statement

Summarizes revenues and expenses, and gains and losses

Ends with the net income for a specific period

Multiple-step format—presents separately

Gross profit

Operating income

Income before taxes

Net income

The Income Statement

Single-step format

Totals all revenues and gains

Deducts total expenses and losses

The Income Statement—Continued

Multiple-Step Single-Step

Net Sales (Revenues)

Cost of Goods Sold (Cost of Sales)

Other Operating Revenue

Operating Expenses

Other Income or Expense

Basic Elements of the Income Statement

Represents revenue from the sale of principal goods or services sold to customers

Shown net of

Discounts

Returns

Allowances

Net Sales (Revenues)

The cost of goods that were sold to produce revenue

Cost of Goods Sold (Cost of Sales)

Retailer
	Beginning Inventory
+	Purchases
−	Ending Inventory
	Cost of Goods Sold

Manufacturer
	Beginning Inventory
+	Cost of Goods Manufactured
−	Ending Inventory
	Cost of Goods Sold

A service firm will not have cost of goods sold, but it will often have cost of services

Depends on the operations of the business

Examples

Lease revenue

Royalties

Other Operating Revenue

Consist of two types

Selling expenses

Result from a company’s effort to create sales

Advertising. Sales commissions, and Sales supplies used

Administrative expenses

Relate to the general administration of a company’s operation

Salaries, Insurance, and Bad debt expense

Operating Expenses

Secondary activities not directly related to operations

Dividend income. Interest income, Gains (losses) from sale of assets, and Interest expense

Other Income or Expense

Unusual or Infrequent Item Disclosed Separately

Shown with normal recurring revenues and expenses

If material, disclosed separately, before tax

Treatment for analysis

Included in primary analysis as they relate to operations

In supplementary analysis, it should be removed net after tax

Special Income Statement Items

Equity Earnings of Nonconsolidated Subsidiaries

The investor’s proportionate share of the investee’s net income

Does not represent cash flow to the investor

Cash dividends received represent cash flow

Analysis issues

Investor’s net income includes revenue of other entity

May distort ratios

Presented before tax; tax consequences typically immaterial

Special Income Statement Items—Continued

Income Taxes Related to Operations

Federal, state, and local taxes

Includes both paid and deferred taxes

Discontinued Operations

Reported net of income tax

Profitability analysis issues

Inadequate disclosure of associated assets

Lack of historical profit and loss information on the discontinued operations

Special Income Statement Items—Continued

Extraordinary Items

Unusual and infrequent

Reported net of income tax

Analysis issues

Exclude from primary analysis; it is not expected to recur

Include for supplementary analysis; this approach avoids disregarding extraordinary items

Special Income Statement Items —Continued

Change in Accounting Principles

Current GAAP requires retrospective approach, unless it is impracticable

Cumulative effect on prior years reported is reflected in beginning retained earnings in the year of change

If impracticable

Determine the difference to the opening balances in the accounts

Prior to current GAAP, changes were presented using the prospective method

Special Income Statement Items—Continued

Net Income—Noncontrolling Interest (prior to Dec. 31, 2009 it was called minority share of earnings)

Earnings of a partially-owned consolidated subsidiary that would accrue to the minority owners

Presented net-of-tax

Special Income Statement Items—Continued

Earnings divided by the number of shares of outstanding common stock

Earnings per Share

EPS =	Net income
	Outstanding shares of common stock

The accumulated undistributed earnings of the corporation reported on the balance sheet

Appropriated

Restricted by law, contract, or management decision

Not available for dividends

Does not represent cash or any other asset

Unappropriated

Available for dividends

Retained Earnings

Reported as part of the statement of stockholders’ equity or combined with the income statement

Reconciliation of Retained Earnings

	Beginning balance of retained earnings
+	Prior period adjustments (net of tax)
±	Cumulative effect of a change in accounting principle (net of tax)
=	Beginning balance as adjusted
+	Net income
–	Dividends
=	End-of-year balance of retained earnings

Dividends return profits to the owners of a corporation

Date of declaration

Creates liability and reduces retained earnings

Date of payment

Eliminates liability and reduces cash

Dividends

Issuing a percentage of outstanding stock as new shares to existing shareholders

Assuming a small distribution (less then 25%)

Removing the fair market value of the stock from retained earnings and transferring it to paid-in capital

If the stock dividend is material

The amount transferred to paid-in capital is determined by multiplying the par value by the number of additional shares

Total equity is unaffected by a stock dividend

Restate share quantities to reflect stock dividend activity

Stock Dividends

100,000 shares outstanding; $1 par; $5 market

10% stock dividend on 100,000 shares, issue 10,000 additional shares recorded at $5 per share

Stock Dividend—Example

100,000 shares outstanding; $1 par; $5 market

40% stock dividend on 100,000 shares, issue 40,000 additional shares recorded at $1 per share

Stock Dividend Example

2-for-1 split

Doubles the quantity of stock

Par or stated value is halved

No effect on retained earnings, additional paid-in capital, or capital stock accounts

Analysis issues

Restate share quantities to reflect split activity

Stock Splits

As per various state laws

Distributions to stockholders are acceptable as long as the firm has the ability to pay debts as they come due in the normal course of business

Distributions to stockholders are acceptable as long as the firm is solvent and the distributions do not exceed the fair value of the assets

Distributions consist of solvency and balance sheet test of liquidity and risk

Legality of Distributions to Shareholders

Foreign currency translation adjustments

Unrealized holding gains and losses on available-for-sale marketable securities

Changes to stockholders’ equity resulting from additional minimum pension liability adjustments

Unrealized gains and losses from derivative instruments

Comprehensive Income

	Net income
+	The period’s change in accumulated other comprehensive income
=	Comprehensive income

Required disclosures

Comprehensive income

Each category of other comprehensive income

Reclassification adjustments for each category of other comprehensive income

Tax effects for each category of other comprehensive income

Balances for each category of accumulated other comprehensive income

Comprehensive Income—Continued

Presentation

A single income statement reporting net income and comprehensive income, or

Report comprehensive income in a separate statement immediately following the statement of income

Analysis issues

Typically more volatile than net income

A better indication of long-run profitability

Comprehensive Income—Continued

Comprehensive Income— Combined with Income Statement

Comprehensive Income—Separate Statement

IFRS and U.S. GAAP for income statements are similar, with some presentation differences

IFRS has no required format of the income statement

IFRS classifies expenses based on their nature or function

IFRS equipment may be revalued which result in the adjustment of depreciation expenses

IFRS allows for alternative performance measures to be presented in income statement

Income Statement IFRS vs. GAAP

Net revenue$37,586

Cost of sales16,742

Gross margin20,844

Operating Expenses:

General & administrative5,458$

Research & development5,722

Restructuring charges710 11,890

Operating income8,954

Interest income (expense)488

Other gains (losses) (net)(1,756) (1,268)

Income before taxes7,686

Provision for taxes2,394

Net Income5,292$

Multiple-step Income Statement

For the Year Ended December 31, 2013

Net revenue37,586$

Interest income488

Other income-

38,074

Costs and Expenses:

Cost of sales16,742$

General & administrative5,458

Research & development5,722

Other losses1,756

Restructuring charges710 30,388

Income before taxes7,686

Provision for taxes2,394

Net income5,292$

Single-step Income Statement

For the Year Ended December 31, 2013

Sheet1

Multiple-step Income Statement
For the Year Ended December 31, 2013
Net revenue		$37,586
Cost of sales		16,742
Gross margin		20,844
Operating Expenses:
General & administrative	$ 5,458
Research & development	5,722
Restructuring charges	710	11,890
Operating income		8,954
Interest income (expense)	488
Other gains (losses) (net)	(1,756)	(1,268)
Income before taxes		7,686
Provision for taxes		2,394
Net Income		$ 5,292

Sheet1

Single-step Income Statement
For the Year Ended December 31, 2013
Net revenue		$ 37,586
Interest income		488
Other income		-
		38,074
Costs and Expenses:
Cost of sales	$ 16,742
General & administrative	5,458
Research & development	5,722
Other losses	1,756
Restructuring charges	710	30,388
Income before taxes		7,686
Provision for taxes		2,394
Net income		$ 5,292

BeforeEffect of dividendAfter

Common stock par value$1.00$1.00

Shares outstanding100,000 issue 10,000 shares110,000

Total par value$100,00010,000 $110,000

Additional paid-in capital750,000 40,000 790,000

Total paid-in capital850,000 900,000

Retained earnings1,000,000 (50,000) 950,000

Total stockholders' equity$1,850,000$1,850,000

10% stock dividend

Sheet1

		10% stock dividend
	Before	Effect of dividend	After
Common stock par value	$1.00		$1.00
Shares outstanding	100,000	issue 10,000 shares	110,000
Total par value	$100,000	10,000	$110,000
Additional paid-in capital	750,000	40,000	790,000
Total paid-in capital	850,000		900,000
Retained earnings	1,000,000	(50,000)	950,000
Total stockholders' equity	$1,850,000		$1,850,000

BeforeEffect of dividendAfter

Common stock par value$1.00$1.00

Shares outstanding100,000 issue 40,000 shares140,000

Total par value$100,00040,000 $140,000

Additional paid-in capital750,000 750,000

Total paid-in capital850,000 890,000

Retained earnings1,000,000 (40,000) 960,000

Total stockholders' equity$1,850,000$1,850,000

40% stock dividend

Sheet1

		40% stock dividend	After 30% stock dividend
	Before	Effect of dividend	After
Common stock par value	$1.00		$1.00
Shares outstanding	100,000	issue 40,000 shares	140,000
Total par value	$100,000	40,000	$140,000
Additional paid-in capital	750,000		750,000
Total paid-in capital	850,000		890,000
Retained earnings	1,000,000	(40,000)	960,000
Total stockholders' equity	$1,850,000		$1,850,000

Sales230,000$

Cost of goods sold140,000

Gross profit90,000

Operating expenses40,000

Operating income50,000

Other income4,000

Income before income taxes54,000

Income taxes20,000

Net income34,000

Other comprehensive income

Available-for-sale security adjustment, net of tax5,500

Minimum pension liability adjustment, net of tax3,500

Foreign currency transaction adjustment, net of tax(5,000)

Other comprehensive income4,000

Comprehensive income38,000$

Earnings per share (for net income only)2.80$

XYZ Corporation

Statement of Income and Comprehensive Income

For the Year Ended December 31, 2013

Sheet1

XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 2013
Sales	$ 230,000
Cost of goods sold	140,000
Gross profit	90,000
Operating expenses	40,000
Operating income	50,000
Other income	4,000
Income before income taxes	54,000
Income taxes	20,000
Net income	34,000
Other comprehensive income
Available-for-sale security adjustment, net of tax	5,500
Minimum pension liability adjustment, net of tax	3,500
Foreign currency transaction adjustment, net of tax	(5,000)
Other comprehensive income	4,000
Comprehensive income	$ 38,000
Earnings per share (for net income only)	$ 2.80

Net income34,000$

Other comprehensive income

Available-for-sale security adjustment, net of tax5,500

Minimum pension liability adjustment, net of tax3,500

Foreign currency transaction adjustment, net of tax(5,000)

Total other comprehensive income4,000

Comprehensive income38,000$

XYZ Corporation

Statement of Comprehensive Income

For the Year Ended December 31, 2013

Sheet1

XYZ Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 2013
Net income		$ 34,000
Other comprehensive income
Available-for-sale security adjustment, net of tax	5,500
Minimum pension liability adjustment, net of tax	3,500
Foreign currency transaction adjustment, net of tax	(5,000)
Total other comprehensive income		4,000
Comprehensive income		$ 38,000