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The Statement of Profit or Loss and Other Comprehensive Income Textbook Pages: 115 - 136
The Statement of Profit or Loss and Other Comprehensive Income Textbook Pages: 115 - 136
Intermediate Accounting I
Spring 2020
3-1
Statement of Profit or Loss General Format
McAllister’s Manufacturing
Statement of Profit or Loss Years Ended December 31
($ in millions, except earnings per share) 2023 2022
Profit from Sales revenue $1,450.6 $1,380.0
Continuing Cost of goods sold 832.6 800.4
Operations Gross profit 618.0 579.6
Operating expenses:
Selling 123.5 110.5
General and administrative 147.8 139.1
ss
Research and development 55.0 65.0
Restructuring costs
l a 125.0 –
nc
Total operating expenses 451.3 314.6
Operating profit
s i 166.7 265.0
Other income (expense):
cus
Interest income
s 12.4 11.1
Interest expense
Gain on sale of investments
Di (25.9)
18.0
(24.8)
19.0
Profit from continuing operations before income taxes 171.2 270.3
Income tax expense 59.9 94.6
Profit from continuing operations 111.3 175.7
nc
Discontinued operations (0.11) (0.63)
si
Net profit $ 2.03 $ 2.75
Earnings per share—diluted:
u s
Profit from continuing operations
isc $ 2.06 $ 3.25
Discontinued operations
Net profit D (0.10)
$ 1.96
(0.61)
$ 2.64
3-2
LO3-2
3-3
Profit From Continuing Operations
McAllister’s Manufacturing
Statement of Profit or Loss Years Ended Dec. 31
($ in millions, except earnings per share) 2023 2022
Profit from Sales revenue $1,450.6 $1,380.0
Continuing Cost of goods sold 832.6 800.4
Operations Gross profit 618.0 579.6
Operating expenses:
Selling 123.5 110.5
Operating General and administrative
Research and development
147.8
55.0
139.1
65.0
Items Restructuring costs 125.0 –
Total operating expenses 451.3 314.6
Operating profit 166.7 265.0
Other income (expense):
Interest income 12.4 11.1
ting Interest expense (25.9) (24.8)
Non-opera Gain on sale of investments 18.0 19.0
Items Profit from continuing operations before
income taxes 171.2 270.3
Income tax expense 59.9 94.6
Income Profit from continuing operations 111.3 175.7
Taxes
3-4
Statement of Profit or Loss Formats:
Function of Expense Method
MAXWELL GEAR CORPORATION
• Expenses are Statement of Profit or Loss
classified by their For the Year Ended December 31, 2023
Sales revenue $557,222
function within the Cost of goods sold $302,371
Gross profit 254,851
company, as part of Operating expenses:
Selling and distribution $47,431
cost of sales, cost of General and administrative 24,888
distribution, cost of Total operating expenses
Operating income
72,229
182,622
administration, and Other income (expense):
Interest and dividend revenue 26,400
other functions. Gain on sale of investments 5,500
Interest expense (14,522)
Total other income, net 17,378
Profit before tax 200,000
Tax expense 40,000
Net profit $160,000
3-5
Statement of Profit or Loss Formats:
Nature of Expense Method
• Expenses are classified by their nature.
MAXWELL GEAR CORPORATION
Statement of Profit or Loss
For the Year Ended December 31, 2023
Revenues and gains:
Sales $557,222
What do Interest and dividends 26,400
you Gain on sale of investments 5,500
notice? Total revenues and gains 589,122
Expenses:
Changes in finished goods and $240,371
work in progress inventory
Raw materials used 75,667
What do Employee-related 18,682
Depreciation and amortization 10,000
you Advertising 30,000
notice? Interest 14,522
Total expenses 389,122
Profit before tax 200,000
Tax expense 40,000
Net profit $160,000
3-6
IFRS Versus US GAAP—Statement
of Profit or Loss Presentation
IFRS US GAAP
Statement of Profit or Loss Presentation
• Require certain minimum • No minimum requirements
information on the
statement of profit or loss.
• Expenses are classified • SEC requires expenses to
either by nature or function. be classified by function.
• “Bottom line” is either profit • “Bottom line” is either net
or loss income or net loss
3-7
Discontinued Operations
• If a company discontinues or sells a part of its
business, profits from these discontinued
operations will not continue.
• Profit or loss from discontinued operations is
reported separately, below profit from continuing
operations.
Profit from continuing operations before income $1,000
taxes
Income tax expense (assuming 20%) 200
Profit from continuing operations 800
Profit from discontinued operations, $100 net of
$20 tax expense 80
Net profit $880
3-8
Reporting Discontinued Operations—
When the Component Has Been Sold
3-9
Discontinued Operations Example—
Component Has Been Sold
In October 2023, management of Duluth Holding Company decided to sell one of
its divisions that qualifies as a separate component according to IFRS. The
division was sold on December 18, 2023. Consider the following facts:
1. From January 1 through disposal, the division had a pre-tax loss from
operations of $5,000,000.
2. The assets of the division had a net selling price of $15,000,000 and a
book value of $12,000,000. Gain = $3,000,000
Duluth’s statement of profit or loss for 2023, beginning with after-tax profit from
continuing operations of $20m, would be reported as follows (assume 20% tax):
Profit from continuing operations $20,000,000
Discontinued operations:
Loss from operations of discontinued $(2,000,000)
component (including gain on disposal
of $3,000,000)
Income tax benefit [2,000,000*20% = 400,000] 400,000
(1,600,000)
Loss on discontinued operations
Net profit $18,400,000
3-10
Reporting Discontinued Operations—
When the Component is Held for Sale
When the discontinued component has not been
sold when the reporting period ends, the income
effects are reported but modified
3-11
Discontinued Operations Example—
Component Held for Sale
In October 2023, management of Duluth Holding Company decided to sell one of
its divisions that qualifies as a separate component according to IFRS. On
December 31, 2023, the end of the company’s financial year, the division had
not yet been sold. Consider the following facts related to the division:
1. For the year, the division reported a pre-tax loss from operations of
$5,000,000.
2. On December 31, assets of the division had a book value of $12,000,000
and a fair value minus anticipated cost to sell of $9,000,000. Loss = $3m
Duluth’s statement of profit or loss for 2023, beginning with after-tax income from
continuing operations of $20m, would be reported as follows (assume 20% tax):
Profit from continuing operations $20,000,000
Discontinued operations:
Loss from operations of discontinued
component (including impairment loss $(8,000,000)
of $3,000,000)
Income tax benefit [8,000,000*20%=1,600,000] 1,600,000
Loss on discontinued operations (6,400,000)
Net profit $13,600,000
3-12
Discontinued Operations Example—
Component Held for Sale: Do it in Class
In October 2023, management of Duluth Holding Company decided to sell one of
its divisions that qualifies as a separate component according to IFRS. On
December 31, 2023, the end of the company’s financial year, the division had
not yet been sold. Consider the following facts related to the division:
1. For the year, the division reported a pre-tax loss from operations of
$5,000,000.
2. On December 31, assets of the division had a book value of $12,000,000
and a fair value minus anticipated cost to sell of $14,000,000.
Duluth’s statement of profit or loss for 2023, beginning with after-tax income from
continuing operations of $20m, would be reported as follows (assume 20% tax):
Profit from continuing operations $...
Discontinued operations:
Loss from operations of discontinued
component ...
3-14
Earnings Quality
In General, when it comes to earnings quality
3-15
Earnings Quality:
Ability of reported earnings (profit) to
predict a company’s future earnings
(the higher earning quality is, the higher
predictive ability)
To enhance the predictive value, analytics
try to separate a company’s transitory
earnings effects from its permanent
earnings.
They are not likely to occur again in the
foreseeable future
3-16
Operating Profit and
Earnings Quality
Costs associated with
Restructuring Costs shutdown or relocation of
(May or may not recur) facilities or downsizing of
operations are recognized
in the period incurred.
• Classification shifting
– Shifting operating expenses to nonoperating expense
classification to report higher operating profit. 3-20
Reporting Manipulation
• An important reason to manipulate earnings is to meet or beat the
market expectations (analyst consensus) or avoid reporting a loss
• Research shows that some mild form of earnings manipulation is quite
widespread—Burgstahler & Dichev (1997)
• A small amount of manipulation is almost impossible to catch (The
company can provide valid reasons for its accounting choices)
3-21
Comprehensive Income
• Provides a broader perspective of income and includes
all revenues, expenses, gains, and losses for the
period
– Includes net profit plus other changes in shareholders’
equity that do not represent transactions with owners
Comprehensive = Net + Other
Income Profit or Comprehensive
Loss Income
• Other comprehensive income (OCI) items:
– Revaluation surplus
– Unrealized holding gains and losses on investments
– Gains (losses) from post-employment benefit plans
– Deferred gains (losses) on derivatives
– Foreign currency translation gains (losses)
3-22
Comprehensive Income Format
(Illustration 3-1)
($ in millions)
Net profit $xxx
Other comprehensive income:
Revaluation surplus $x
3-23
Flexibility in Reporting
Information in the statement of profit or loss and
other comprehensive income items can be
presented as:
3-24
LO3-8
IFRS Versus US GAAP
— Comprehensive Income
IFRS US GAAP
Comprehensive income is presented either in a single,
continuous statement or in two separate statements.
Similar OCI items, but an Similar OCI items, except for
additional item, changes in revaluation surplus. US GAAP
revaluation surplus, is possible. prohibits the revaluation model.
3-25
Accounting Changes
Accounting changes fall into one of two categories
accounting policy
change in
accounting estimate
3-26
Change in Accounting Policy
Need to
• Refers to a change from one acceptable recalculate the
accounting method to another. numbers of prior
years for
Voluntary changes in accounting policies comparison
• Accounted for retrospectively by revising prior
years’ financial statements.
Example: Change in inventory costing method
3-27
Change in Depreciation or
Amortization Method
• Considered to be a change in accounting
estimate.
• Accounted prospectively.
• Accounted for the same way as a change in an
accounting estimate (see next slide).
3-28
Change in Accounting Estimate
• Changes due to modification of estimate as new
information comes to light. Need to go back for
• Accounted prospectively. numbers
• If the effect of the change is material, a disclosure
note is needed to describe the change and its
effect on net profit or loss and earnings per share.
Examples:
– Amount of future bad debts on existing
accounts receivable.
– Useful life and residual value of depreciable
asset.
– Future warranty expenses.
3-29