income statement
DESCRIPTION
Income Statement. Two most common formats: Single-Step Format Multiple-Step Format. classify all revenues. then subtract all expenses. to arrive at net income. Net Sales$1,000,000 Rental Revenue $525,000 Total Revs$1,525,000. Cost of Goods Sold$725,000 - PowerPoint PPT PresentationTRANSCRIPT
Income Statement
Two most common formats:
Single-Step Format
Multiple-Step Format
Income Statement
Single-step format:
Earnings Per Share (Common) $0.605*
*assume 1,000,000 shares of common outstanding
Cost of Goods Sold $725,000Selling Exps $115,000Admin Exps $45,000Income Tax Expense $35,000
Total Exps $920,000
then subtract all expenses
Net Income $605,000
to arrive at net income.
Net Sales $1,000,000Rental Revenue $525,000
Total Revs $1,525,000
classify all revenues
Income Statement
Multiple-step format
• Compute Operating Income
• Add other income and gains.
- Operating Revenue – Operating Expenses
•Subtract other expenses and losses to arrive at net income.
Allows a better picture of whether operations provided sufficient net income, since income from operations is directly computed.
Multi-step Income Statement
Less Income Tax (30%) $99,600Net Income $232,400
Sales (Operating Revenue) $2,000,000Less COGS $1,150,000
Gross Margin $850,000Less Operating Expenses $350,000Less Administration Expenses $175,000
Operating Income $325,000
Operating Revenues –Operating Expenses
Other Revenues and Gains $55,000Less Other Expenses $48,000
Net Income (before tax) $332,000
Other Revenues –Other Expenses
Income StatementMost common general format
Salesminus COGSequals Gross Marginminus Selling Expensesminus Administrative and General Expensesequals Operating Incomeplus Other Revenues and Gainsplus Unusual Gainsminus Unusual Lossesequals Net Income Before Taxes, Disc. Operations, & Extraord. Items
minus Discontinued Operations (net of tax)minus Extraordinary Items (net of tax)plus/min Cumulative Effect of Change in Accounting Principle (net of tax)equals Net Income
Earnings Per Share
minus Income Taxesequals Net Income Before Disc. Operations & Extraord. Items (net of tax)
Note: from this point forward, all additions and subtractions need to be made in after-tax
dollars (i.e. net of tax).
Income Statement
Major income statement “highlights”
• Called “highlighting” because each of the following categories must be represented in its own line on the income statement.
- Discontinued Operations- Extraordinary Items- Unusual Gains and Losses- Changes in Accounting Principle- Changes in Estimates
Income Statement
Discontinued Operations
Gains or losses from
disposal of a segment of a business
are reported separately from the normal operating income of the parent.
This is reported net of tax since it comes after taxes have been subtracted.
Normal disposal of assets, partial segment disposal, phasing out a product line do not qualify for this treatment.
These are considered normal operating disposals and are reported as operating gains
and losses.
Income Statement
Extraordinary Items
Material, non-normal, non-recurring gains or losses.
The following cannot be considered extraordinary:
• Write down of receivables, inventory, intangible assets• Foreign currency exchange gains or losses• Effects of a labor strike• Adjustments of accruals on long-term contracts
Must meet two criteria:• Unusual in nature• Infrequent occurrence
• Major, unusual natural disasters• Terrorism (assuming it’s not frequent, like Israel)
Income Statement
Extraordinary Items
Material, non-normal, non-recurring gains or losses.
The following might be considered extraordinary:
Report net of tax
Must meet two criteria:• Unusual in nature• Infrequent occurrence
Income Statement
Unusual Gains and Losses
Items that are considered unusual but generally occur frequently and therefore cannot be called extraordinary.
• Restructuring charges• Layoffs• Plant Closings • Asset write-offs
The following might be considered unusual:
Note that these are not discontinued operations, because they do not pertain to an entire business segment.Report in before-tax
dollars (since this is highlighted before taxes
are deducted).
Income Statement
Changes in Accounting Principle
• If there is a change in GAAP • If the company changes its reporting choice for a particular item (LIFO for FIFO, for example)
Reported net of tax.
the retroactive cumulative (all prior years) effect of the change is reported as a separate item.
Income Statement
Changes in Accounting Principle
Example: Inventory was purchased in 2000:
1/10 100 units @ $4.001/25 400 units @ $5.002/10 200 units @ $6.00
Inventory sold (and method chosen):
Year 2000: 300 units (LIFO)Year 2001: 350 units (switch to FIFO)
The switch to FIFO requires us to report 2001 income under FIFO
and fix 2000 income as if it were reported under FIFO.
This is done using a cumulative adjustment on the new year’s income statement (2001).
Income StatementChanges in Accounting Principle
2000: 300 units (LIFO)2001: 350 units (switch to FIFO)
PurchasesSales
First, compute the 2000 adjustment for change in principle:
1/10/00 100 units @ $4.001/25/00 400 units @ $5.002/10/00 200 units @ $6.00
COGS under old system (LIFO): COGS under new system (FIFO):
100 x $4.00 $400200 x $5.00 $1000Total $1400
200 x $6.00 $1200100 x $5.00 $500Total $1700
If the tax rate is 30%, this results in a $210, net of tax, cumulative increase to income to be reported on the 2001 income statement.
The difference is a $300 reduction in 2000 COGS
Income StatementChanges in Accounting Principle
2000: 300 units (LIFO) (now FIFO)2001: 350 units (switch to FIFO)
PurchasesSales
Next, compute the 2001 COGS:
1/10/00 100 units @ $4.001/25/00 400 units @ $5.002/10/00 200 units @ $6.00
now 200 are left here
200 x $5.00 $1000150 x $6.00 $900Total $1900
Income StatementChanges in Accounting Principle
This will be reflected in the 2001 (current year’s) income statement as follows:
Sales $3,875COGS $1,900Gross Margin $1,975Selling Exps $350Admin Exps $200Operating Income $1,425Taxes Paid (30%) $427.50Net Income bef. Cumulative effect of acctg change $997.50Cumulative effect of accounting change (net of tax) $210Net Income $1207.50
Income Statement
Changes in Estimates
Covered in Chapter 23.Not retroactively applied.
Examples:
• Changes in bad debt allowance estimate• Changes in expected useful life for an asset
Income StatementEarnings Per Share
• Required to be reported in Income Statement
• Must be reported for discontinued operations, extraordinary items, and cumulative effect of accounting changes (see example, bottom of illustration 4-17 on pg. 148)
Net Income – Preferred DividendsWeighted Average # of Shares Outstanding
Income StatementRetained Earnings
RetainedEarnings
Revenues ExpensesDividends
Income StatementRetained Earnings
RetainedEarnings
Revenues –Expenses =Net Income
ExpensesDividends
Alternatively,
Income StatementStatement of Retained Earnings
Reconciles activities in the Retained Earnings account
Income StatementStatement of Retained Earnings
Reconciles activities in the Retained Earnings account
Beginning Balance $1,000,000
Income StatementStatement of Retained Earnings
Reconciles activities in the Retained Earnings account
Beginning Balance $1,000,000Correction for understatement of income error, prior year $100,000
Any prior year net income errors are adjusted directly to the Retained Earnings account.
Income StatementStatement of Retained Earnings
Reconciles activities in the Retained Earnings account
Beginning Balance $1,000,000Correction for understatement of income error, prior year $100,000Adjusted Beginning Balance $1,100,000Add: Net Income $450,000Less: Dividends Paid $350,000Ending Balance $1,200,000