CHAPTER 4&5

INCOME STATEMENT AND

STATEMENT OF FINANCIAL POSITION

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4-1
 Financial Statements

Statement of Financial Position

Income Statement

Statement of Stockholders’ Equity

(Statement of Retained Earnings)

Statement of Cash Flows

(Statement of Changes in Cash & Cash Equivalents)

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4-2
 Reporting Within the Income Statement
Illustration 4-12

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 Income Statement Components

Revenues represent increases in owners’ equity arising from

the sale of merchandise or the performance of services by an
enterprise to its customers.

Expenses represent decreases in owners’ equity arising from

the sacrifice or expiration of assets and the performance of
activities necessary to generate revenues.

Net Income is the amount by which total revenues exceed total

expenses plus or minus any gains or losses.

Revenues ( and Gains) – Expenses ( and Losses) = Net Income

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4-4
 Income Statement
Usefulness
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of achieving future
cash flows.

Limitations
Companies omit items that cannot be measured reliably.
Income is affected by the accounting methods employed.
Income measurement involves judgment.
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4-5
 Income Statement

Quality of Earnings

Companies have incentives to manage income to meet

or beat market expectations, so that
market price of stock increases and
value of management’s compensation increase.

Quality of earnings is reduced if earnings management

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

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4-6 LO 1 Understand the uses and limitations of an income statement.
 Limitations of the income statement include all of the following
except

a. items that cannot be measured reliably are not reported.

b. only actual amounts are reported in determining net
income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods
employed

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4-7
 Which of the following is an example of managing earnings up?

a. Decreasing estimated salvage value of equipment.

b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.

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4-8
 Format

Illustration

Includes all of the

major items in the list
above, except for
discontinued
operations.

Illustration 4-2
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4-9 LO 3 Income Statement
 Reporting Within the Income Statement
Illustration 4-7
Gains and Losses Number of Unusual Items
Reported in a Recent Year
by 600 Large Companies

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4-10 LO 4 Explain how to report items in the income statement.
 Reporting Within the Income Statement

Allocation to Non-Controlling Interest

If a company prepares a consolidated income statement that
includes a partially own subsidiary. IFRS requires that net income
of the subsidiary be allocated to the controlling and non-
controlling interest. This allocation is reported at the bottom of the
income statement after net income.
Illustration 4-9

(amounts given)
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4-11 LO 4 Explain how to report items in the income statement.
 Reporting Within the Income Statement

Discontinued Operations
Companies report as discontinued operations

1. (in a separate income statement category) the gain or loss

from disposal of a component of a business.

2. The results of operations of a component that has been or

will be disposed of separately from continuing operations.

3. The effects of discontinued operations net of tax, as a

separate category after continuing operations.

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4-12 LO 5 Identify where to report earnings per share information.
 During 2019, Lopez Corporation disposed of Pine Division, a
major component of its business. Lopez realized a gain of
€1,500,000, net of taxes, on the sale of Pine's assets. Pine's
operating losses, net of taxes, were €1,800,000 in 2019. How
should these facts be reported in Lopez's income statement for
2019?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. €1,800,000 loss €1,500,000 gain
b. 300,000 loss 0
c. 0 300,000 loss
d. 1,500,000 gain 1,800,000 loss

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4-13
 Reporting Within the Income Statement

Presented below is some financial information related to Volaire

Group. Compute the following:
Discontinued
Operations
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
- €10,000
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4-14 LO 4 Explain how to report items in the income statement.
 Reporting Within the Income Statement

Earnings Per Share

Net income - Preference dividends
Weighted average of ordinary shares outstanding

Important business indicator.

Measures the dollars earned by each ordinary share.
Must be disclosed on the income statement.

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4-15 LO 5 Identify where to report earnings per share information.
 Reporting Within the Income Statement

Summary

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4-16 LO 6 Explain intraperiod tax allocation.
 Reporting Within the Income Statement

Summary

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4-17 LO 6 Explain intraperiod tax allocation.
 Reporting Within the Income Statement

Different Income Concepts

Users and
preparers look at
more than just
the bottom line
income number,
which supports
the IFRS
requirement to
provide subtotals
within the income
statement.

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4-18 LO 6 Explain intraperiod tax allocation.
 Other Reporting Issues

Comprehensive Income
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
equity.

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4-19 LO 9 Explain how to report other comprehensive income.
 Other Reporting Issues

Comprehensive Income
Other Comprehensive
Income Statement + Income
Unrealized gains and
losses on available-for-
sale securities.
Translation gains and
losses on foreign
currency.
Plus others

Reported in Equity

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4-20 LO 9 Explain how to report other comprehensive income.
 Other Reporting Issues
Illustration 4-21
Comprehensive
Income
Two-statement
format:
Comprehensive
Income

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4-21 LO 9 Explain how to report other comprehensive income.
 Other Reporting Issues
Illustration 4-22
Comprehensive
Income
Combined
statement
format:
Comprehensive
Income

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4-22 LO 9 Explain how to report other comprehensive income.
 Reporting Within the Income Statement

Presented below is some financial information related to Volaire

Group. Compute the following: Other
Comprehensive
Income
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
€30,000
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4-23 LO 4 Explain how to report items in the income statement.
 Madsen Company reported the following information for 2019:
Sales revenue 510,000
Cost of goods sold 350,000
Operating expenses 55,000
Unrealized holding gain on available-for-sale securities 30,000
Cash dividends received on the securities 2,000

For 2019, Madsen would report other comprehensive income of

a. ₤137,000.
b. ₤135,000.
c. ₤32,000.
d. ₤30,000.

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 Comprehensive income includes all of the following except

a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.

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 Other Reporting Issues

Statement of Changes in Equity

Illustration 4-23

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4-26 LO 9 Explain how to report other comprehensive income.
 For the year ended December 31, 2019, Transformers Inc.
reported the following:
Net income €120,000
Preference dividends declared 20,000
Ordinary share dividends declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings, beginning balance 160,000
Share capital – ordinary 80,000
Accumulated other comprehensive income,
Beginning balance 10,000

What would Transformers report as total stockholders' equity?

a. €344,000
b. €336,000
c. €256,000
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d. €240,000
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 Statement of Financial
Position Format

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 Statement of financial position Components

Assets are rights or resources owned by an enterprise that have

future benefit in use.

Liabilities are obligations owed by an enterprise that require the

future disbursement of assets or the rendering of services to
non-owners.

Stockholders’ Equity represents the residual claims by the

owners against the assets of an enterprise.
-Contributed capital:

-Retained earnings

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 CLASSIFICATION IN THE STATEMENT

Equity

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4-30 LO 2
 CLASSIFICATION IN THE STATEMENT

Subclassifications ILLUSTRATION 5-1

Statement of Financial
Position Classification

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 Statement of Cash Flows: cash inflows and outflows for a
period of time

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 Cash Flow Statement Components
Operating Activities are related to the production & sale of
goods or the rendering of services.

Investing Activities are related to the purchase or sale of long-

term assets including property, plant & equipment, intangible
assets as well as investments in other companies.

Financing Activities are related to the borrowing & repayment

of short-term & long-term loans and the contributions from &
distributions to the owners of an enterprise.

Net Increase (Decrease) in Cash represents the net effect of

increases & decreases in cash arising from the above activities
as well as the effect of exchange rate fluctuations on cash

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 ADDITIONAL INFORMATION

Notes to the Financial Statements

Accounting Policies
 Specific principles, bases, conventions, rules, and
practices applied in preparing and presenting
financial information.

 First note generally titled, “Summary of Significant

Accounting Policies.”

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4-34 LO 8