Ch 3

income statement

shows the revenues, expenses, gains, and losses for a period of time

what accounts does the income statement consist of?

temporary (nominal) accounts

usefulness of the income statement

confirmatory value (regarding past operating activities)

predicting future performance

how does the income statement provide confirmatory value for past op. activities (usefulness)?

multiple periods are presented on the I/S for the user to review

how does the income statement provide basis for predicting future performance of a corporation (usefulness)?

you can predict the amount/timing/uncertainty of achieving future cash flows

limitations of the income statement

• mgmt. has flexibility in choosing accounting methods which affects reported numbers (ex. depr. methods, FIFO/LIFO, etc.)

• income measurement involves judgment (ex. ADA, BDE, depreciation)

what items can affect usefulness of the income statement?

• unusual charges/irregular items (ex. restructuring costs, write-downs, lower of cost or NRV adjustments, disc. ops, etc.)

• earnings mgmt. can impact quality of earnings (occurs when mgmt. tries to achieve a certain bottom line that may not reflect reality)

comprehensive income formula

net income (loss) + other comprehensive income (loss)

2 types of income statement presentation

multiple-step income statement format

single-step income statement format

multiple-step income statement format

• reports critical subtotals before computing income from continuing ops. & net income

• provides key performance measures and operating vs. non-op classification

• two subtotals: gross profit (margin) & op. income (income from ops.)

single-step income statement format

• reports all revenues/gains together and expenses/losses together

• simple in preparation + presentation, but lack of classification hinders usefulness (no priority of elements implied therefore the user has to decide which revs/exps. are most important to the company)

• no classification btwn op & non-op.

many companies prepare a condensed income statement that summarizes income statement expenses into one line, SG&A expenses. but now…

ASU No. 2024-03 requires more detailed disclosures of the following info:

• purchases of inv., employee compensation, depreciation, intangible asset amortization, depr./depletion/amortization related to oil/gas activities

(more details abt SG&A expenses required)

sections of a multi-step income statement

op. section

• GP, op. expenses, SG&A expenses, income from ops.

non-op. section

• other revs./gains, income b4 income taxes

income tax provision

net income & EPS

which sections of the multi-step income statement are pre-tax?

op & non-op section

how often is income tax expense prepared?

annually

advantage of multi-step format

separation of op. from non-op. helps predictive value

(adv of multi-step I/S; predictive value) reporting of gross profit & op. income provides a useful number for…

evaluating performance & assessing trends across periods and across companies

(adv of multi-step I/S; predictive value) highlighting the diff. btwn regular & irregular earnings helps users recognize that…

these activities will not necessarily continue at the same level

what is non-op for one company could be __ for another

operating

ex. interest revenue would be an important line item for a bank

companies include most items as part of NI. but, if the items are present and material, they must be individually highlighted with additional disclosures provided (to help users identify what’s permanent vs. transitory). what are these items?

1. unusual/infrequent gains (losses)

2. discontinued ops.

3. EPS

4. noncontrolling interest

material

determined by mgmt. to be large enough to make a difference to a financial statement user

(needs its own line item)

unusual/infrequent gains (losses)

material items that are unusual and/or infrequent

unusual

abnormal/unrelated to company’s typical activities

infrequent

not expected to recur in the foreseeable future (or occur frequently)

unusual/infrequent gains and losses examples

• restructuring charges

• losses from write-downs of receivables/inventory/PP&E/goodwill (including impairment, more infrequent)

• gains/losses on disposal of assets/liabilities

• losses due to natural disasters

how do you report unusual/infrequent gains and losses?

as a separate I/S line item or disclose in footnotes

typically in non-op. section, “other revs./gains”, or “other exps./losses”, which is part of continuing ops. if related to a company’s primary ops., it’s shown in operating section

continuing ops. includes..

op & non-op section

what is the purpose of highlighting the unusual/infrequent gains and losses separately in the I/S?

predictive value

ex. of how unusual gains (losses) might be presented on I/S (non-op. section)

gain on sale of investment

loss on writedown of goodwill

discontinued ops.

occur when a company sells or plans to sell a component or segment of their ops.

component/segment of company

involves ops. and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company

ex. a division, subsidiary, geographical area

can you generate a B/S for just a segment?

yes

what 2 conditions must both be met for discontinued ops. treatment?

• the ops. and CFs of the component have been (or will be) eliminated

• the elimination represents a strategic shift, having a major effect on the company’s ops. & financial results

when mgmt. commits to a plan to sell a component or segment, where will disc. ops. be reported?

in the I/S on the “held for sale” component, even if the component/segment has not sold by year-end

for discontinued ops., where must you report net-of-tax?

in a separate section of the I/S after income from continuing ops. but before net income

net-of-tax is AKA…

“below-the-line”

net of tax - intraperiod tax allocation

relating tax expense for the year to specific items to provide a more informative disclosure

net income is broken down into 2 components…

NI from continuing ops.

NI from discontinued ops.

diff. btwn net of tax and intraperiod tax allocation??

intraperiod tax allocation is the method & net of tax is the result

where would disc. ops go? :

op. section

non-op. section

income tax provision

net income & EPS

after income tax provision (income from cont. ops.) & before net income & EPS

ex. of disc. ops section

income (loss) from ops. of discontinued component, net of tax

gain (loss) on disposal of component, net of tax

intraperiod tax allocation

the tax effect of discontinued operations is not included in the “income tax expense” line item, but is accounted for within the discontinued ops. section of the income statement

if there is no discontinued ops. section, income from cont. ops would be called..

net income

if the company has decided to sell a component but still retains the component at the F/S date, how does that affect the B/S?

assets and liabilities of the component must be classified on the B/S separately from the rest of the company’s assets & liabilities

• report them at the lower of carrying value (BV) or selling price less cost to dispose of the segment

• no depreciation of assets of the component after it’s classified as held for sale (at the measurement date)

calculation to record unsold component on B/S

carrying value (BV)

or

selling price - cost to dispose segment

whichever is lower

lower of cost

use whichever number is lower

on the B/S, is there depreciation of assets of the component after it’s classified as held for sale (i.e. at measurement date)?

no

why is it important that a company reports their intent to sell a component?

comparability; so you can still see impact on the bottom line

if a company commits to sell the component AND disposes of the component within the same fiscal year, what will the company report?

two line items within discontinued operations:

• income or loss from operations of discontinued component

• gain or loss from disposal of discontinued component

any amounts reported within discontinued operations are reported…

net of tax

when a company sells a component, they should compare…

BV & what it was sold for

how to calculate BV of a component

component’s assets - component’s liabilities

if the decision to sell & the disposal date of a component occur in DIFFERENT fiscal years, to calculate the amts reported in yr. 1, the company must assess…

the FV of the component

(sale date & disposal date in diff yrs) if the FV of the component is less than the CV (BV) of the component, what will the company record in year 1? (BV > FV)

impairment loss

(sale date & disposal date in diff yrs) if the FV of the component is greater than the CV (BV) of the component, what will the company report in year 1? (BV < FV)

nothing. the gain will be recognized when the component is sold

is there ever an unrealized gain for selling a component?

no

diff. btwn yr 1 reporting if selling component in same yr of intent vs. selling in diff yr

same yr = gain or loss reported

diff yr = impairment loss if FV < BV

calculation of gain/loss of component using actual sale price

actual sale price - adjusted BV of comp.

is loss from the ops. of disc. components (revs-exps.) the same as impairment loss/loss from the sale/disposal?

no. loss from ops. is based on actual performance of the component, while impairment/loss from sale/disposal is based on the sale of the component.

impairment loss is AKA

write-down/write-off

do you ever report impairment/loss on sale of disc. component in the next yr

no

journal entry associated with impairment loss

DR impairment loss (I/S)

CR FV adjustment - component (B/S)

(pre-tax numbers)

what type of acct. is impairment loss

expense

DR ba;

what type of account is FV adjustment - component

contra asset

CR bal

if you record impairment loss and end up selling the component for less than expected the next yr., what should you do?

record loss from disposal, net of tax

earnings per share (EPS)

measures how much money the company generates for each share outstanding

indicates how productive the company has been with its capital

key number

why is EPS a key number?

b/c analysts forecast on a per share basis

where must EPS be disclosed?

the face of the I/S

the effect of disc. ops. on EPS must be presented…

separately

to show the impact of events that aren’t expected to occur on a regular basis

only subtract the preferred dividends once.

when calculating EPS (+effect of disc. ops?), how many times do you subtract preferred dividends?

once

what should you do with the impact of noncontrolling interest from net income when calculating EPS?

exclude it

there is pressure for businesses to…

manage earnings

EPS calculation formula

(net income* - preferred dividends ) / weighted avg. # of shares of common stock outstanding

*or income from cont. ops if there are disc. ops

is the weighted avg. # of shares of common stock outstanding the same as # of shares outstanding (on B/S)?

no

if the company has discontinued ops. during the yr., how does that impact the EPS calculation?

the calculation will start with “income from cont. ops” instead of NI in order to breakout disc. ops. separately

diff. btwn weighted avg. # of shares of common stock outstanding & # of shares of common stock outstanding

#of shares of common stock outstanding could be reduced by purch. of TS or issuance or shares

what must you calculate EPS for?

“income from cont. ops” as well as all items below the line

how do you calculate weighted avg. # of shares outstanding? 2 ways

• use BB shares outstanding + issuance (during yr) to get EB. multiply the BB & EB by the amt of time passed separately, then add them together.

• take BB shares outstanding & add (issuance of shares * time passed SINCE ISSUANCE. HOW LONG THEY’VE EXISTED)

do you use the yr end outstanding #of shares to calculate EPS? why or why not?

NO, b/c it doesn’t reflect the timing of when the capital was actually available

income per share from cont. ops. calculation

(income from cont. ops - preferred dividends) / weighted avg. # shares outstanding

loss per share on disc. ops calculation (if loss on disposal is BEFORE TAX)

[(loss on disposal * (1-tax%)) / weighted avg. # shares outstanding

EPS calculation (with loss on disc. ops)

income per share from cont. ops - loss per share on disc. segment

OR

[(income from cont. ops - loss on disc. segment, net of tax) - preferred dividends) / weighted avg. # shares outstanding]

DO NOTTT forget this when calculating EPS.

preferred dividends

a company that owns more than a 50% interest in another company must…

consolidate the financial results of the subsidiary in the income statement

the portion of a company that isn’t owned must be reflected on the income statement as…

an allocation of income to the noncontrolling interest

when do you have noncontrolling interest?

when there is a portion of another company that isn’t owned

where is allocation (of income to noncontrolling interest) presented on the I/S?

at the bottom, AFTER NET INCOME.

but BEFORE EPS.

consolidated financial statements can look __ if you don't make the noncontrolling interest adjustment.

overstated

NCI (noncontrolling interest) calculation

take NI & multiply it by what u don’t own in the subsidiary company

if there’s net income/loss attributed to noncontrolling interest, how is each reported in relation to NI?

SUBTRACT net income

ADD net loss

who has a consolidated I/S? parent or subsidiary?

parent

all I/S sections we could do

op. section

non-op section

income tax provision

disc. ops.

NI & EPS

how does allocation of NCI look on I/S?

net (income)loss attributable to noncontrolling interest

net income attributable to parent*

(NI - NCI attribution)

comprehensive income formula

net income (loss) - other comprehensive income (loss)

items recognized as “other comprehensive income” by FASB result in…

unrealized gains/losses that bypass the income statement but still affect stockholder’s equity through comprehensive income.

net income (loss) impacts __ within _

RE, SE

other comprehensive income (loss) affects __ within _

AOCI, SE

comprehensive income must be presented in the F/S in one of two ways:

• as a continuation of the I/S

• in a separate statement of comprehensive income

how would unrealized gains be reported in SCI?

unrealized holding gains on debt securities (net of tax)

statement of stockholder’s equity (SSE)

reports the changes in each component of SE during the yr

the BBs & EBs will agree to those reported in the equity section of the B/S