slide 4-1. slide 4-2 c h a p t e r 4 income statement and related information intermediate...

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C H A P T E RC H A P T E R 44

INCOME STATEMENT AND RELATED INCOME STATEMENT AND RELATED INFORMATIONINFORMATION

Intermediate AccountingIFRS Edition

Kieso, Weygandt, and Warfield

3

1.1. Understand the uses and limitations of an income statement.Understand the uses and limitations of an income statement.

2.2. Understand the content and format of the income statement. Understand the content and format of the income statement.

3.3. Prepare an income statement.Prepare an income statement.

4.4. Explain how to report items in the income statement.Explain how to report items in the income statement.

5.5. Identify where to report earnings per share information. Identify where to report earnings per share information.

6.6. Explain intraperiod tax allocation.Explain intraperiod tax allocation.

7.7. Understand the reporting of accounting changes and errors.Understand the reporting of accounting changes and errors.

8.8. Prepare a retained earnings statement.Prepare a retained earnings statement.

9.9. Explain how to report other comprehensive income.Explain how to report other comprehensive income.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4

ElementsElements

Minimum Minimum disclosuredisclosure

Intermediate Intermediate componentscomponents

IllustrationIllustration

Condensed Condensed income statementsincome statements

Income StatementIncome Statement Format of Income Format of Income StatementStatement

Reporting Within Reporting Within the Income the Income StatementStatement

Other Reporting Other Reporting IssuesIssues

UsefulnessUsefulness

LimitationsLimitations

Quality of Quality of EarningsEarnings

Gross profit Gross profit

Income from Income from operationsoperations

Income before Income before income taxincome tax

Net incomeNet income

Non-controlling Non-controlling interestsinterests

Earnings per shareEarnings per share

Discontinued Discontinued operationsoperations

Intraperiod tax Intraperiod tax allocationallocation

SummarySummary

Accounting Accounting changes and errors changes and errors

Retained earnings Retained earnings statementstatement

Comprehensive Comprehensive incomeincome

Changes in equity Changes in equity statementstatement

Income Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related Information

5

Evaluate past performance.Evaluate past performance.

Income StatementIncome StatementIncome StatementIncome Statement

LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.

Help assess the risk or uncertainty of Help assess the risk or uncertainty of

achieving future cash flows.achieving future cash flows.

Predicting future performance.Predicting future performance.

UsefulnessUsefulness

6

Companies omit items that cannot Companies omit items that cannot

be measured reliably.be measured reliably.


LimitationsLimitations


Income measurement involves Income measurement involves

judgment.judgment.

Income is affected by the accounting Income is affected by the accounting

methods employed. methods employed.

7

Companies have incentives to Companies have incentives to manage incomemanage income to meet to meet

or beat market expectations, so thator beat market expectations, so that

market price of stock increases andmarket price of stock increases and

value of management’s compensation increase. value of management’s compensation increase.



Quality of earningsQuality of earnings is reduced if earnings management is reduced if earnings management

results in information that is less useful for predicting results in information that is less useful for predicting

future earnings and cash flows.future earnings and cash flows.

Quality of EarningsQuality of Earnings

8

Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement


Income Income – Increases in economic benefits during the accounting – Increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or period in the form of inflows or enhancements of assets or

decreases of liabilities that result in increases in equity, other decreases of liabilities that result in increases in equity, other

than those relating to contributions from shareholders.than those relating to contributions from shareholders.

Elements of the Income StatementElements of the Income Statement

9


LO 2 Understand the content and format of the income statement.

Revenue AccountsRevenue Accounts


SalesSales

Fee revenueFee revenue

Interest revenueInterest revenue

Dividend revenueDividend revenue

Rent revenueRent revenue

IncomeIncome includes both revenues and gains. includes both revenues and gains.

RevenuesRevenues - ordinary activities of a company - ordinary activities of a company

GainsGains - may or may not arise from ordinary activities. - may or may not arise from ordinary activities.

Gain AccountsGain Accounts

Gains on the sale of long-term Gains on the sale of long-term assetsassets

Unrealized gains on available-Unrealized gains on available-for-sale securities.for-sale securities.

10


LO 1 Understand the uses and limitations of an income statement.

ExpensesExpenses – Decreases in economic benefits during the – Decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets accounting period in the form of outflows or depletions of assets

or incurrences of liabilities that result in decreases in equity, or incurrences of liabilities that result in decreases in equity,

other than those relating to distributions to shareholders.other than those relating to distributions to shareholders.

Cost of goods soldCost of goods sold

Depreciation expenseDepreciation expense

Interest expenseInterest expense

Examples of Expense AccountsExamples of Expense Accounts

Elements of the Income Statement

Rent expenseRent expense

Salary expenseSalary expense

11


LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.

Expense AccountsExpense Accounts


Cost of goods soldCost of goods sold

Depreciation expenseDepreciation expense

Interest expenseInterest expense

Rent expenseRent expense

Salary expenseSalary expense

ExpensesExpenses includes both expenses and losses. includes both expenses and losses.

ExpensesExpenses - ordinary activities of a company - ordinary activities of a company

LossesLosses - may or may not arise from ordinary activities. - may or may not arise from ordinary activities.

Loss AccountsLoss Accounts

Losses on restructuring chargesLosses on restructuring charges

Losses on to sale of long-term Losses on to sale of long-term assetsassets

Unrealized losses on available-Unrealized losses on available-for-sale securities.for-sale securities.

12



IFRS requires, IFRS requires, at a minimumat a minimum, the following be presented on , the following be presented on

the income statement.the income statement.

LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.

13


Intermediate Intermediate ComponentsComponents

Common for Common for

companies to companies to

present some or all present some or all

of these sections of these sections

and totals within the and totals within the

income statement.income statement.

Illustration 4-1Income Statement Format LO 2LO 2

14


FormatFormatFormatFormat

LO 3LO 3Illustration 4-2Income Statement

Includes all of the Includes all of the

major items in the list major items in the list

above, except for above, except for

discontinued discontinued

operations.operations.

15


LO 3 Prepare an income statement.LO 3 Prepare an income statement.

CondensedCondensed

More More

representative representative

of the type of the type

found in found in

practice.practice.

Illustration 4-3Condensed Income Statement

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Reporting Within the Income StatementReporting Within the Income StatementReporting Within the Income StatementReporting Within the Income Statement

Gross ProfitGross Profit

LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.

Computed by deducting cost of goods sold from net sales Computed by deducting cost of goods sold from net sales

revenue. revenue.

Disclosure of net sales revenue is useful. Disclosure of net sales revenue is useful.

Unusual or incidental revenue is disclosed in other income Unusual or incidental revenue is disclosed in other income

and expense. and expense.

Analysts can more easily understand and assess trends in Analysts can more easily understand and assess trends in

revenue from continuing operations.revenue from continuing operations.

17


Income from OperationsIncome from Operations


Determined by deducting selling and administrative Determined by deducting selling and administrative

expenses as well as other income and expense from gross expenses as well as other income and expense from gross

profit. profit.

Highlights items that affect regular business activities. Highlights items that affect regular business activities.

Used to predict the amount, timing, and uncertainty of Used to predict the amount, timing, and uncertainty of

future cash flows.future cash flows.

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Income from OperationsIncome from Operations


Reported byReported by

Nature, orNature, or

FunctionFunction

Expense ClassificationExpense Classification

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Illustration:Illustration: Assume that the accounting firm of Telaris Co. Assume that the accounting firm of Telaris Co.

provides audit, tax, and consulting services. It has the provides audit, tax, and consulting services. It has the

following revenues and expenses.following revenues and expenses.

Expense ClassificationExpense Classification

20



Expense Classification (Expense Classification (NatureNature-of-Expense -of-Expense Approach)Approach)

Illustration 4-5Illustration 4-5

21



Expense Classification (Expense Classification (FunctionFunction-of-Expense -of-Expense Approach)Approach)


The function-of-expense method is generally used in practice although many The function-of-expense method is generally used in practice although many

companies believe both approaches have merit.companies believe both approaches have merit.

22

Illustration 4-7Illustration 4-7 Number of Unusual Items Number of Unusual Items Reported in a Recent Year Reported in a Recent Year by 600 Large Companiesby 600 Large Companies



Gains and LossesGains and Losses

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IASBIASB takes the position that both takes the position that both

revenues and expenses andrevenues and expenses and

other income and expense other income and expense

should be reported as part of income from operations.should be reported as part of income from operations.

Companies can provide additional line items, headings, and subtotals when Companies can provide additional line items, headings, and subtotals when

such presentation is relevant to an understanding of the entity’s financial such presentation is relevant to an understanding of the entity’s financial

performance.performance.

24




Additional items that may need disclosure: Additional items that may need disclosure:

Losses on write-downs of inventories to net realizable value or of Losses on write-downs of inventories to net realizable value or of

property, plant, and equipment to recoverable amount, as well as property, plant, and equipment to recoverable amount, as well as

reversals of such write-downs.reversals of such write-downs.

Losses on restructurings of the activities and reversals of any Losses on restructurings of the activities and reversals of any

provisions for the costs of restructuring.provisions for the costs of restructuring.

Gains or losses on the disposal of items of property, plant, and, Gains or losses on the disposal of items of property, plant, and,

equipment or investments.equipment or investments.

Litigation settlements.Litigation settlements.

Other reversals of liabilities.Other reversals of liabilities.

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Income before Income TaxIncome before Income Tax


Financing costs must be reported on the income statement.Financing costs must be reported on the income statement.

Illustration 4-8

26


Net IncomeNet Income


Represents the income after Represents the income after allall

revenues and revenues and

expenses expenses

for the period are considered. for the period are considered.

Viewed by many as the most important measure of a Viewed by many as the most important measure of a

company’s success or failure for a given period of time.company’s success or failure for a given period of time.

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Allocation to Non-Controlling InterestAllocation to Non-Controlling Interest


If a company prepares a consolidated income statement that If a company prepares a consolidated income statement that

includes a partially own subsidiary. IFRS requires that net income includes a partially own subsidiary. IFRS requires that net income

of the subsidiary be allocated to the controlling and non-of the subsidiary be allocated to the controlling and non-

controlling interest. This allocation is reported at the bottom of the controlling interest. This allocation is reported at the bottom of the

income statement after net income. income statement after net income. Illustration 4-9

(amounts given)

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€€800,000800,000

100,000100,000

120,000120,000

90,00090,000

- 220,000- 220,000

- 500,000- 500,000

200,000200,000


BE4-3:BE4-3: Presented below is some financial information related to Presented below is some financial information related to Volaire Group. Compute the following:Volaire Group. Compute the following:


Revenues Revenues €€800,000800,000

Income from continuing operations Income from continuing operations 100,000100,000

Comprehensive income Comprehensive income 120,000120,000

Net income Net income 90,00090,000

Income from operations Income from operations 220,000220,000

Selling and administrative expenses Selling and administrative expenses 500,000500,000

Income before income tax Income before income tax 200,000200,000

Other Income Other Income and Expenseand Expense

€€80,00080,000Solution on notes page

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€€800,000800,000

100,000100,000

120,000120,000

90,00090,000

220,000220,000

500,000500,000

- 200,000- 200,000

€€20,00020,000










Financing Financing CostsCosts

Solution on notes page


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€€100,000100,000

€€800,000800,000

- 100,000- 100,000

120,000120,000

90,00090,000

220,000220,000

500,000500,000

200,000200,000










Income TaxIncome Tax



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- - €€10,00010,000

€€800,000800,000

100,000100,000

120,000120,000

- 90,000- 90,000

220,000220,000

500,000500,000

200,000200,000










Discontinued Discontinued OperationsOperations



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€€30,00030,000

€€800,000800,000

100,000100,000

120,000120,000

- 90,000- 90,000

220,000220,000

500,000500,000

200,000200,000










Other Other Comprehensive Comprehensive

IncomeIncome



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Important business indicator.Important business indicator.

Measures the dollars earned by each ordinary share.Measures the dollars earned by each ordinary share.

Must be disclosed on the income statement.Must be disclosed on the income statement.

LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.

Net income - Preference dividends Net income - Preference dividends

Weighted average of ordinary shares outstandingWeighted average of ordinary shares outstanding

Earnings Per ShareEarnings Per Share


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Earnings Per Share (BE4-10): Earnings Per Share (BE4-10): In 2010, Hollis Corporation In 2010, Hollis Corporation

reported net income of $1,000,000. It declared and paid reported net income of $1,000,000. It declared and paid

preference share dividends of $250,000. During 2010, Hollis had preference share dividends of $250,000. During 2010, Hollis had

a weighted average of 190,000 ordinary shares outstanding. a weighted average of 190,000 ordinary shares outstanding.

Compute Hollis’s 2010 earnings per share.Compute Hollis’s 2010 earnings per share.

- $250,000- $250,000$1,000,000$1,000,000

190,000190,000= $3.95$3.95 per share per share


Net income - Preference dividends Net income - Preference dividends

Weighted average number of ordinary sharesWeighted average number of ordinary shares


35 LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.

Discontinued OperationsDiscontinued Operations


A component of an entity that either has been disposed of, or is A component of an entity that either has been disposed of, or is

classified as held-for-sale, and:classified as held-for-sale, and:

1.1. Represents a major line of business or geographical area of Represents a major line of business or geographical area of

operations, oroperations, or

2.2. Is part of a single, co-coordinated plan to dispose of a major Is part of a single, co-coordinated plan to dispose of a major

line of business or geographical area of operations, orline of business or geographical area of operations, or

3.3. Is a subsidiary acquired exclusively with a view to resell. Is a subsidiary acquired exclusively with a view to resell.

36 LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.

Discontinued OperationsDiscontinued Operations


Companies report as discontinued operations Companies report as discontinued operations

1.1. (in a separate income statement category) the gain or loss (in a separate income statement category) the gain or loss

from disposal of a component of a business. from disposal of a component of a business.

2.2. The results of operations of a component that has been or The results of operations of a component that has been or

will be disposed of separately from continuing operations. will be disposed of separately from continuing operations.

3.3. The effects of discontinued operations net of tax, as a The effects of discontinued operations net of tax, as a

separate category after continuing operations.separate category after continuing operations.

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Total loss on discontinued operations

800,000

Illustration: Multiplex Products, a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost $300,000 (net of tax). Multiplex sold the division at the end of the year at a loss of $500,000 (net of tax).

Income from continuing operations

$20,000,000Discontinued operations:

Loss from operations, net of tax

300,000Loss on disposal, net of tax

500,000Net income

$19,200,000 LO 5 Identify where to report earnings per share information.


38

A company that A company that

reports a reports a

discontinued discontinued

operation must operation must

report per share report per share

amounts for the amounts for the

line item either on line item either on

the face of the the face of the

income statement income statement

or in the notes to or in the notes to

the financial the financial

statements.statements.




39

Relates the income tax expense to the specific items that give Relates the income tax expense to the specific items that give

rise to the amount of the tax expense.rise to the amount of the tax expense.

On the income statement, income tax is allocated to:On the income statement, income tax is allocated to:

(1)(1) Income from continuing operations before taxIncome from continuing operations before tax

(2)(2) Discontinued operationsDiscontinued operations

LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.

Intraperiod Tax AllocationIntraperiod Tax Allocation


““let the tax follow the incomelet the tax follow the income””

40

Illustration:Illustration: Schindler Co. has income before income tax of Schindler Co. has income before income tax of

$250,000. It has a $250,000. It has a gaingain of $100,000 from a discontinued of $100,000 from a discontinued

operation. Assuming a 30 percent income tax rate, Schindler operation. Assuming a 30 percent income tax rate, Schindler

presents the following information on the income statement.presents the following information on the income statement.




Illustration 4-13

41

Illustration:Illustration: Schindler Co. has income before income tax of Schindler Co. has income before income tax of

$250,000. It has a $250,000. It has a lossloss of $100,000 from a discontinued of $100,000 from a discontinued

operation. Assuming a 30 percent income tax rate, Schindler operation. Assuming a 30 percent income tax rate, Schindler

presents the following information on the income statement.presents the following information on the income statement.




Illustration 4-14

42

SummarySummary



43



SummarySummary

44

Different Income ConceptsDifferent Income Concepts



Users and Users and

preparers look at preparers look at

more than just more than just

the bottom linethe bottom line

income number, income number,

which supports which supports

the IFRS the IFRS

requirement to requirement to

provide subtotals provide subtotals

within the income within the income

statement.statement.

45

Company adopts a different accounting principle.Company adopts a different accounting principle.

Retrospective adjustment.Retrospective adjustment.

Cumulative effect adjustment to beginning retained earnings.Cumulative effect adjustment to beginning retained earnings.

Approach preserves comparability.Approach preserves comparability.

Examples include:Examples include:

Change from FIFO to average cost.Change from FIFO to average cost.

Change from the percentage-of-completion to the Change from the percentage-of-completion to the

completed-contract method.completed-contract method.

Other Reporting IssuesOther Reporting IssuesOther Reporting IssuesOther Reporting Issues

LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.

Accounting Changes and ErrorsAccounting Changes and Errors

Changes in Accounting PrincipleChanges in Accounting Principle

46

Change in Accounting Principle:Change in Accounting Principle: Gaubert Inc. decided in Gaubert Inc. decided in March 2011 to change from FIFO to weighted-average inventory March 2011 to change from FIFO to weighted-average inventory pricing. Gaubert’s income before taxes, using the new weighted-pricing. Gaubert’s income before taxes, using the new weighted-average method in 2011, is $30,000. average method in 2011, is $30,000.

Illustration 4-17Illustration 4-17Calculation of a Change inCalculation of a Change inAccounting PrincipleAccounting Principle

Illustration 4-18Illustration 4-18Income StatementIncome StatementPresentation of a ChangePresentation of a Changein Accounting Principle in Accounting Principle (Based on 30% tax rate)(Based on 30% tax rate)

Pretax Income Data

LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.Solution on

notes page


47

Accounted for in the period of change and future periods.Accounted for in the period of change and future periods.

Not handled retrospectively.Not handled retrospectively.

Not considered errors.Not considered errors.

Examples include:Examples include:

Useful lives and residual values of depreciable assets.Useful lives and residual values of depreciable assets.

Allowance for uncollectible receivables.Allowance for uncollectible receivables.

Inventory obsolescence.Inventory obsolescence.



Changes in EstimateChanges in Estimate

48

Change in Estimate:Change in Estimate: Arcadia HS, purchased equipment for Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line Depreciation has been recorded for 7 years on a straight-line basis. In 2011 (year 8), it is determined that the total estimated basis. In 2011 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end life should be 15 years with a salvage value of $5,000 at the end of that time.of that time.

Questions:Questions: What is the journal entry to correct What is the journal entry to correct

the prior years’ depreciation?the prior years’ depreciation? Calculate the depreciation expense Calculate the depreciation expense

for 2011. for 2011.

No Entry No Entry RequiredRequired



49

EquipmentEquipment $510,000$510,000

Fixed Assets:Fixed Assets:

Accumulated depreciationAccumulated depreciation 350,000350,000

Net book value (NBV)Net book value (NBV) $160,000$160,000

Balance SheetBalance Sheet (Dec. 31, 2010)(Dec. 31, 2010)

After 7 yearsAfter 7 years

Equipment cost

$510,000

Residual value

- 10,000

Depreciable base

500,000

Useful life (original)

10 years

Annual depreciation

$ 50,000

x 7 years = x 7 years = $350,000$350,000

First, establish NBV First, establish NBV at date of change in at date of change in

estimate.estimate.

First, establish NBV First, establish NBV at date of change in at date of change in

estimate.estimate.



50

After 7 yearsAfter 7 years

Net book value

$160,000

Residual value (new)

- 5,000

Depreciable base

155,000

Useful life remaining

8 years

Annual depreciation

$ 19,375

Depreciation Depreciation Expense calculation Expense calculation

for 2011.for 2011.

Depreciation Depreciation Expense calculation Expense calculation

for 2011.for 2011.

Depreciation expense 19,375

Accumulated depreciation 19,375

Journal entry for 2011



51

Result from:Result from: mathematical mistakes.mathematical mistakes. mistakes in application of accounting principles.mistakes in application of accounting principles. oversight or misuse of facts.oversight or misuse of facts.

Corrections treated as Corrections treated as prior period adjustments.prior period adjustments.

Adjustment to the beginning balance of retained Adjustment to the beginning balance of retained

earnings.earnings.

Corrections of ErrorsCorrections of Errors



52

Corrections of Errors:Corrections of Errors: To illustrate, in 2012, Hillsboro Co. To illustrate, in 2012, Hillsboro Co.

determined that it incorrectly overstated its accountsdetermined that it incorrectly overstated its accounts

receivable and sales revenue by $100,000 in 2011. In 2012, receivable and sales revenue by $100,000 in 2011. In 2012,

Hillsboro makes the following entry to correct for this error Hillsboro makes the following entry to correct for this error

(ignore income taxes).(ignore income taxes).

Retained earningsRetained earnings 100,000100,000

Accounts receivableAccounts receivable100,000100,000



53



54 LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.

IncreaseIncrease

Net incomeNet income

Change in Change in

accounting principleaccounting principle

Prior period Prior period

adjustmentadjustment

DecreaseDecrease

Net lossNet loss

DividendsDividends

Change in Change in

accounting principleaccounting principle

Prior period Prior period

adjustmentadjustment

Retained Earnings StatementRetained Earnings Statement


55 LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.

Retained Earnings StatementRetained Earnings Statement



56

Woods, Inc.Retained Earnings Statement

For the Year Ended December 31, 2012

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

Before issuing the report for the year ended December 31, 2012, you Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused 2011 inventory to be discover a $50,000 error (net of tax) that caused 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? the reporting of the Statement of Retained Earnings for 2012?

LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.



57

Woods, Inc.Retained Earnings Statement

For the Year Ended December 31, 2012

Balance, January 1 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1 (restated) 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$





58

DisclosedDisclosed

In notes to the financial statements.In notes to the financial statements.

As Appropriated Retained Earnings.As Appropriated Retained Earnings.



Restrictions of Retained EarningsRestrictions of Retained Earnings

59

All changes in equity during a period except those All changes in equity during a period except those

resulting from investments by owners and distributions resulting from investments by owners and distributions

to owners. to owners.

IncludesIncludes: :

all revenues and gains, expenses and losses all revenues and gains, expenses and losses

reported in net income, and reported in net income, and

all gains and losses that bypass net income but affect all gains and losses that bypass net income but affect

equity.equity.


Comprehensive IncomeComprehensive Income

LO 9 Explain how to report other comprehensive income.LO 9 Explain how to report other comprehensive income.

60

Other Comprehensive Other Comprehensive IncomeIncome

Unrealized gains and Unrealized gains and losses on available-for-losses on available-for-sale securities.sale securities.

Translation gains and Translation gains and losses on foreign losses on foreign currency.currency.

Plus othersPlus others

+

Reported in EquityReported in Equity

Comprehensive IncomeComprehensive Income



Income Statement

61

Review QuestionReview Question

Gains and losses that bypass net income but affect equity Gains and losses that bypass net income but affect equity are referred to as are referred to as

a. a. comprehensive income.comprehensive income.

b. b. other comprehensive incomeother comprehensive income..

c. c. prior period incomeprior period income..

d. d. unusual gains and lossesunusual gains and losses..


Gains and losses that bypass net income but affect equity Gains and losses that bypass net income but affect equity are referred to as are referred to as

a. a. comprehensive income.comprehensive income.

b. b. other comprehensive incomeother comprehensive income..

c. c. prior period incomeprior period income..

d. d. unusual gains and lossesunusual gains and losses..


62

Two approaches to reporting Comprehensive Two approaches to reporting Comprehensive

Income:Income:

1.1. A second income statement.A second income statement.

2.2. A combined statement of comprehensive A combined statement of comprehensive

income.income.



63



Comprehensive Comprehensive IncomeIncome

Two-statement Two-statement format: format: Comprehensive Comprehensive Income Income


64




Comprehensive Comprehensive IncomeIncome

Combined Combined statement statement format: format: Comprehensive Comprehensive IncomeIncome

65


Statement of Changes in EquityStatement of Changes in Equity


Required,Required, in addition in addition to a statement of comprehensive to a statement of comprehensive

income. income.

Generally comprised of Generally comprised of

share capital—ordinary, share capital—ordinary,

share premium—ordinary, share premium—ordinary,

retained earnings, and the retained earnings, and the

accumulated balances in other comprehensive accumulated balances in other comprehensive

items.items.

66




Reports the change in each equity account and in total Reports the change in each equity account and in total

equity for the period. equity for the period.

1.1. Comprehensive income for the period.Comprehensive income for the period.

2.2. Contributions (issuances of shares) and distributions Contributions (issuances of shares) and distributions

(dividends) to owners.(dividends) to owners.

3.3. Reconciliation of the carrying amount of each component Reconciliation of the carrying amount of each component

of equity from the beginning to the end of the period.of equity from the beginning to the end of the period.

67





68





Regardless of the display format used, V. Gill reports the Regardless of the display format used, V. Gill reports the accumulated accumulated

other comprehensive income other comprehensive income of $90,000 in the equity section of the of $90,000 in the equity section of the

statement of financial position as follows.statement of financial position as follows.

69

Presentation of the income statement under U.S. GAAP follows either a Presentation of the income statement under U.S. GAAP follows either a

single-step or multiple-step format. IFRS does not mention a single-step single-step or multiple-step format. IFRS does not mention a single-step

or multiple-step approach. In addition, under U.S. GAAP, companies or multiple-step approach. In addition, under U.S. GAAP, companies

must report an item as extraordinary if it is unusual in nature and must report an item as extraordinary if it is unusual in nature and

infrequent in occurrence. Extraordinary items are prohibited under infrequent in occurrence. Extraordinary items are prohibited under

IFRS. IFRS.

Under IFRS, companies must classify expenses by either nature or Under IFRS, companies must classify expenses by either nature or

function. U.S. GAAP does not have that requirement, but the U.S. SEC function. U.S. GAAP does not have that requirement, but the U.S. SEC

requires a functional presentation.requires a functional presentation.

70

IFRS identifies certain minimum items that should be presented on the IFRS identifies certain minimum items that should be presented on the

income statement. U.S. GAAP has no minimum information income statement. U.S. GAAP has no minimum information

requirements. However, the SEC rules have more rigorous presentation requirements. However, the SEC rules have more rigorous presentation

requirements. requirements.

IFRS does not define key measures like income from operations. SEC IFRS does not define key measures like income from operations. SEC

regulations define many key measures and provide requirements and regulations define many key measures and provide requirements and

limitations on companies reporting non-U.S. GAAP/IFRS information.limitations on companies reporting non-U.S. GAAP/IFRS information.

U.S. GAAP does not require companies to indicate the amount of net U.S. GAAP does not require companies to indicate the amount of net

income attributable to non-controlling interest.income attributable to non-controlling interest.

U.S. GAAP and IFRS follow the same presentation guidelines for U.S. GAAP and IFRS follow the same presentation guidelines for

discontinued operations, but IFRS defines a discontinued operation discontinued operations, but IFRS defines a discontinued operation

more narrowly. Both standard-setters have indicated a willingness to more narrowly. Both standard-setters have indicated a willingness to

develop a similar definition to be used in the joint project on financial develop a similar definition to be used in the joint project on financial

statement presentation. statement presentation.

71

Both U.S. GAAP and IFRS have items that are recognized in equity as Both U.S. GAAP and IFRS have items that are recognized in equity as

part of comprehensive income but do not affect net income. U.S. GAAP part of comprehensive income but do not affect net income. U.S. GAAP

provides three possible formats for presenting this information: single provides three possible formats for presenting this information: single

income statement, combined income statement of comprehensive income statement, combined income statement of comprehensive

income, in the statement of shareholders’ equity. Most companies that income, in the statement of shareholders’ equity. Most companies that

follow U.S. GAAP present this information in the statement of follow U.S. GAAP present this information in the statement of

shareholders’ equity. IFRS allows a separate statement of shareholders’ equity. IFRS allows a separate statement of

comprehensive income or a combined statement. comprehensive income or a combined statement.

Under IFRS, revaluation of property, plant, and equipment, and Under IFRS, revaluation of property, plant, and equipment, and

intangible assets is permitted and is reported as other comprehensive intangible assets is permitted and is reported as other comprehensive

income. The effect of this difference is that application of IFRS results in income. The effect of this difference is that application of IFRS results in

more transactions affecting equity but not net income.more transactions affecting equity but not net income.

72

The terminology used in the IFRS literature is sometimes different than The terminology used in the IFRS literature is sometimes different than

what is used in U.S. GAAP. what is used in U.S. GAAP.

73

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