CH 04

Intermediate Accounting
Seventeenth Edition
Kieso; Weygandt; Warfield
Chapter 4
Income Statement and Related

Information
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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. Discuss how to report various income items.
4. Explain the reporting of accounting changes and errors.
5. Describe related stockholders’ equity statements.
Copyright ©2019 John Wiley & Sons, Inc. 2

Preview of Chapter 4 (1 of 5)
Income Statement and Related Information
Income Statement
• Usefulness
• Limitations
• Quality of earnings

Content and Format of the Income Statement
• Elements
• Intermediate components
• Condensed income statements
• Single-step income statements

Reporting Various Income Items
• Unusual and infrequent gains and losses
• Discontinued operations
• Noncontrolling interest in income
• Earnings per share
• Summary

Accounting Changes and Errors
• Changes in accounting principle
• Change in accounting estimates
• Corrections of errors
• Summary

Related Stockholders’ Equity Statements
• Retained earnings statement
• Comprehensive income
• Statement of stockholders’ equity
• Balance sheet presentation

Learning Objective 1
Identify the Uses and Limitations of an
Income Statement

Income Statement
Usefulness
• Evaluate past performance of the company

• Provide a basis for predicting future performance
• Help assess the risk or uncertainty of achieving future
cash flows
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Income Statement
Limitations
• Companies omit items they cannot measure reliably

• Income numbers are affected by the accounting
methods employed
• Income measurement involves judgment

Income Statement
Quality of Earnings
Companies have incentives to manage income to meet or
beat Wall Street expectations, so that
• market price of stock increases and
• value of management’s stock compensation packages
increases.
Quality of earnings is reduced if earnings management

results in information that is less useful for predicting
future earnings and cash flows.

Describe the Content and Format of the
Income Statement

Content and Format of the Income
Statement
Elements of the Income Statement (Revenues)
Revenues – Inflows or other enhancements of assets of an
entity or settlements of its liabilities during a period from
delivering or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major or
central operations.
Examples include sales, fees, interest, dividends, and rents.

Elements of the Income Statement (1 of 2)
Expenses – Outflows or other using-up of assets or

incurrences of liabilities during a period from delivering
or producing goods, rendering services, or carrying out
other activities that constitute the entity’s ongoing
major or central operations.
Examples include cost of goods sold, depreciation,
interest, rent, salaries and wages, and taxes.

Elements of the Income Statement (2 of 2)
Gains – Increases in equity (net assets) from peripheral or

incidental transactions of an entity except those that result
from revenues or investments by owners.
Losses – Decreases in equity (net assets) from peripheral or
incidental transactions of an entity except those that result
from expenses or distributions to owners.
Gains and losses result from the sale of investments or plant
assets, settlement of liabilities, and write-offs of assets due to
impairments or casualty.

Intermediate Components of the
Income Statement
Multiple-Step Income Statement
• Separates operating transactions from nonoperating
transactions
• Matches costs and expenses with related revenues
• Highlights certain intermediate components of income
that analysts use assessing financial performance

Intermediate Components
Common to present some or all of the following sections
and totals within the income statement.
1. Operating section
2. Nonoperating section
3. Income tax
4. Discontinued operations
5. Noncontrolling interest
6. Earnings per share

Multiple-Step
CABRERA COMPANY
Income Statement
For The Year Ended December 31, 2020

Condensed Income Statements
Cabrera Company
Income Statement
For the Year Ended December 31, 2020
Net sales $2,972,413
Cost of goods sold 1,982,541
Gross profit 989,872
Selling expenses (see Note D) $453,028
Administrative expenses 350,771 803,799
Income from operations 186,073
Other revenues and gains 171,410
357,483
Other expenses and losses 126,060
Income before income tax 231,423
Income tax 66,934
Net income for the year $ 164,489
Earnings per common share $1.74

Single-Step Income Statements
No implication that one type of revenue or expense item has priority over
another.
Income Statement (1 of 2)
Exercise E4.5: Prepare a income statement from the data below using the multiple-step form.
Administrative expense
Officers’ salaries $4,900
Depreciation of office furniture and equipment 3,960
Cost of goods sold 60,570
Rent revenue 17,230
Selling expense
Delivery expense 2,690
Sales commissions 7,980
Depreciation of sales equipment 6,480
Sales revenue 96,500
Income tax 9,070
Interest expense 1,860

Income Statement (2 of 2)
P. Bride Company Sales revenue $96,500
Income Statement Cost of goods sold 60,570
Gross profit 35,930
Operating expenses:
Selling expense 17,150
Administrative expense 8,860
Total operating expenses 26,010
Income from operations 9,920
Other revenue (expense):
Rent revenue 17,230
Interest expense (1,860)
Total other 15,370
Income before tax 25,290
Income tax 9,070
Net income $16,220

Format of the Income Statement
Review Question
A separation of operating and non operating activities of a
company exists in
a. both a multiple-step and single-step income statement.
b. a multiple-step but not a single-step income statement.
c. a single-step but not a multiple-step income statement.
d. neither a single-step nor a multiple-step income
statement.

Format of the Income Statement
Review Question Answer
A separation of operating and non operating activities of a
company exists in
a. both a multiple-step and single-step income statement.
b. Answer: a multiple-step but not a single-step income
statement.
c. a single-step but not a multiple-step income statement.
d. neither a single-step nor a multiple-step income
statement.

Discuss How to Report Various Income
Items

Companies are required to report additional items as part
of net income so users can better determine the long-run
earning power of the company.
These income items fall into four general categories:
1. Unusual and infrequent gains and losses
2. Discontinued operations
3. Noncontrolling interest
4. Earnings per share
Modified all-inclusive concept
Unusual and Infrequent Gains and Losses
a. Unusual. High degree of abnormality and of a type
clearly unrelated to, or only incidentally related to, the
ordinary and typical activities of the company, taking
into account the environment in which it operates.
b. Infrequency of occurrence. Type of transaction that is
not reasonably expected to recur in the foreseeable
future, taking into account the environment in which
the company operates.

(1 of 3)
Common types of unusual or infrequent gains and losses:

• Losses on write-down (impairment) of receivables;
inventories; property, plant, and equipment; goodwill or
other intangible assets
• Restructuring charges
• Gains and losses from sale or abandonment of property,
plant and equipment
• Effects of a strike

(2 of 3)
Common types of unusual or infrequent gains and losses:

• Gains and losses on extinguishment (redemption) of debt
obligations.
• Gains and losses related to casualties such as fires, floods,
and earthquakes.
• Gains or losses on sale of investment securities.

(3 of 3)
Number of unusual items reported in a recent year by 500 large companies.

Discontinued Operations
Occurs when two things happen:

1. A company eliminates the results of operations of a
component of the business.
2. The elimination of a component that represents a
strategic shift, having a major effect on the company’s
operations and financial results.
Amounts are reported “net of tax.”

Discontinued Operations Illustration 1
Illustration: Multiplex Products Inc., a highly diversified
company, decides to discontinue its electronics division.
During the current year, the electronics division lost
$300,000 (net of tax). Multiplex Products sold the division
at the end of the year at a loss of $500,000 (net of tax).
Multiplex determines that the electronics division
discontinuation meets the strategic shift criteria because
the division is a major line of business (its assets exceed
20 percent of Multiplex’s total assets).

Discontinued Operations Illustration 2
Illustration: The following illustration shows how the discontinued
operations would be reported on the income statement for Multiplex
Products.
Income from continuing operations $20,000,000

Discontinued operations
Loss from operation of discontinued electronics
division (net of tax) $300,000
Loss from disposal of electronics division (net of tax) 500,000 (800,000)
Net income $19,200,000

are reported after “Income
from continuing
operations.”
Without any discontinued
operations, “Income from
continuing operations”
would be “net income.”

Intraperiod Tax Allocation
• Allocation of tax within a period
• Helps users understand impact of income taxes on various
components of net income
• Intraperiod tax allocation is used for:
1. income from continuing operations
2. discontinued operations

Discontinued Operations (Gain)
Illustration: Schindler Co. has income before income tax of

$250,000. It has a gain of $100,000 from a discontinued operation.
Assuming a 30 percent income tax rate, Schindler presents the
following information on the income statement.
Income before income tax $250,000
Income tax 75,000
Income from continuing operations 175,000
Gain on discontinued operations $100,000
Less: Applicable income tax 30,000 70,000
Net income $245,000

Discontinued Operations (Loss)
Illustration: Schindler Co. has income before income tax of

$250,000. It suffers a loss from discontinued operations of
$100,000. Assuming a 30 percent tax rate, Schindler presents the
income tax on the income statement as shown
Income before income tax $250,000
Income tax 75,000
Income from continuing operations 175,000
Loss from discontinued operations $100,000
Less: Applicable income tax reduction 30,000 70,000
Net income $105,000

Noncontrolling Interest in Income
When a company owns substantial interests (generally

greater than 50%) in another company, GAAP generally
require that the financial statements of both companies
be consolidated together into one set of financials.
Noncontrolling interest is the portion of equity (net
assets) interest in a subsidiary not attributable to the
parent company.

Noncontrolling Interest in Income
Illustration: Assume that Coca-Cola acquires 70 percent of the
outstanding stock of Koch Company. Because Coca-Cola owns more
than 50 percent of Koch, it consolidates Koch’s financial results
with its own. GAAP requires that net income be allocated to the
controlling and noncontrolling interest.

Earnings per Share
Net Income  Preferred Dividends

Weighted Average of Common Shares Outstanding
• A significant business indicator

• Measures the dollars earned by each share of common stock
• Must be disclosed on the income statement

Earnings per Share Illustration
Illustration: Lancer, Inc. reports net income of $350,000. It
declares and pays preferred dividends of $50,000 for the year.
The weighted-average number of common shares outstanding
during the year is 100,000 shares. Lancer computes earnings
per share as follows:
Net Income  Preferred Dividends

 Earnings per Share
Weighted -Average of Common Shares Outstanding
$350,000  $50,000
 $3
100,000

Earnings per Share
Poquito Industries Inc.
Income Statement (partial)
For the year Ended December 31, 2020
Income from continuing operations $276,000

Discontinued operations
Income from operations of Pizza Division, less
applicable income tax of $24,800 $54,000
Loss on disposal of Pizza Division, less
applicable income tax of $41,000 90,000 36,000
Net income $240,000
Per share of common stock
Income from continuing operations $2.76
Income from operations of discontinued division, net of tax 0.54
Loss on disposal of discontinued operation, net of tax 0.90
Net income $2.40

Explain the Reporting of Accounting
Changes and Errors

Changes in Accounting Principle
• Retrospective adjustment
• Cumulative effect adjustment to beginning retained
earnings
• Approach preserves comparability across years
• Examples include:
• change from FIFO to average-cost
• change from percentage-of-completion to
completed-contract method
Changes in Accounting Principle Illustration 1
Illustration: Gaubert Inc. decided in March 2020 to change from
FIFO to weighted-average inventory pricing. Gaubert’s income
before taxes, using the new weighted-average method in 2020, is
$30,000. This illustration presents the pretax income data for
2018 and 2019 for this example.
Weighted- Excess of FIFO over
Average Weighted-Average
Year FIFO Method Method
2018 $40,000 $35,000 $5,000
2019 30,000 27,000 3,000
Total $8,000

Changes in Accounting Principle Illustration 2
Illustration: Gaubert Inc. decided in March 2020 to change from
FIFO to weighted-average inventory pricing. Gaubert’s income
before taxes, using the new weighted-average method in 2020, is
$30,000. This illustration shows the information Gaubert
presented in its comparative income statements, based on a 30
percent tax rate.
2020 2019 2018
Income before income tax $30,000 $27,000 $35,000
Income tax 9,000 8,100 10,500
Net income $21,000 $18,900 $24,500

Change in Accounting Estimates
• Accounted for in period of change or period of change
and future periods if change affects both
• Not handled retrospectively, not considered an error
• Examples include:
• Useful lives and salvage values of depreciable assets
• Allowance for uncollectible receivables
• Inventory obsolescence

Change in Accounting Estimate (1 of 3)
Illustration: Arcadia HS, purchased equipment for $510,000
which was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time. Depreciation
has been recorded for 7 years on a straight-line basis. In 2020
(year 8), it is determined that the total estimated life should be
15 years with a salvage value of $5,000 at the end of that time.
Questions:
• What is the entry to correct prior years’ depreciation?
• Calculate the depreciation expense for 2020.

Calculation of depreciation for first 7 years.
Equipment cost $510,000
Salvage value − 10,000
Depreciable base 500,000
Useful life (original) ÷ 10 years
Annual depreciation $ 50,000
× 7 years = $350,000
After 7 Balance Sheet (December 31, 2019)
years Fixed Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

Calculate depreciation expense for 2020 and remaining years.
Net book value $160,000
Salvage value (revised) − 5,000
Depreciable base 155,000
Useful life ÷ 8 years
Annual expense $ 19,375
Journal entry for 2020 and remaining years.

Depreciation Expense 19,375
Accumulated Depreciation 19,375

Accounting Errors
Corrections of Errors
• Result from:
• mathematical mistakes
• mistakes in application of accounting principles
• oversight or misuse of facts
• Corrections treated as prior period adjustments
• Adjustment to the beginning balance of retained earnings

Accounting Errors
Illustration: In 2021, Hillsboro Co. determined that it
incorrectly overstated its accounts receivable and sales
revenue by $100,000 in 2020. In 2021, Hillboro makes the
following entry to correct for this error (ignore income
taxes).
Retained Earnings 100,000

Accounts Receivable 100,000

Summary: Changes in Accounting Principle
Placement on Income
Type of Situation Criteria Example Statement
Changes in Change from Change in the basis of Recast prior years' income
accounting one generally inventory pricing from statement on the same
principle accepted FIFO to average-cost. basis as the newly
accounting adopted principle.
principle to (Shown net of tax.)
another.

Summary: Changes in Estimates
Placement on
Type of Situation Criteria Example Income Statement
Changes in Normal, recurring Changes in the Show change only in
estimates corrections and realizability of the affected
adjustments. receivables and accounts in current
inventories; changes and future periods.
in estimated lives of (Not shown net of
equipment, tax.)
intangible assets;
changes in
estimated liability
for warranty costs,
income taxes, and
salary payments.

Summary: Corrections of Errors
Placement on
Type of Situation Criteria Example Income Statement
Corrections of Mistake, misuse of Error in reporting Treat as prior period
errors facts. income and adjustment; restate
expenses. prior years' income
statements to
correct for error.
(Shown net of tax.)

Describe Related Stockholders’ Equity
Statements

Retained Earnings Statement (1 of 4)
Increase
• Net income
• Change in accounting principle
• Prior period adjustments
Decrease
• Net loss
• Dividends
• Change in accounting principles
• Prior period adjustments

Woods, Inc.
Statement of Retained Earnings
Balance, January 1 $ 1,050,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000
Before issuing the report for the year ended December 31, 20 20, you
discover a $50,000 error (net of tax) that caused 2019 inventory to be
overstated (overstated inventory caused COGS to be lower and thus net
income to be higher in 2019). Would this discovery have any impact on
the reporting of the Statement of Retained Earnings for 2020?

Woods, Inc.
Statement of Retained Earnings
Balance, January 1 $ 1,050,000
Prior period adjustment - error correction (50,000)
Balance, January 1 (restated) 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000

Restrictions on Retained Earnings
Disclosed
• In notes to the financial statements
• As Appropriated Retained Earnings

Comprehensive Income (1 of 7)
All changes in equity during a period except those
resulting from investments by owners and distributions to
owners.
Includes:
• all revenues and gains, expenses and losses reported in net
income, and
• all gains and losses that bypass net income but affect
stockholders’ equity

Net Income + Other Comprehensive Income
Income Statement (in thousands)
Sales $285,000 • Unrealized gains and losses
Cost of goods sold 149,000 on available-for-sale
Gross profit 136,000 securities
Operating expenses:
Selling expenses 10,000 • Translation gains and losses
Administrative expenses 43,000 on foreign currency
Total operating expense 53,000
Income from operations 83,000 • Plus others
Other revenue (expense):
Interest revenue 17,000
Interest expense (21,000)
Total other (4,000) Reported in Stockholders’
Income before taxes 79,000
Income tax expense 24,000 Equity
Net income $ 55,000

Review Question
Gains and losses that bypass net income but affect

stockholders' equity are referred to as
a. comprehensive income.
b. other comprehensive income.
c. prior period income.
d. unusual gains and losses.

Review Question Answer
Gains and losses that bypass net income but affect

stockholders' equity are referred to as
a. comprehensive income.
b. Answer: other comprehensive income.
c. prior period income.
d. unusual gains and losses.

Companies must display the components of other
comprehensive income 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).

One Statement Approach
V. Gill Inc.
Advantage - does Statement of Comprehensive Income
not require the For the Year Ended December 31, 2020
creation of a new Sales revenue $800,000
financial statement. Cost of goods sold 600,000
Gross profit 200,000
Disadvantage - net Operating expenses 90,000
income buried as a Net income 110,000
subtotal on the Other comprehensive income
Unrealized holding gain, net of tax 30,000
statement. Comprehensive income $140,000

Two Statement Approach
V. Gill Inc.
Income Statement
Sales revenue $800,000
Cost of goods sold 600,000
Gross Profit 200,000
Operating expenses 90,000
Net income $110,000
V. Gill Inc.
Comprehensive Income Statement
Net income $110,000
Other comprehensive income
Unrealized holding gain, net of tax 30,000
Comprehensive income $140,000

Statement of Stockholders’ Equity
• Reports changes in each stockholders’ equity account
and total stockholders' equity for the period
• Following items are disclosed in the statement:
• Contributions (issuances of shares) and distributions
(dividends) to owners
• Reconciliation of carrying amount of each component of
stockholders’ equity from beginning to end of period

Statement of Stockholders’ Equity (chart)
V. Gill Inc.
Accumulated
Other
Retained Comprehensive Common
Total Earnings Income Stock
Beginning balance $410,000 $ 50,000 $60,000 $300,000
Net income 110,000 110,000
Other comprehensive
income
Unrealized holding
gain, net of tax 30,000 30,000
Ending balance $550,000 $160,000 $90,000 $300,000

Balance Sheet Presentation
V. Gill Inc.
Balance Sheet
As of December 31, 2020
(Stockholders’ Equity Section)
Stockholder’s equity
Common stock $300,000
Retained earnings 160,000
Accumulated other comprehensive income 90,000
Total stockholders’ equity $550,000

Compare the Accounting Procedures for
Income Reporting Under GAAP and IFRS

IFRS Insights (1 of 4)
Relevant Facts
Similarities
• Both GAAP and IFRS require companies to indicate the amount of net income
attributable to noncontrolling interest.
• With the recent FASB Accounting Standards Update, under both I FRS and GAAP,
unusual and infrequent income items are reported in Income before income taxes
(i.e., not an extraordinary item treatment, with reporting similar to discontinued
operations).
• Both GAAP and IFRS follow the same presentation guidelines for discontinued
operations, but IFRS defines a discontinued operation more narrowly. Both
standard-setters have indicated a willingness to develop a similar definition to be
used in the joint project on financial statement presentation.
Relevant Facts
Similarities
• Both GAAP and IFRS have items that are recognized in equity as part of
comprehensive income but do not affect net income. Both G AAP and IFRS allow a
one statement or two statement approach to preparing the statement of
comprehensive income.
Differences
• 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. G AAP
does not have that requirement, but the SEC requires a functional presentation.

Relevant Facts
Differences
• IFRS identifies certain minimum items that should be presented on the
income statement. GAAP has no minimum information requirements.
However, the SEC rules have more rigorous presentation requirements.
• IFRS does not define key measures like income from operations. SEC
regulations define many key measures and provide requirements and
limitations on companies reporting non-GAAP/IFRS information.
• Under IFRS, revaluation of property, plant, and equipment, and intangible
assets is permitted, with gains reported as other comprehensive income. The
effect of this difference is that application of IFRS results in more transactions
affecting equity but not net income.

On The Horizon
The IASB and FASB have worked on a project that would
restructure the financial statements. One stage of this project will
address the issue of how to classify various items in the income
statement. A main goal of this new approach is to provide
information that better represents how businesses are run, that
is, an idea to require comprehensive income be reported in a
combined statement of comprehensive income. This approach
draws attention away from just one number—net income. This
broad project is on hold; both Boards are working on separate,
narrower projects in response to non-GAAP reporting.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
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copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies
for his/her own use only and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.

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Intermediate Accounting

Kieso; Weygandt; Warfield

Income Statement and Related

Copyright ©2019 John Wiley & Sons, Inc. 2

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• Evaluate past performance of the company

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• Companies omit items they cannot measure reliably

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Quality of earnings is reduced if earnings management

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Expenses – Outflows or other using-up of assets or

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Gains – Increases in equity (net assets) from peripheral or

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Common types of unusual or infrequent gains and losses:

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Common types of unusual or infrequent gains and losses:

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Number of unusual items reported in a recent year by 500 large companies.

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Occurs when two things happen:

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Income from continuing operations $20,000,000

Net income $19,200,000

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Illustration: Schindler Co. has income before income tax of

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Illustration: Schindler Co. has income before income tax of

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When a company owns substantial interests (generally

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Net Income  Preferred Dividends

• A significant business indicator

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Net Income  Preferred Dividends

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