Income Statement

Income Statement

Chapter 4

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Chapter 4, Slide #2

The Income Statement

• Dated for a period of time– For the Year Ended...

• Multiple-step format– Gross profit– Operating income– Income before taxes– Net income

• Single-step format– Total of all revenues and gains– Less the total of all expenses and losses


Chapter 4, Slide #3

Multiple-Step Single Step

Net revenue $37,586

Cost of sales 16,742

Gross margin 20,844 Operating Expenses:

General & administrative 5,458$ Resaarch & development 5,722 Restructuring charges 710 11,890

Operating income 8,954 Interest income (expense) 488 Other gains (losses) (net) (1,756) (1,268)

Income before taxes 7,686 Provision for taxes 2,394

Net Income 5,292$

Multiple-Step CompanyIncome Statement

For the Year Ended December 31, 20XX

Net revenue 37,586$ Interest income 488 Other income -

38,074 Costs and Expenses:

Cost of sales 16,742$ General & administrative 5,458 Research & development 5,722 Other losses 1,756

Restructuring charges 710 30,388

Income before taxes 7,686 Provision for taxes 2,394

Net income 5,292$

Single-Step CompanyIncome Statement



Chapter 4, Slide #4

Basic Elements of the Income Statement

• Net Sales (Revenues)• Cost of Goods Sold (Cost of Sales)• Other Operating Revenue• Research and Development• Restructuring Charges• Impairment Charges• Operating Expenses• Other Income or Expense ( gains or losses)


Chapter 4, Slide #5

• Revenue from the sale of principal goods or services sold to customers

• Shown net of– Discounts– Returns– Allowances

Net Sales


Chapter 4, Slide #6

• The cost of goods that were sold to produce revenue (cost of services in a service company)

Retailer

Beginning Inventory

+ Purchases

– Ending Inventory

= Cost of Goods Sold

Manufacturer

Beginning Inventory

+ Cost of Goods Manufactured

– Ending Inventory

= Cost of Goods Sold

Cost of Goods Sold


Chapter 4, Slide #7

• Reflects the nature of the business• Examples

– Lease revenue– Royalty revenue– Finance charges– Commission revenue

Other Operating Revenue


Chapter 4, Slide #8

Operating Expenses

• Selling expenses– Result from the company’s effort to create sales– Examples

• Advertising• Sales commissions• Sales supplies used

• Administrative expenses– Relate to the general administration of the

company’s operation– Examples

• Salaries• Insurance• Bad debt expense


Chapter 4, Slide #9

Other Income or Expense

• Secondary activities not directly related to operations– Dividend income– Interest income– Gains (losses) from sale of assets– Interest expense


Chapter 4, Slide #10

Special Income Statement Items

• Unusual or Infrequent Items Disclosed Separately– Included with normal recurring revenues and

expenses– If material, disclosed separately, before income

taxes– Relate to operations– Treatment for analysis

• Primary analysis: include• Supplementary analysis: exclude



Special Income Statement Items (cont’d)

• Equity in Earnings of Nonconsolidated Subsidiaries– The investor’s proportional share of the investee’s

net income– Does not represent cash flow to the investor

• Cash dividends received represent cash flow

– Analysis issues:• Investor’s net income includes revenue of other entity• May distort ratios• Presented before tax; tax consequences typically

immaterial




• Income Taxes Related to Operations– Federal, state, and local– Includes both paid and deferred taxes

• Discontinued Operations– Reported net of income tax– Analysis issues:

• Inadequate disclosure of associated assets• Lack of historical profit and loss information on the

discontinued operations




• Extraordinary Items– Unusual and infrequent– Reported net of income tax– Analysis issues:

• Exclude from primary analysis• Include for supplementary analysis




• Cumulative Effect of a Change in Accounting Principle– For fiscal years beginning before 12/15/05

• Cumulative effect of the change shown net of tax on the income statement of the period in which change was made

• Earlier statements not restated to reflect application of the new principle

– Effective for fiscal years beginning after 12/15/05• All comparative statements are retrospectively restated to reflect

application of the new accounting principle• The cumulative effect on income of earlier years is shown as a

net-of-tax adjustment to the beginning Retained Earnings balance of the earliest period presented




• Net Income-Noncontrolling Interest (prior to Dec. 31,2009 is was called Minority Share of Earnings)– Earnings of a partially-owned consolidated

subsidiary that would accrue to the minority owners– Presentation may be either pre-tax or net-of-tax

• Earnings per ShareNet income ÷ Number of shares outstanding



Reconciliation of Retained Earnings

Beginning of year balance of retained earnings

+ Prior period adjustments (net of tax)

± Cumulative effect of a change in accounting principle

(net of tax)

= Beginning balance as adjusted

+ Net income

– Dividends

= End-of-year balance of retained earnings

Reported as part of the Statement of Stockholders’ Equity or combined with the Income Statement



Retained Earnings

• The accumulated undistributed earnings of the corporation reported on the balance sheet

• Appropriated– Restricted by law, contract, or management

decision– Not available for dividends

• Unappropriated– Available for dividends– Does not represent cash or any other asset



Stock Dividends

• Cash dividends– Date of declaration: create liability and reduce retained

earnings– Date of payment: reduce liability and cash

• Stock dividends– Small (less then 25%): capitalize the market value of the

stock– Material: capitalize the par value of the stock– Total equity is unaffected by a stock dividend– Analysis issues:

• Restate share quantities to reflect stock dividend activity



Stock Dividend Example

100,000 shares outstanding; $1 par; $5 market

B efore e ffec t o f d ividend ba lanc e a fte r e ffec t o f d ividend ba lanc e a fte rC om m on s toc k par va lue $1.00 $1.00 $1.00S hares ou ts tand ing 100,000 is s ue 10 ,000 s h 110,000 is s ue 40 ,000 s h 140,000 To ta l par va lue $100,000 10,000 $110,000 40,000 $140,000A dd it iona l pa id -in c ap ita l 750,000 40 ,000 790 ,000 750 ,000

To ta l pa id -in c ap ita l 850,000 900 ,000 890 ,000 R e ta ined earn ings 1,000,000 (50 ,000) 950 ,000 (40 ,000) 960 ,000

To ta l s toc k ho lders ' equ ity $1 ,850,000 $1,850,000 $1,850,000

10% s toc k d ividend 40% s toc k d ividend

10% stock dividend on 100,000 shares: issue 10,000 additional shares recorded at $5 per share

40% stock dividend on 100,000 shares: issue 40,000 additional shares recorded at $1 per share



Stock Splits

• 2-for-1 split– Doubles the quantity of stock– Par or stated value is halved

• No effect on retained earnings, additional paid-in capital, or capital stock accounts

• Analysis issues:– Restate share quantities to reflect split activity



Legality of Distributions to Shareholders

• Per various state laws– Distributions are acceptable as long as the firm has

the ability to pay debts as they come due in the normal course of business

– Distributions to stockholders are acceptable as long as the firm is solvent and the distributions do not exceed the fair value of the assets

– Distributions consist of solvency and balance sheet test of liquidity and risk



Comprehensive Income

Net income

+ The period’s change in accumulated other comprehensive income

= Comprehensive income

• Foreign currency translation adjustments• Unrealized holding gains and losses on available-for-sale marketable securities• Changes to stockholders’ equity resulting from additional minimum pension liability adjustments• Unrealized gains and losses from derivative instruments



Comprehensive Income (cont’d)

• Required disclosures– Comprehensive income– Other comprehensive income from each category– Reclassification adjustments for each category of

other comprehensive income– Tax effects for each category of other

comprehensive income– Balances for each category of other comprehensive

income



Comprehensive Income –Combined with Income Statement

Sales 230,000$ Cost of goods sold 140,000

Gross profit 90,000

Operating expenses 40,000

Operating income 50,000

Other income 4,000

Income before income taxes 54,000

Income taxes 20,000

Net income 34,000 Other comprehensive income

Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000)

Other comprehensive income 4,000

Comprehensive income 38,000$

Earnings per share (for net income only) 2.80$

XYZ CorporationStatement of Income and Comprehensive Income




Comprehensive Income – Separate Statement

Net income 34,000$ Other comprehensive income

Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000)

Total other comprehensive income 4,000

Comprehensive income 38,000$

XYZ CorporationStatement of Comprehensive Income





• Presentation– In a separate financial statement– Combined with the income statement– As part of the schedule of changes in stockholders’

equity



Comprehensive Income – As Part of the Statement of Stockholders’ Equity

Retained

Accumulated Other

Comprehensive

Total Earnings Income Amount Shares

Beginning Balance $180,000 $60,000 $10,000 $110,000 55,000

Net Income 34,000 34,000Available-for-sale security adjustment, net of tax 5,500 5,500Minimum pension liability adjustment, net of tax 3,500 3,500Foreign currency transaction adjustment, net of tax (5,000) (5,000)

Comprehensive income 38,000

Ending Balance $218,000 $94,000 $14,000 $110,000 55,000

XYZ CorporationStatement of Changes in Stockholders' Equity


Common Stock




• Analysis issues:– Typically more volatile than net income– A better indication of long-run profitability



Income Statement IFRS vs GAAP

• Income Statements are similar with some presentation differences-IFRS has no required format of the Income Statement.

-IFRS equipment may be revalued which has impact on depreciation expense-IFRS allows for alternative performance measures to be presented in Income Statement.


Income Statement

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