CHAPTER 4 THE INCOME STATEMENT AND RELATED INFORMATION Overview The purpose of the income statement is to summarize the profit generating activities that occurred during a particular reporting period Comprehensive income includes net income as well as a few gains and losses that are not part of net income and are considered other comprehensive income items instead The purpose of the statement of cash flows is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during the period This chapter has a twofold purpose 1 to consider important issues dealing with the content presentation and disclosure of net income and other components of comprehensive income and 2 to provide an overview of the statement of cash flows which is covered in depth in Chapter 21 Learning Objectives LO4 1 Discuss the importance of income from continuing operations and describe its components LO4 2 Describe earnings quality and how it is impacted by management practices to manipulate earnings LO4 3 Discuss the components of operating and nonoperating income and their relationship to earnings quality LO4 4 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions LO4 5 Define extraordinary items and describe the appropriate income statement presentation for these transactions LO4 6 Define earnings per share EPS and explain required disclosures of EPS for certain income statement components LO4 7 Explain the difference between net income and comprehensive income and how we report components of the difference LO4 8 Describe the purpose of the statement of cash flows LO4 9 Identify and describe the various classifications of cash flows presented in a statement of cash flows LO4 10 Discuss the primary differences between U S GAAP and IFRS with respect to the income statement and statement of cash flows SINGLE STEP INCOME STATEMENT advantage of the single step format is its simplicity MAXWELL GEAR CORPORATION Income Statement For the Year Ended December 31 2013 An Revenues and gains Sales Interest and dividends Gain on sale of investments Total revenues and gains Expenses and losses Cost of goods sold Office salaries Depreciation Miscellaneous Interest Total expenses and losses Income before income taxes Income tax expense Net income 573 522 26 400 5 500 605 422 302 371 47 341 24 888 16 300 14 522 405 422 200 000 80 000 120 000 MULTIPLE STEP INCOME STATEMENT An advantage of the multiple step format is that it separately reports operating and nonoperating activities MAXWELL GEAR CORPORATION Income Statement For the Year Ended December 31 2013 Sales revenue Cost of goods sold Gross profit Operating expenses Office salaries 47 341 Depreciation 24 888 Miscellaneous 16 300 Total operating expenses Operating income Other income expense Interest and dividend revenue 26 400 Gain on sale of investments 5 500 Interest expense 14 522 Total other income net Income before income taxes Income tax expense Net income 573 522 302 371 271 151 88 529 182 622 17 378 200 000 80 000 120 000 INTERNATIONAL FINANCIAL REPORTING STANDARDS Income Statement Presentation There are more similarities than differences between income statements prepared according to U S GAAP and those prepared applying international standards Some of the differences are International standards require certain minimum information to be reported on the face of the income statement U S GAAP has no minimum requirements International standards allow expenses to be classified either by function e g cost of goods sold general and administrative etc or by natural description e g salaries rent etc SEC regulations require that expenses be classified by function In the U S the bottom line of the income statement usually is called either net income or net loss The descriptive term for the bottom line of the income statement prepared according to international standards is either profit or loss As we discuss later we report extraordinary items separately in an income statement prepared according to U S GAAP International standards prohibit reporting extraordinary items OPERATING INCOME AND EARNINGS QUALITY Operating income could include some unusual items that may or may not continue in the future Income Statements JDS Uniphase Corporation Income Statements in part in millions Net revenue Cost of sales Gross profit Operating expenses Research and development Selling general and administrative Amortization of intangibles Impairment of goodwill Impairment of long lived assets Restructuring costs Total operating expenses Operating loss Years Ended July 3 June 27 2010 2009 1 363 9 1 283 3 816 8 796 7 547 1 486 6 174 9 167 1 380 9 27 8 17 7 601 3 54 2 399 0 27 0 741 7 13 2 38 5 1 386 5 899 9 NONOPERATING INCOME AND EARNINGS QUALITY Some nonoperating items have generated considerable discussion with respect to earnings quality notably gains and losses from the sale of investments Income Statements Intel Corporation Income Statements in part in millions Operating income Gains on investments net Interest and other net Income before taxes Years Ended December 30 2000 10 395 3 759 987 15 141 1999 9 767 883 578 11 228 SEPARATELY REPORTED ITEMS Discontinued operations and Extraordinary items Income from continuing operations before income taxes and extraordinary item Income tax expense Income from continuing operations before extraordinary item Discontinued operations net of xx in taxes Extraordinary items net of xx in taxes Net income XXX XX XXX XX XX XXX Their income tax effect is included in the separate presentation rather than as part of the amount reported as income tax expense DISCONTINUED OPERATION If a component of an entity has either been disposed of or classified as held for sale we report the results of its operations separately in discontinued operations DISCONTINUED OPERATIONS When the component has been sold When the component has been sold the income effects of a discontinued operation includes 1 Operating income or loss revenues expenses gains and losses of the component from the beginning of the reporting period to the disposal date 2 Gain or loss on disposal The Duluth Holding Company has several operating divisions In October 2013 management decided to sell one of its divisions that qualifies as a separate component according to generally accepted accounting principles The division was sold on December 18 2013 for a net selling price of 14 000 000