【Intermediate Accounting】Chapter 4 The Income Statement and The Statement Of Cash Flows

4 The Income Statement and The Statement Of Cash Flows Part A the income statement and comprehensive income

1. Income from Continuing Operations

·components：Revenue, Expenses(include Income Tax Expense), Gains, And Losses,

Exclude those related to discontinued operations

·Revenue, Expenses, Gains, And Losses

·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 vs Nonoperating Income

·Operating Income

·Revenues and expenses directly related to the primary revenue-generating activities of the company

·Example: For manufacturing company

Sales revenues for selling the productions it manufactured

Expenses related to this activity

·Non-operating income (Other Income)

·Relates to peripheral or incidental activities of the company

·Example: Interest revenue

Gain or loss from selling investments

Dividend revenue

Interest expense in nonoperating income (not for Banks )

·Income Statement Formats

·The Single-Step Format

·Advantage: Simplicity

·The Multiple-Step Format

·Advantage: By separating operating and non-operating items, it provides information that might be useful in analyzing trends

·用multiple的五百强比single的多五倍哟！

·GAAP vs IFRS

2. Earnings Quality

·the ability of reported earnings(income) to predict a company’s future earnings

·to enhance predictive value, analysts try to separate a company’s transitory earnings effects from its permanent earnings.

·Transitory earnings effects result from transactions or events that are not likely to occur again in the foreseeable future, or that are likely to have a different impact on earnings in the future.

·income from continuing operations 不完全等于permanent earnings ·Manupulating Income And Income Smoothing

·Two ways to manipulate income:

·Income shifting

·Income statement classification

·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.

·Nonperating Income And Earnings Quality

3. Separately reported items

·U.S. GAAP ：2 types

·Discontinued Operation

·Extraordinary Item

·IFRS 不允许financial statements里面report Extraordinary Item

·Intraperiod Income Tax Allocation

·Associates（allocates）income tax expense（or income tax benefit if there is a loss）with each major components of income that causes it

·将所得税费和引起它的主要收益项目联系起来

·分配到持续经营收益和三个单独报告项目中去

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

·Show Income Tax Expense related to Income from Continuing Operations.

·Report effects of Discontinued Operations net of related income tax effect.

·Discontinued Operations

·终止某项业务，将它卖出去

·The discontinued operation is a “component” that either:

·Has been disposed of

·Is classified as held for sale

·What Constitutes an Operation?

·Reporting Discontinued Operations

·when the component has been sold

·when the component is considered held for sale

·unusual or infrequent items

4. Accounting changes

·Change In Accounting Policy

·A change from one acceptable accounting policy to another

·Voluntary Changes In Accounting Policies 自发

·IFRS requires that voluntary changes in accounting policy be accounted for retrospectively by revising pri or years’ financial statements.

·Mandated Changes In Accounting Policies 要求的

·For mandated changes in accounting policies, companies are required to account for the change according to the requirements in that new or updated standard. If not specified, companies are required to account for the change retrospectively

·GAAP：Allowed to choose either to account for the mandated change retrospectively or to report separately in the income statement of the year of change the cumulative

effect on the income of previous years from having used the old method rather

than the new method.

·Disclosures Required

·required to report in a disclosure note :

·the nature and reason for the change

·the effect on current period and prior period of the change in each financial statements

item affected and on basic and diluted EPS

·Change In Depreciation Or Amortization Methods

·Change In Accounting Estimate

5. Correction Of Accounting Errors

·Prior Period Adjustments

6. Earnings Per Share Disclosures

·shows the amount of income earned by a company expressed on a per share basis ·diluted EPS: on the face amount of the income statement

= Income available to ordinary shareholders/

Weighted-average number of shares outstanding for the period

= (net income – dividends)/(weighted by timing outstanding)

·Report EPS data separately for:

1.Income (loss) from continuing operations

2.Income (loss) from discontinued operations

https://www.sodocs.net/doc/d55821274.html, Income (loss)

7. Comprehensive Income

·An expanded version of income that includes gains and losses that traditionally have not been included in income statements.

·Other Comprehensive Income

·Comprehensive income includes traditional net income as well as additional gains and losses that change shareholders’ equity.

https://www.sodocs.net/doc/d55821274.html, unrealized gains (losses) from investments (net of tax).

2.Gains and losses due to reviewing assumptions or market returns differing from

expectations and prior service cost from amending the postretirement benefit plan.

3.When a derivative designated as a hedging instrument for a cash flow hedge is adjusted

to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction.

4.Gains or losses from changes in foreign currency exchange rates. The amount could be

an addition to or reduction in shareholders’ equity. (This item is discussed elsewhere in your accounting curriculum).

·Flexibility In Reporting

·The information in the income statement and other comprehensive income items can be presented either:

1) in a single, continuous statement of comprehensive income or

2) in two separate, but consecutive statements, an income statement and a statement of comprehensive income

·GAAP Vs IFRS

·Accumulated Other Comprehensive Income

The Statement Of Cash Flow

- Purpose: provide information about the cash receipts and cash disbursement of an enterprise that occurred during a period

- Helps investors and creditors to assess：

- Future net cash flows

- Liquidity

- Long-term solvency.

- Required for each income statement period reported.

- Operating activities

- Inflows and outflows of cash related to transactions entering into the determination of net income

+ Sales to customers.

+ Interest and dividends received from investments

- Purchase of inventory.

- Salaries, wages, and other operating expenses.

- Interest on debt.

- Income taxes.

- Dividends paid.

- 2 Formats for Reporting Operating Activities

·Direct Method：Reports the cash effects of each operating activity

·The cash effect of each operating activity is reported directly in the statement.

·Indirect Method：Starts with accrual net income and converts to cash basis

·We arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.

- Investing activities

- involve the acquisition and sale of long-term assets used in the business and nonoperating investment assets

+ sale of long-lived assets used in the business.

+ sale of investment securities (shares and bonds).

+ collection of nontrade receivables.

+ interest or dividends received from investments.

- purchase of long-lived assets used in the business.

- purchase of investment securities (shares and bonds).

- loans to other entities.

- Financing activities

- Cash inflows and outflows from transactions with creditors and owners

+ sale of shares to owners.

+ borrowing from creditors through notes, loans, mortgages, and bonds.

- owners for the repurchase or reacquisition of shares previously sold.

- owners in the form of dividends or other distributions .

- creditors for the repayment of the principal amounts of debt.

- creditors for the payment of interest on debt

- Noncash Investing and Financing Activities

- Significant investing and financing transactions not involving cash also are reported.

- Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).

- GAAP vs IFRS

- Both U.S. GAAP and IFRS require a statement of cash flows and classify cash flows as operating, investing, or financing.