Professional Documents
Culture Documents
CHAPTER 4
CHAPTER 4
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Chapter
4
Income Statement
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use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.
The Income Statement
• Summarizes revenues and expenses, and gains
and losses
• Ends with the net income for a specific period
• Multiple-step format—presents separately
– Gross profit
– Operating income
– Income before taxes
– Net income
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
The Income Statement—Continued
• Single-step format
– Totals all revenues and gains
– Deducts total expenses and losses
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product or service or otherwise on a password-protected website for classroom use.
Multiple-Step Single-Step
Multiple-step Income Statement Single-step Income Statement
For the Year Ended December 31, 2013 For the Year Ended December 31, 2013
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Basic Elements of the Income
Statement
• Net Sales (Revenues)
• Cost of Goods Sold (Cost of Sales)
• Other Operating Revenue
• Operating Expenses
• Other Income or Expense
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product or service or otherwise on a password-protected website for classroom use.
Net Sales (Revenues)
• Represents revenue from the sale of principal
goods or services sold to customers
• Shown net of
– Discounts
– Returns
– Allowances
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product or service or otherwise on a password-protected website for classroom use.
Cost of Goods Sold (Cost of Sales)
• The cost of goods that were sold to produce
revenue
Retailer Manufacturer
Beginning Inventory Beginning Inventory
+ Purchases + Cost of Goods Manufactured
− Ending Inventory − Ending Inventory
Cost of Goods Sold Cost of Goods Sold
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product or service or otherwise on a password-protected website for classroom use.
Other Operating Revenue
• Depends on the operations of the business
• Examples
– Lease revenue
– Royalties
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product or service or otherwise on a password-protected website for classroom use.
Operating Expenses
• Consist of two types
– Selling expenses
• Result from a company’s effort to create sales
• Advertising. Sales commissions, and Sales supplies used
– Administrative expenses
• Relate to the general administration of a company’s
operation
• Salaries, Insurance, and Bad debt expense
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Other Income or Expense
• Secondary activities not directly related to
operations
• Dividend income. Interest income, Gains
(losses) from sale of assets, and Interest
expense
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Earnings per Share
• Earnings divided by the number of shares of
outstanding common stock
Net income
EPS =
Outstanding shares of common stock
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product or service or otherwise on a password-protected website for classroom use.
Retained Earnings
• The accumulated undistributed earnings of the
corporation reported on the balance sheet
• Appropriated
– Restricted by law, contract, or management decision
– Not available for dividends
– Does not represent cash or any other asset
• Unappropriated
– Available for dividends
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Reconciliation of Retained Earnings
• Reported as part of the statement of
stockholders’ equity or combined with the
income statement
Beginning balance of retained earnings
+ Prior period adjustments (net of tax)
± Cumulative effect of a change in accounting principle
(net of tax)
= Beginning balance as adjusted
+ Net income
– Dividends
= End-of-year balance of retained earnings
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Dividends
• Dividends return profits to the owners of a
corporation
• Date of declaration
– Creates liability and reduces retained earnings
• Date of payment
– Eliminates liability and reduces cash
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Stock Dividends
• Issuing a percentage of outstanding stock as
new shares to existing shareholders
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product or service or otherwise on a password-protected website for classroom use.
Stock Dividend—Example
• 100,000 shares outstanding; $1 par; $5 market
• 10% stock dividend on 100,000 shares, issue
10,000 additional shares recorded at $5 per
share
10% stock dividend
Before Effect of dividend After
Common stock par value $1.00 $1.00
Shares outstanding 100,000 issue 10,000 shares 110,000
Total par value $100,000 10,000 $110,000
Additional paid-in capital 750,000 40,000 790,000
Total paid-in capital 850,000 900,000
Retained earnings 1,000,000 (50,000) 950,000
Total stockholders' equity $1,850,000 $1,850,000
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Stock Dividend Example
• 100,000 shares outstanding; $1 par; $5 market
• 40% stock dividend on 100,000 shares, issue
40,000 additional shares recorded at $1 per
share
40% stock dividend
Before Effect of dividend After
Common stock par value $1.00 $1.00
Shares outstanding 100,000 issue 40,000 shares 140,000
Total par value $100,000 40,000 $140,000
Additional paid-in capital 750,000 750,000
Total paid-in capital 850,000 890,000
Retained earnings 1,000,000 (40,000) 960,000
Total stockholders' equity $1,850,000 $1,850,000
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product or service or otherwise on a password-protected website for classroom use.
Stock Splits
• 2-for-1 split
– Doubles the quantity of stock
– Par or stated value is halved
• No effect on retained earnings, additional paid-in
capital, or capital stock accounts
• Analysis issues
– Restate share quantities to reflect split activity
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Legality of Distributions to Shareholders
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product or service or otherwise on a password-protected website for classroom use.
Comprehensive Income
• Foreign currency translation adjustments
• Unrealized holding gains and losses on
available-for-sale marketable securities
• Changes to stockholders’ equity resulting from
additional minimum pension liability adjustments
• Unrealized gains and losses from derivative
instruments
Net income
+ The period’s change in accumulated other comprehensive income
= Comprehensive income
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Comprehensive Income—Continued
• Required disclosures
– Comprehensive income
– Each category of other comprehensive income
– Reclassification adjustments for each category of
other comprehensive income
– Tax effects for each category of other comprehensive
income
– Balances for each category of accumulated other
comprehensive income
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Comprehensive Income—Continued
• Presentation
– A single income statement reporting net income and
comprehensive income, or
– Report comprehensive income in a separate
statement immediately following the statement of
income
• Analysis issues
– Typically more volatile than net income
• A better indication of long-run profitability
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Comprehensive Income—
Combined with Income Statement
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 2013
Sales $ 230,000
Cost of goods sold 140,000
Gross profit 90,000
Operating expenses 40,000
Operating income 50,000
Other income 4,000
Income before income taxes 54,000
Income taxes 20,000
Net income 34,000
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Other comprehensive income 4,000
Comprehensive income $ 38,000
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.