Income Statement Overview
Income Statement definition: F/S that discloses a company’s performance over a period of time
Shows how profitable a company is over a year
Shows how portable a company is (how much money do they keep)
Two types of Income Statements:
Single Step Income Statement
2. Multi-Step Income Statement
Need to know from exams:
Put together income statement or trial balance
Make adjustments to accruals
Adjusting entries (when to recognize revenues)
Expenses are recognized when they are incurred
Revenue definition:
The Company’s gross amount of money’s earned or the amount of money that the company is entitled to.
This will be recognized as an increase to as sales made (increase assets) or the settlement of a liability (decrease in liability)
“Settlement of a Liability” → what does this mean?
Refers to the Unearned revenues account
further notes needed
Ex.
Debit: Cash ; Credit: Revenue
Debit: A/R ; Credit: Revenue
Expenses definition: the Company’s expenses will be reported if there is a decrease to net assets or an incurrence of liabilities
Assets - Liabilities
“Incurrence of liabilities” → Primary Operating Activities
Ex. Debit: Expense ; Credit: Cash
Sale of a Fixed Asset: Either results in a gain or loss
Gain or Sale on investments are reported in the Non-Operating
This is not money coming in from normal business activities
Gains & Losses definitions:
Gain: Increase in net assets other then from revenue
Losses: Decrease in net assets other than from expenses
Single Step Income Statement Overview and Breakdown:
How is it Classified:
Net Income + Other Comprehensive Income (OCI) = Total Comprehensive Income
The Total Comprehensive Income then brought over to the balance sheet and added to the Retained Earnings (Stockholder’s Equity) and can be paid out in the form of a dividend.
Single Step:
Total Revenue & Gains - Total Expenses & Losses = Net Income
Lumping all Revenue and expense items together; there is no operating income & expenses section
Revenue can be misleading under the Multi-step income statement
Multi-Step Income Statement Overview & Breakdown (Mental Map)
Step 1: Operating Section
Operating Line Items (Operating Revenues & other) :
Depreciation Expense
SG&A
Wages Expense
Rent Expense
Non-Operating (Misc. non-operating income & expense items):
Gains
Losses
Interest Income
Interest Expense
Step 2: Unusual & Infrequent Gains / Losses
Unusual & Infrequent gains or losses will be reported as a non-operating activity when calculating income from continuing operations
These get put in the Non-operating section
If the item is presented as unusual in occurrence or unusual in nature, it will be presented as a component of income from continuing operations
Income from Continuing Operations:
This has two sections to it → Operating and Non-Operating
Operating Expenses & Selling Expenses
Commissions Expenses and Total Selling Expenses
This gives you your Total Operating Expenses
Non-Operating & Other Items:
Interest revenues, Gain on sale of Investments, Interest Expense, Loss from lawsuit
Totaling this gives you your Total Non-Operating
Step 3: Selling vs General Administrative Expenses
Selling Expenses include:
Wages, Commissions, Advertising, Or any expense to build brand awareness
General Admin Expenses include:
Officer salaries, Legal fees, Accounting fees
Step 4: Additional Concepts
1. Freight-in is capitalized to inventory and included in COGS
Freight is transferring cost or shipping cost; the cost of
Freight in is the cost of receiving goods
Will be included in cost of goods sold
Inventory will be capitalized
2. Freight out is expensed as a selling expense
Cost of shipping goods to customer
Expenses as a selling expenses and put within the in the SG&A
Will be put in the Continuing Income Operating Section
3. Interest will always be included in the Non-Operating section
Trial Balance to Multi-Step Income Statement Notes
Go down the trial balance and but B/S to I/S next to the line items to help break down
Total Comprehensive Income
There are two questions the FAR exam usually focuses on
1. Where is something reported?
AKA → Which financial statement
2. How is something valued?
AKA → What is the number presented
Total Comprehensive Income definition: All Changes in Owner’s equity with the exception of investments & distributions by owners
Does not include: Owners contributions and Owner Distributions
Items NOT INCLUDED in Net Income calculation (but they are excluded from the Total Comprehensive Income calculation):
FUPIE:
Foreign currency translation gains & losses
These foreign currency translations (ex. from USD to BP) are reported as a gain or a loss.
Unrealized holiday gains or losses on available-for-sale securities
A Realized gain or loss is the profit from the sale of a security
An Unrealized gain or loss is a hypothetical gain or loss if the security was sold
Unrealized gains or losses from trading securities are reported in net income
Pension adjustments:
These sit in OCI / AOCI
If there is an adjustment made to a pension plan:
1. Gain or loss from change in funded status
2. Change in prior service cost
3. Net transition gain or losses
Instrument-Specific Credit Risk
Reported in OCI
Effective portion of cash flow hedges
Cash Flow Hedge:
Effective potion of cash flow hedge goes to OCI
Ineffective portion of cash flow hedge goes to Net Income
How to present Total Comprehensive Income
Option #1 for Separate Statements: Revenue - Expenses = Net Income
Net Income + Other Comprehensive Income = Total Comprehensive Income
Option #2 for Single Statements:
Creating 1 statements
OCI becomes 1 line item after Net Income
Discontinued Operations: How to Present in the Income Statement?
Discontinued Operations: A component that is help-for-sale or has been sold in the period
Key Terms to know:
1, Component
A Component under US GAAP can be defined by the following:
1. An Operating segment
A Reportable Segment
A Reportable Unit
A Subsidiary
A Group of Assets
2. Strategic Shift
Examples of Strategic Shift are:
1. Major lines of business
2. Major Investments in other organizations
3. Major geographical areas
3. Held-For-Sale:
→ There needs to be an active plan to sell the Component
1. Available to be used immediately upon receipt by buyer
2. Set forth a plan to actually sell the component
3. Set forth an active plan to locate a buyer
4. The organization is actively marketing its plan to sell
5. Sale of the component is considered “probable” or “likely” to occur
Discontinued Operations Steps:
→ These are steps are only applicable when it is in a Held-for-Sale state
Step 1. Check for impairments
Fair Value (less costs to sell) - Book Value = Impairment loss if results are negative
Recorded in the year it occurred
Step 2: Gain or Loss on Disposed Component
Proceeds from Sale (-) Net Book or Carrying Value
This will be reflected on the B/S
Step 3: Determine total impact for each Year
Combine all items:
1. Gain / Loss on disposal
2. Operating profit / loss
3. Impairment loss (if any)
Step 4: Net of Tax
Discontinued Operations Additional notes for Test:
Focus on the dates and what type of activity will impact the income statement each year
Foreign Currency Transactions:
If there is a change in the Spot Rate, the Gain or Loss would be reported on the I/S
There are 3 Stages / Dates in a Foreign Currency Transaction
1. Initial Transaction date (invoice) → Use Spot Rate
Invoice Amount (Currency you are buying the Product from) x Spot Rate
2. Financial Reporting Date → Spot Rate
A/P (Currency you are buying the Product from) x Spot Rate
3. Settlement Date (Cash) → Spot Rate
Gain or Loss on FX
Prior A/P Amount - New A/P Amount = Gain or Loss on FX
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