FINANCIAL ACCOUNTING

THEORY AND ANALYSIS:

TEXT AND CASES
11TH EDITION

RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY
CHAPTER 6

Financial Statements I:
The Income Statement
SFAS No 130 - Reporting
Comprehensive Income
 Reasons for the initial project
Off-balance sheet financing
 The practice of reporting some items of
comprehensive income in
stockholders’ equity
 Acknowledged need for harmonization
of accounting standards
 Definitions

 Comprehensive income
 The change in equity (net assets) of a business
enterprise during a period from transactions and other
events and circumstances from nonowner sources.
 Other comprehensive income
 Revenues, expenses, gains, and losses included in
comprehensive income but excluded from net income.
 SFAS No 130 - Reporting
Comprehensive Income
 Original issues:
1. Should comprehensive income be reported?
2. Should cumulative accounting adjustments be included in
comprehensive income?
3. How should the components of comprehensive income be classified for
disclosure?
4. How should comprehensive income be disclosed
in the financial statements?
5. Should the components of other comprehensive
income be disclosed before or after their related
tax effects?
 Should Comprehensive Income Be
Reported?

 SFAS No 130
 Requires the disclosure of comprehensive
income and
 Discusses how to report and disclose
comprehensive income and its components,
including net income.
 Does not specify when to recognize or how to
measure components
 Should Cumulative Accounting
Adjustments Be Included?

Include As Part Of
Cumulative Accounting Comprehensive Income
Adjustments

Cumulative
Accounting
Adjustments
 How Should the Components of
Comprehensive Income Be
Classified for Disclosure?
 Requirement:
 Companies must disclose an
amount for net income
 That amount must be accorded equal
prominence with the amount disclosed for
comprehensive income
 Items of other comprehensive income are
classified based on their nature
 How Should Comprehensive Income
be Disclosed in the Financial
Statements?
 Requires a gross disclosure technique for
items of other comprehensive income
 ASU 2011-05 allows for the disclosure of
comprehensive income
 On income statement
 On a separate statement
 Previous alternative treatment of disclosure in statement of
stockholders’ equity no longer allowed
Should Components of Other Comprehensive
Income Be Displayed Before or After Their
Related Tax Effects.
 Allows the components of other comprehensive income
to be disclosed either
 Net of related tax effects or
 Before related tax effects with one amount shown for the
aggregate income tax expense or benefit related to the total
amount of other comprehensive income
 Other comprehensive income is transferred to a
separate component of stockholders’ equity
 Hershey’s discloses changes in other comprehensive
income in its consolidated statement of shareholders’
equity as a single net amount. (No longer allowed)
 Tootsie Roll includes the calculation of other
comprehensive income on its income statement.
Prior Period Adjustments
 An adjustment to beginning retained
earnings balance
 Original criteria in APB No. 9
 Examples were income tax
disputes and litigation
 SEC Staff Bulletin No. 8
and APB Opinion No. 16
 Correction of an error
 Adjustments from realization of operating loss carryforward
of purchased subsidiary
 Proposed Format of Statement of
Comprehensive Income
 Separate categories for disclosure of
 Operating business activities
 Financing activities
 Investing activities
 Tax payments
 Subtotal for each category
 All income and expense items to be classified into operating,
investing, and financing
 Disaggregate line items by function
 Function: the primary activities in which an entity is engaged
 Further disaggregate line items by nature
 Nature: the economic characteristics or attributes that distinguish assets, liabilities, and income and
expense items that do not respond equally to similar economic events
 The Value of Corporate Earnings

 The financial analysis of a company’s income

statement focuses on a company’s operating
performance by focusing on such questions as:
1. What are the company’s major sources of revenue?
2. What is the persistence of a company’s revenues?
3. What is the company’s gross profit ratio?
4. What is the company’s operating profit margin?
5. What is the relationship between earnings and the market
price of the company’s stock?