ssn 7e 04 student
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
The Income Statement, Comprehensive Income, and the Statement of Cash Flows
Chapter 4
4-2
An income statement for a
hypothetical manufacturing
company that you can refer to as we proceed through
the chapter.
4-3
Expenses
Outflows of resources incurred in generating revenues.
Revenues
Inflows of resources resulting
from providing goods or
services to customers.
Gains and Losses
Increases or decreases in equity from
peripheral or incidental
transactions of an entity.
Income from Continuing Operations
Income Tax Expense
Because of its
importance and size,
income tax expense is a
separate item.
4-4
Operating Income
Nonoperating Income
Operating versus Nonoperating Income
Includes revenues and expenses
directly related to the principal
revenue-generating
activities of the company
Includes certain gains and losses and revenues and expenses related to peripheral or
incidental activities of the
company
4-5
Earnings Quality
Earnings quality refers to the ability of reported earnings to predict a company’s future earnings.
Transitory Earningsversus
Permanent Earnings
4-6
Separately Reported ItemsReported separately, net of taxes:
Discontinued operations
Extraordinary items
4-7
Intraperiod Income Tax AllocationIncome 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 and
Extraordinary Items net of related income tax effect.
4-8
Reporting Discontinued OperationsReporting for Components Sold
Income or loss from operations of the
component from the beginning of the
reporting period to the disposal date.
Gain or loss on the disposal of the
component’s assets.
Reporting for Components Held For SaleIncome or loss from
operations of the component from the
beginning of the reporting period to the
end of the reporting period.
An “impairment loss” if the carrying value of
the assets of the component is more than the fair value minus cost to sell.
4-9
An extraordinary item is a material event or transaction that is both:1.Unusual in nature, and2.Infrequent in occurrenceExtraordinary items are reported net of related taxes
Extraordinary Items
4-10
Unusual or Infrequent Items
Items that are material and are either unusual or infrequent—but not
both—are included as separate items in continuing operations.
4-11
Type of Accounting Changes Definition
Change in Accounting Principle
Change from one GAAP method to another GAAP method
Change in Accounting Estimate
Revision of an estimate because of new information or new experience
Change in Reporting Entity
Preparation of financial statements for an accounting entity other than the entity that existed in the previous period
Accounting Changes
4-12
Correction of Accounting ErrorsErrors occur when transactions are either recorded incorrectly or not recorded at all.
Errors Discovered in
Same Year
Reverse original erroneous journal entry and record the appropriate journal entry.
Record a prior period adjustment to the beginning retained
earnings balance in a statement of shareholders’ equity.Previous years’ financial
statements that are incorrect as a result of the error are
retrospectively restated to reflect the correction.
Material Errors
Discovered in Subsequent
Year
4-13
Earnings Per Share DisclosureOne of the most widely used ratios is earnings per share (EPS), which shows the amount of income
earned by a company expressed on a per share basis.
Basic EPS
Net income less preferred dividends
Weighted-average number of common shares outstanding for the
period
Diluted EPS
Reflects the potential dilution that could occur for companies that have certain
securities outstanding that are convertible into common shares or stock options that could create additional common shares if
the options were exercised.
4-14
Earnings Per Share Disclosure
Report EPS data separately for:
1. Income or Loss from Continuing Operations
2. Separately Reported Items
a) discontinued operations
b) extraordinary Items
3. Net Income or Loss
4-15
Comprehensive Income
An expanded version of income that includes four types of gains and
losses that traditionally have not been included
in income statements.
4-16
The Statement of Cash Flows Provides relevant information about a
company’s cash receipts and cash disbursements.
Helps investors and creditors to assess future net cash flows liquidity long-term solvency.
Required for each income statement period reported.
4-17
Operating Activities
Cash Flows from
Operating Activities
Inflows from: sales to customers. interest and dividends
received. +
Outflows for: purchase of inventory. salaries, wages, and other
operating expenses. interest on debt. income taxes.
_
4-18Direct and Indirect Methods of
Reporting
Two Formats for Reporting Operating Activities
Reports the cash effects of each operating
activity
Direct Method
Starts with accrual net income and converts to cash basis
Indirect Method
4-19
Cash Flows from
Investing Activities
+
Investing ActivitiesInflows from:
sale of long-lived assets used in the business.
sale of investment securities (stocks and bonds).
collection of nontrade receivables.
_Outflows for:
purchase of long-lived assets used in the business.
purchase of investment securities (stocks and bonds).
loans to other entities.
4-20
Cash Flows from
Financing Activities
+
_
Financing Activities
Inflows from: sale of shares to owners. borrowing from creditors
through notes, loans, mortgages, and bonds.
Outflows for: owners in the form of dividends
or other distributions. owners for the reacquisition of
shares previously sold. creditors as repayment of the
principal amounts of debt.
4-21Noncash 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).
4-22
End of Chapter 4
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