Chapter 4 Professor's presentation - Income statement and Related Item

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The Income Statement, Comprehensive Income, and Related Items :

The Income Statement, Comprehensive Income, and Related Items Professor: Farima Fakoor, MBA Course: Acctg 100A

Income from Continuing Operations :

Income from Continuing Operations 2 Revenues: Inflows of resources resulting from providing goods or services to customers . Expenses: Outflows of resources incurred in generating revenues . Gains and Losses Increases or decreases in equity from peripheral or incidental transactions of an entity . Income Tax Expense Because of its importance and size, income tax expense is a separate item.

Operating versus Non-operating Income:

Operating Income Non-operating Income Operating versus Non-operating Income Includes revenues and expenses directly related to the principal revenue-generating activities of the company Includes certain gains and losses and revenues and expenses related to peripheral or incidental activities of the company

Income Statement (Single-Step):

Income Statement (Single-Step) Expenses & Losses Revenues & Gains Proper Heading

Income Statement (Multiple-Step):

Income Statement (Multiple-Step) Non- operating Items Gross Profit Operating Expenses Proper Heading

U. S. GAAP vs. IFRS:

U. S. GAAP vs. IFRS Has no minimum requirements. SEC requires that expenses be classified by function. “Bottom line” called net income or net loss. Report extraordinary items separately. Specifies certain minimum information to be reported on the face of the income statement. Allows expenses classified by function or natural description. “Bottom line” called profit or loss. Prohibits reporting extraordinary items.

Earnings Quality:

Earnings Quality Earnings quality refers to the ability of reported earnings to predict a company’s future earnings. Transitory Earnings versus Permanent Earnings

Manipulating income and Income Smoothing:

Manipulating income and Income Smoothing Two ways to manipulate the income - Income Shifting -Income Statement Classification 8

Operating Income and Earnings Quality:

Operating Income and Earnings Quality 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 and Earnings Quality:

Nonoperating Income and Earnings Quality Gains and losses generated from the sale of 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?

Separately Reported Items:

Separately Reported Items Reported separately, net of taxes: Discontinued Operation and Extraordinary Items

Intraperiod Income Tax Allocation:

Intraperiod Income Tax Allocation Income Tax Expense must be associated with each component of income that causes it.

Discontinued Operations:

Discontinued Operations As part of the continuing process to converge U.S. GAAP and international standards, the FASB and IASB have been working together to develop a common definition and a common set of disclosures for discontinued operations. The proposed ASU defines a discontinued operation as a “component” that either (a) has been disposed of or ( b) is classified as held for sale, and represents one of the following: A separate major line of business or major geographical area of operations, Part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations , or A business that meets the criteria to be classified as held for sale on acquisition .

Extraordinary Items:

An extraordinary item is a material event or transaction that is both: Unusual in nature, and Infrequent in occurrence Extraordinary items are reported net of related taxes Extraordinary Items

U. S. GAAP vs. IFRS:

U. S. GAAP vs. IFRS Report extraordinary items separately in the income statement. The scarcity of extraordinary gains and losses reported in corporate income statements and the desire to converge U.S. and international accounting standards could guide the FASB to the elimination of the extraordinary item classification. Prohibits reporting extraordinary items in the income statement or notes.

Unusual or Infrequent Items:

Unusual or Infrequent Items Items that are material and are either unusual or infrequent— but not both —are included as separate items in continuing operations.

Accounting Changes:

Accounting Changes

Change in Accounting Principle:

Change in Accounting Principle Occurs when changing from one GAAP method to another GAAP method, for example, a change from LIFO to FIFO GAAP requires that most voluntary accounting changes be accounted for retrospectively by revising prior years’ financial statements. For mandated changes in accounting principles, the FASB often allows companies to choose to account for the change retrospectively or as a separately reported item below extraordinary items.

Change in Depreciation, Amortization, or Depletion Method:

Change in Depreciation, Amortization, or Depletion Method We account for a change in depreciation, amortization, or depletion method prospectively, almost exactly as we would any other change in estimate.

Change in Accounting Estimate:

Change in Accounting Estimate - Revision of a previous accounting estimate - Use new estimate in current and future periods - Includes changes in depreciation, amortization, and depletion methods

Earnings Per Share Disclosure:

Earnings Per Share Disclosure Report EPS data separately for: - Income or Loss from Continuing Operations - Separately Reported Items discontinued operations extraordinary Items - Net Income or Loss

Questions?:

Questions? 22

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