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Statement of Comprehensive Income - Handout
Statement of Comprehensive Income - Handout
Income Statement
and Related Information
CHAPTER REVIEW
Note: All asterisked (*) items relate to material contained in the Appendices to the chapter.
4-2 Student Study Guide for Intermediate Accounting, 17th Edition
7. (L.O. 3) For the most part, accountants tend to agree on the composition of items
included on the income statement. However, certain unusual or infrequent items have
Chapter 4: Income Statement and Related Information 4-3
stirred controversy in regard to the effect they should have on the presentation of net
income. Those who support the current operating performance concept to income
measurement believe that the unusual and infrequent items should be closed directly to
retained earnings (not included in computing net income). The accounting profession has
adopted a modified all-inclusive concept and requires application of this approach in
practice.
9. The following items may need separate disclosure in the income statement to help
users predict the amounts, timing, and uncertainty of future cash flows.
• Losses on the write-down or write-off of receivables; inventories; property,
plant and equipment; goodwill or other intangible assets.
• Gains or losses on extinguishment of debt obligations or on sale of investment
securities.
• Restructuring charges.
• Other gains or losses from sale or abandonment of property, plant, or
equipment used in the business.
• Effects of a strike, including those against competitors and major suppliers.
• Gains and losses related to casualties such as floods, fires, and earthquakes.
Companies will itemize each gain or loss on the income statement or show one amount
for all these items and then itemize these items in the notes to the financial statements.
Discontinued Operations
10. A discontinued operation occurs when (a) a company eliminates the results of
operations of a component of the business, and (b) there is the elimination of a
component that represents a strategic shift. A strategic shift includes the disposal of (1)
a major line of business, (2) a major geographical area, or (3) a major equity method
investment. When an entity decides to dispose of a component of its business, certain
classification and disclosure requirements must be met. A separate income statement
category for gain or loss from disposal of a component of a business must be provided. In
addition, the results of operations of a component that has been or will be disposed of are
also reported—separately from continuing operations. Both items are reported net of tax.
4-4 Student Study Guide for Intermediate Accounting, 17th Edition
11. Companies use intraperiod tax allocation on the income statement for (1)
income from continuing operations, and (2) discontinued operations. The concept being
followed is “let the tax follow the income.”
Noncontrolling Interest
12. When a company owns substantial interests in other companies, that company
generally consolidates the financial results of these companies into its own financial
statements. In these cases, the original company is referred to as the parent, and the
other companies are referred to as subsidiaries. Noncontrolling interest is then the
portion of equity (net assets) interest in a subsidiary not attributable to the parent
company.
13. When a company prepares a consolidated income statement, GAAP requires the
net income be allocated to the controlling and noncontrolling interest. This allocation is
reported at the bottom of the income statement after net income.
14. In general, earnings per share represents the ratio of net income minus preferred
dividends (income available to common shareholders) divided by the weighted average
number of common shares outstanding. It is considered by many financial statement
users to be the most significant statistic presented in the financial statements, and must
be disclosed on the face of the income statement. Per share amounts for gain or loss
on discontinued operations must be disclosed on the face of the income statement or in
the notes to the financial statements.
15. (L.O. 4) A change in accounting principle results when an entity adopts a new
accounting principle that is different from the one previously used. A company recognizes
a change in accounting principle by making a retrospective adjustment to the financial
statements. Such an adjustment recasts the prior years’ statements on a basis consistent
with the newly adopted principle. The company records the cumulative effect of the
change for prior periods as an adjustment to beginning retained earnings of the earliest
year presented.
Changes in Estimates
Corrections of Errors
17. Companies must correct errors by making proper entries in the accounts and
reporting corrections in the financial statements. Corrections of errors are treated as prior
period adjustments, similar to changes in accounting principles. Companies record an
error in the year in which it is discovered. They report the effect of the error as an
adjustment to the beginning balance of retained earnings. If a company prepares
comparative financial statements, it should restate the prior statements for the effects of
the error.
18. (L.O. 5) The statement of retained earnings serves to reconcile the balance of
the retained earnings account from the beginning to the end of the year. The important
information communicated by the statement of retained earnings includes: (a) prior period
adjustments (income or loss related to corrections of errors in the financial statements of
a prior period net of tax), (b) changes in accounting principle, and (c) dividend
distributions (cash or stock) for the period.
Comprehensive Income
19. (L.O. 7) Items that bypass the income statement are included under the concept of
comprehensive income. Comprehensive income includes all changes in equity during a
period except those resulting from investments by owners and distributions to owners.
Components of other comprehensive income must be displayed in one of two ways: (1) a
single continuous statement (one statement approach) or (2) two separate but
consecutive statements of net income and other comprehensive income (two statement
approach).
*IFRS Insights
*20. (L.O. 8) Presentation of the income statement under GAAP follows either a single-
step or multiple-step format. IFRS does not mention a single-step or multiple-step
approach. Under IFRS, companies must classify expenses by either nature or function;
GAAP does not have that requirement, but the SEC requires a functional presentation.
GLOSSARY