Intermediate accounting IFRS 3rd ch04
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Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
4-1
Income Statement and
Related Information
CHAPTER 4
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Identify the uses and limitations
of an income statement.
2.
Describe the content and format
of the income statement.
3.
4-2
Discuss how to report various
income items.
4.
Explain the reporting of
accounting changes and
errors.
5.
Describe related equity
statements.
PREVIEW OF CHAPTER 4
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
4-3
Income Statement
LEARNING OBJECTIVE 1
Identify the uses and limitations
of an income statement.
Usefulness
Evaluate past performance.
4-4
Predicting future performance.
Help assess the risk or uncertainty of
achieving future cash flows.
LO 1
Income Statement
Limitations
Companies omit items that cannot be
measured reliably.
4-5
Income numbers are affected by the
accounting methods employed.
Income measurement involves
judgment.
LO 1
Income Statement
Quality of Earnings
Companies have incentives to manage income
to meet earnings targets or
to make earnings look less risky.
Earnings management is the planned timing of revenues,
expenses, gains, and losses to smooth out earnings.
Quality of earnings is reduced if earnings management
results in information that is less useful for predicting future
earnings and cash flows.
4-6
LO 1
Content and Format of
the Income Statement
LEARNING OBJECTIVE 2
Describe the content and format
of the income statement.
Elements of the Income Statement
Income – Increases in economic benefits during the
accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities
that result in increases in equity, other than those relating to
contributions from shareholders.
4-7
LO 2
Elements of the Income Statement
Income includes both revenues and gains.
Revenues - ordinary activities of a company
Gains - may or may not arise from ordinary activities.
Revenue Accounts
4-8
Sales
Fee
Interest
Dividend
Rent
Gain Accounts
Gains on the sale of longterm assets
Unrealized gains on trading
securities
LO 2
Elements of the Income Statement
Expenses represent decreases in economic benefits during
the accounting period in the form of
outflows or depletions of assets or
incurrences of liabilities
that result in decreases in equity, other than those relating to
distributions to shareholders.
4-9
LO 2
Elements of the Income Statement
Expenses include both expenses and losses.
Expenses - ordinary activities of a company
Losses - may or may not arise from ordinary activities.
Expense Accounts
Cost of goods sold
Depreciation
Interest
Rent Salary and
wages
4-10
Taxes
Loss Accounts
Losses on restructuring
charges
Losses on to sale of long-term
assets
Unrealized losses on trading
securities
LO 2
Income
Statement
1. Sales or Revenue
Intermediate
Components
3. Selling Expenses
Companies generally
present some or all of
these sections and totals
within the income
statement.
2. Cost of Goods Sold
Gross Profit
4. Administrative or General Expenses
5. Other Income and Expense
Income from Operations
6. Financing costs
Income before Income Tax
7. Income Tax
Income from Continuing Operations
8. Discontinued Operations
Net Income
9. Non-Controlling Interest
10. Earnings Per Share
4-11
Format of the
Income
Statement
1
2
3
Includes all of the
major items in
previous list, except
for discontinued
operations.
4
5
6
7
ILLUSTRATION 4.2
Income Statement
4-12
9
10
Condensed
Income
Statement
More representative of
the type found in
practice.
ILLUSTRATION 4.3
Condensed Income
Statement
Company prepares
supplementary
schedules to
support the totals.
4-13
ILLUSTRATION 4.4
Sample Supporting
Schedule
Reporting Various
Income Items
LEARNING OBJECTIVE 3
Discuss how to report various
income items.
Gross Profit
Computed by deducting cost of goods sold from net
sales.
Provides a useful number for evaluating performance
and predicting future earnings.
Unusual or incidental revenues are disclosed in other income
and expense.
4-14
LO 3
Reporting Various Income Items
Income from Operations
4-15
Determined by deducting selling and administrative
expenses as well as other income and expense from
gross profit.
Highlights items that affect regular business activities.
Used to predict the amount, timing, and uncertainty of
future cash flows.
LO 3
Income From Operations
Expense Classification
Nature
4-16
Function
Cost of materials used
Employee benefits
Direct labor incurred
Depreciation expense
Delivery expense
Amortization expense
Advertising expense
LO 3
Income From Operations
Expense Classification
Nature
4-17
Function
Cost of goods sold
Selling expenses
Administrative
expenses
LO 3
Income From Operations
Expense Classification
Illustration: The firm of Telaris Co. performs audit, tax, and
consulting services. It has the following revenues and expenses.
4-18
LO 3
Expense Classification
Nature-of-Expense Approach
ILLUSTRATION 4.5
4-19
LO 3
Expense Classification
Function-of-Expense Approach
ILLUSTRATION 4.6
The function-of-expense method is generally used in practice
although many companies believe both approaches have merit.
4-20
LO 3
Income From Operations
Gains and Losses
4-21
ILLUSTRATION 4.7
Number of Unusual Items
Reported in a Recent Year
by 500 Large Companies
LO 3
Income From Operations
Gains and Losses
IASB takes the position that both
revenues and expenses and
other income and expense
should be reported as part of income from operations.
Companies
Companiescan
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4-22
LO 3
Income From Operations
Gains and Losses
Additional items that may need disclosure:
4-23
Losses on write-downs of inventories to net realizable value or of
property, plant, and equipment to recoverable amount, as well as
reversals of such write-downs.
Losses on restructurings of the activities and reversals of any
provisions for the costs of restructuring.
Gains or losses on the disposal of items of property, plant, and,
equipment or investments.
Litigation settlements.
Other reversals of liabilities.
LO 3
Reporting Various Income Items
Income before Income Tax
ILLUSTRATION 4.8
Presentation of
Finance Costs
Illustration 4-8
Financing costs must be reported on the income statement.
4-24
LO 3
Reporting Various Income Items
Net Income
Represents the income after all
revenues and
expenses
for the period are considered.
Viewed by many as the most important measure of a
company’s success or failure for a given period of time.
4-25
LO 3
