Ch 3 Income Statement

Concepts

Multiple-Step Income Statement

An income statement format that separates operating and non-operating sections and includes gross profit and operating income. (Shows detailed performance in steps).

Example of Multiple-Step Income Statement

Includes sections for Sales, COGS, Gross Profit, Operating Expenses, Non-operating items (interest, gains/losses), and Net Income.

Single-Step Income Statement

An income statement that groups all revenues and gains together and all expenses and losses together. (Simpler format—no subtotals for operations).

Example of Single-Step Income Statement

Total Revenues: Sales + Interest + Dividends; Total Expenses: COGS + Expenses + Losses; Net Income = Total Revenues – Total Expenses.

Operating Items

Revenues and expenses from the primary business activities. (Core business stuff).

Example of Operating Items

Sales, Cost of Goods Sold, Selling expenses, General & Administrative expenses.

Non-Operating Items

Revenues and expenses from secondary or side activities. (Not part of core operations).

Example of Non-Operating Items

Dividend income, Interest income, Interest expense, Gain/loss on investments.

Unusual or Infrequent Items

Items not expected to recur and not part of normal operations. (One-time or rare events).

Example of Unusual or Infrequent Items

Casualty loss (e.g., storm damage), Asset impairments, Restructuring costs.

Discontinued Operations

Results from a separate business component that has been disposed of or classified as held for sale. (Shut down or sold business part).

Example of Discontinued Operations

Reporting separate loss from a division shut down and sold during the year, net of tax.

Earnings Per Share (EPS)

Net Income minus Preferred Dividends, divided by Weighted Average Shares. (How much profit per share).

Example of EPS

If Net Income is $100,000 and shares = 10,000, EPS = $10.00.

Other Comprehensive Income (OCI)

Gains/losses not included in net income, reported separately. (Not realized or part of regular income).

Example of OCI

Unrealized holding gains/losses on debt securities, Foreign currency translation adjustments.

Statement of Stockholders' Equity

Shows changes in stockholders’ equity accounts. (Tracks what owners' part of the company is worth over time).

Example of Stockholders' Equity Items

Paid-in capital, Retained earnings, Accumulated OCI.

Change in Accounting Estimate

Handled prospectively (current and future periods). (Don’t change past).

Example of Change in Estimate

Change in useful life of equipment or expected warranty costs.

Change in Accounting Principle

Usually requires retrospective application. (Apply to past and adjust opening balances).

Example of Change in Principle

Switching from FIFO to LIFO inventory method.

Error Correction

Corrected through prior period adjustment (after-tax) and restated financials. (Fixing past mistake).

Example of Error Correction

Understated depreciation from a prior year requires adjusting opening retained earnings.