Slide 1Discussion QuestionIncome StatementIncome StatementDiscussion QuestionsDiscussion QuestionIncome StatementEarnings Quality – Operating/NonoperatingClassificationDiscussion QuestionSingle-Step FormatMultiple-Step FormatMultiple-Step FormatMultiple-Step FormatE4-7E4-7E4-7 Single StepIncome Statement ClassificationsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Discontinued OperationsReporting Discontinued OperationsP&G’s Income StatementReporting Irregular ItemsReporting Extraordinary ItemsReporting Irregular ItemsReporting Irregular ItemsReporting Irregular ItemsSpecial Reporting IssuesIntraperiod Income Tax AllocationSpecial Reporting IssuesSpecial Reporting IssuesExample of Intraperiod Tax AllocationSlide 35E4-6BCHAPTER 4INCOME STATEMENT AND RELATED INFORMATIONSommers – ACCT 3311Discussion QuestionQ4-1 What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?Evaluate past performance.Help assess the risk or uncertainty of achieving future cash flows.Predicting future performance.UsefulnessIncome StatementLimitationsCompanies omit items that cannot be measured reliably.Income is affected by the accounting methods employed.Income measurement involves judgment.Income StatementDiscussion QuestionsQ4-3 Identify at least two situations in which important changes in value are not reported in the income statement.Discussion QuestionQ4-8 Why should caution be exercised in the use of the net income figure derived in an income statement?Companies have incentives to manage income to meet or beat Wall Street expectations, so thatmarket price of stock increases andvalue of stock options increase. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.Quality of EarningsIncome StatementEarnings Quality – Operating/NonoperatingOperating Income•Restructuring Costs – Costs associated with shutdown or relocation of facilities or downsizing of operations are recognized in the period incurred.•Goodwill Impairment and Long-lived Asset Impairment - Involves asset impairment losses or charges.Nonoperating Income•Gains and losses from the sale of operational assets and investments - Often can significantly inflate or deflate current earnings.Example: As the stock market boom reached its height late in the year 2000, many companies recorded large gains from sale of investments that had appreciated significantly in value. How should those gains be interpreted in terms of their relationship to future earnings? Are they transitory or permanent?Operating NonoperatingPermanentTransitoryWhere would the following items lie?•Sales revenue•Restructuring charges•Royalty income•Interest expense•Payment made for settlement of lawsuit•R&D expenseIncentives for disclosures that influence user classification?ClassificationDiscussion QuestionQ4-10 What is the major distinction (a) between revenues and gains and (b) between expenses and losses?RevenuesExpensesNet IncomeSingle- StepSingle- StepNo distinction between Operating and Non-operating categories.Single-Step Income StatementSingle-Step FormatSeparates operating transactions from nonoperating transactions.Matches costs and expenses with related revenues.Highlights certain intermediate components of income that analysts use. Multiple-Step Income StatementMultiple-Step Format1. Operating section 2. Nonoperating section3. Income tax4. Discontinued operations5. Extraordinary items6. Earnings per shareIntermediate Components of the Income StatementMultiple-Step FormatThe presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax Multiple-Step FormatE4-7The accountant of Weatherspoon Shoe Co. has compiled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2014.Rent revenue $29,000Interest expense 18,000Market appreciation on land above cost 31,000Salaries and wages expense (sales) 114,800Supplies (sales) 17,600Income tax 30,600Salaries and wages expense (administrative) 135,900Other administrative expenses 51,700Cost of goods sold 516,000Net sales 980,000Depreciation on plant assets (70% selling, 30% administrative) 65,000Cash dividends declared 16,000There were 20,000 shares of common stock outstanding during the year.Prepare a multiple-step income statement.E4-7E4-7 Single Step WEATHERSPOON SHOE CO.Income StatementFor the Year Ended December 31, 2014Revenues Net sales $ 980,000 Rent revenue 29,000 Total revenues 1,009,000 Expenses Cost of goods sold $516,000 Administrative expenses 207,100 Selling expenses 177,900 Interest expense 18,000 Total expenses 919,000 Income before income tax 90,000 Income tax 30,600Net income $ 59,400 Earnings per share ($59,400 ÷ 20,000) $2.97Income Statement ClassificationsIrregular items fall into six categories1. Discontinued operations.2. Extraordinary items.3. Unusual gains and losses.4. Changes in accounting principle.5. Changes in estimates.6. Corrections of errors.Reporting Irregular ItemsCompanies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.Illustration 4-6 Number of Unusual Items Reported in a Recent Year by 500 Large CompaniesReporting Irregular ItemsOccurs when,(a) company eliminates the results of operations and cash flows of a component.(b) there is no significant continuing involvement in that component. Amount reported “net of tax.”Discontinued OperationsReporting Irregular ItemsIllustration: KC Corporation had after tax income from continuing operations of $55,000,000 for the year. During the year, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 for the year. Assume a tax rate of 30%. Prepare a partial income statement for KC. Income from continuing operations $55,000,000Discontinued operations:Loss from operations, net of $135,000 tax 315,000Loss on disposal, net of $81,000 tax 189,000Net income $54,496,000Total loss on discontinued operations