Lecture-13

Income Statement

ACC 108- Financial

Reporting
Dr. ARPIT SIDHU
(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM, Dip-EComm)
 Learning Outcome
• To Illustrate the terms,
components and format of
income statement

• To Understand the various

income Statement
presentations
 Lecture Outline

Format of single step income statement as per US

GAAP

Format of multi step income statement as per US

GAAP

Income from continued and discontinued operations, Comprehensive

income, cases on additional income statement presentations
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 MCQ from the last lecture

The following information is available

for Matthews Holdings Inc.:
Net sales $25,000
Depreciation 2,000 Calculate the income from
Cost of goods sold 3,500 continuing operations.
Gain on sale of asset 3,000
A) $23000
B) $17000
Loss from discontinued C) $17600
5,400
operations
D) $22500
Gain from unusual items 500
•A

Net sales $25,000

Less: Cost of goods sold 3,500
Less: Depreciation 2,000
Add: Gain on sale of asset 3,000
Add: Gain from unusual items 500
$23,000
Income Statement (continue from the last
lecture)

Single-Step Income Statement

 Income Statement

Single-Step Income Statement

C) Comprehensive Income
o Comprehensive Income = Net Income + Other Comprehensive Income

D) Other Comprehensive Income:

 Includes revenues, expenses, gains, and losses that are yet to be realized.
A. Pension Adjustments
B. Available-for-sale debt/equity securities
C. Currency Translation
D. Cash Flow Hedges
E. Revaluation Surplus on intangible assets & fixed assets

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C) Currency Translation

Single-Step Income Statement

o Currency translation is the process of converting the financial results of a parent
company's foreign subsidiaries into its functional (home) currency.

o Companies must report using the currency of the environment in which it

primarily generates and expends cash.

o Gains and losses resulting from varying exchange rates over time.

Cont…

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D) Currency Translation

Single-Step Income Statement

o For example, if a U.S.-based company wishes to operate in Germany, it must
convert some of its U.S. dollars to euros for purposes of purchasing or renting a
property, paying employees, paying German taxes, etc.

o In addition, German citizens or businesses that work with this U.S.-based company
will pay with euros.

o The company will create its financial statements in one currency, the dollar. It
must convert the value of its business activities conducted in Germany with the
euro back to dollars via an exchange rate.
Cont…

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E) Currency Translation

Single-Step Income Statement

o Currency values and exchange rates shift regularly, and the value of the dollar relative
to the euro may fluctuate over fiscal periods. 

o When a company's functional (home) currency, the dollar, increases in value relative
to the secondary currency, the euro, a U.S.-based company will experience a
functional gain due to the change in the exchange rate, as the functional currency can
now be converted into a larger number of the foreign currency.

o When the functional currency decreases in value against the second, this results in a
loss.

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Overview of Financial Reporting-MCQ

Treasury stock and a retained earnings deficit will have what effect on stockholders’
equity?

a) They will increase stockholders’ equity.

b) They will have no effect on stockholders’ equity.
c) They will reduce stockholders’ equity.
d) They will double stockholders’ equity.

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•C
F) Cash Flow Hedges
o Arrangement to manage risk of changes in cash flows associated with a recognized

Single-Step Income Statement

asset or liability or a probable forecast transaction.

o Example: Let’s think about a euro-denominated importer who pays their

provider in USD. To hedge their exposure to a possible depreciation of the euro
against the USD, each time the company signs a deal with their provider, they
purchase a forward contract or future contract for the full value of the
aforementioned deal with maturity on the date when payment is due. This hedge
protects the importer against a potential increase in costs caused by the weakening
of the euro.

o A forward contract is a customized contract between two parties to buy or sell an

asset at a specified price on a future date. 

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Income Statement
G) Revaluation Surplus on intangible assets & fixed assets

Single-Step Income Statement

o If an asset’s carrying amount (Cost less Acc. Depreciation) is increased as a
result of a revaluation, the increase shall be recognised in other comprehensive
income.

o Example: An entity purchased a piece of land on 1 July 2011 for $125 million.
At 31 December 2011, the land was valued at $150 million. The revaluation
surplus of $25 million is recognised in other comprehensive income.

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Overview of Financial Reporting-MCQ

Holden Company purchased 150 acres of land on the outer edge of a growing city.
Holden expects the value of this land to appreciate by 500% over the next three
years. How would you expect Holden to report the value of this land on their
balance sheet?

a) At market value
b) At the expected future value at the time of sale
c) At historical cost
d) At a depreciated value

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C

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2) Multi-Step Income Statement
• The multi-step income statement format comprises a gross profit
section where the cost of sales is deducted from sales, followed by
income and expenses to reach an income before tax.

• As compared to a single-step income statement, a multi-step income

statement examples are more complex.

• It also provides a more detailed overview of the company’s financial

position.
The sections of a multi-step income
statement include:
• Sales: This section includes total sales, the cost of goods sold, and the
difference between the two, which is gross profit.
• Operating Expenses: These are the expenses that are directly related to
Operations of the company like selling, general, and administrative expenses.
• Operating Income: It is the income earned from operating activities of the
income. It is derived from the difference between gross profit and total
operating expenses.
• Non-Operating Income or Expenses: Non-operating activities like investments
involve expenses, revenue, gain, or loss. Such an entity comes under this
category.
• Net Income: Any resulting profit or loss calculated as the difference between
total income and total expenses is called net income.
Overview of Financial Reporting-MCQ

Holden Company purchased 150 acres of land on the outer edge of a growing city.
Holden expects the value of this land to appreciate by 500% over the next three
years. How would you expect Holden to report the value of this land on their
balance sheet?

a) At market value
b) At the expected future value at the time of sale
c) At historical cost
d) At a depreciated value
•C
Thank you