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1、Intermediate Accounting 4 Examining the Income Statement Examining the Income StatementChapter 4Income StatementUsefulnessLimitationsQuality of EarningsFormat of the Income StatementReporting Irregular ItemsSpecial Reporting IssuesIntraperiod tax allocationEarnings per shareRetained earnings stateme
2、ntComprehensive incomeDiscontinued operationsExtraordinary itemsUnusual gains and lossesChanges in accounting principlesChanges in estimatesCorrections of errorsIncome Statement and Related InformationElementsSingle-stepMultiple-stepCondensed income statementsIncome StatementEvaluate past performanc
3、e.Predicting future performance.Help assess the risk or uncertainty of achieving future cash flows.Usefulness of the Income StatementLO 1 Understand the uses and limitations of an income statement.Income StatementCompanies omit items that cannot be measured reliably.Income is affected by the account
4、ing methods employed. Income measurement involves judgment.Limitations of the Income StatementLO 1 Understand the uses and limitations of an income statement.Income StatementCompanies have incentives to manage income to meet or beat Wall Street expectations, so thatthe market price of stock increase
5、s andthe value of stock options increase. LO 1 Understand the uses and limitations of an income statement.Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.Quality of EarningsElements of the Income Statement
6、LO 1 Understand the uses and limitations of an income statement.Revenues Inflows or other enhancements of assets or settlements of its liabilities that constitute the entitys ongoing major or central operations.SalesFee revenueInterest revenueDividend revenueRent revenueExamples of Revenue AccountsE
7、lements of the Income StatementLO 1 Understand the uses and limitations of an income statement.Expenses Outflows or other using-up of assets or incurrences of liabilities that constitute the entitys ongoing major or central operations.Cost of goods soldDepreciation expenseInterest expenseRent expens
8、eSalary expenseExamples of Expense AccountsElements of the Income StatementLO 1 Understand the uses and limitations of an income statement.Gains Increases in equity (net assets) from peripheral or incidental transactions.Losses - Decreases in equity (net assets) from peripheral or incidental transac
9、tions. Gains and losses can result fromsale of investments or plant assets, settlement of liabilities, write-offs of assets.Single-Step Income StatementLO 2 Prepare a single-step income statement.The single-step statement consists of just two groupings:RevenuesExpensesNet IncomeSingle- StepNo distin
10、ction between Operating and Non-operating categories.Multiple-Step Income StatementSeparates operating transactions from nonoperating transactions.Matches costs and expenses with related revenues. Highlights certain intermediate components of income that analysts use. LO 3 Prepare a multiple-step in
11、come statement.BackgroundMultiple-Step Income StatementLO 3 Prepare a multiple-step income statement.The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax Reporting Irregular ItemsLO 4 Explain how to report irregular items.Illustration 4
12、-5 Number of Irregular Items Reported in a Recent Year by 600 Large CompaniesCompanies are required to report irregular items in the financial statements so users can determine the long-run earning power of the company.Reporting Irregular ItemsIrregular items fall into six categoriesDiscontinued ope
13、rations.Extraordinary items.Unusual gains and losses.Changes in accounting principle.Changes in estimates.Corrections of errors.LO 4 Explain how to report irregular items.Reporting Irregular ItemsDiscontinued Operations occurs when,(a)company eliminates the results of operations and cash flows of a
14、component.there is no significant continuing involvement in that component. Amount reported “net of tax.”LO 4 Explain how to report irregular items.Reporting Discontinued OperationsExercise: McCarthy Corporation had after tax income from continuing operations of $55,000,000 in 2007. During 2007, it
15、disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in 2007. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Income from continuing operations$55,000,000Discontinued operations:Loss from operations, net of $135,000 tax315,000Loss on disposal, net of $81,000 tax189,000Net income$54,496,000Total loss on discontinued operations504,000LO 4 Explain how to report irregular items.Reporting
