Chapter 4 Income Statement

Chapter 4, Slide #1

What is income statement (profit & loss statement)?

Is a summary of a companys profit or loss during any one given period of time.

Chapter 4, Slide #2

What are income statements used for?

Track revenues and expenses Find out what areas of the business are over budget or under budget

Chapter 4, Slide #3

The Income Statement

Dated for a period of time
For the Year Ended...

Multiple-step format
Gross profit Operating income Income before taxes Net income

Single-step format
Total of all revenues and gains Less the total of all expenses and losses
Chapter 4, Slide #4

Multiple-Step
Multiple-Step Company Income Statement For the Year Ended December 31, 20XX Sales Cost of Goods Sold Gross Profit Operating Expenses: General & Administrative Advertising Uncollectible Accounts Operating (Loss) Income Interest (Income) Expense Other (Revenue)Expense (net) (Loss) Income Before Taxes Income Taxes (Benefit) Net Income $ $426,426 190,831 235,595 $ 116,902 126,120 687 (1,293) (6,371)

Single Step
Single-Step Company Income Statement For the Year Ended December 31, 20XX Sales Interest Income Other Income $ 426,426 1,293 6,371 434,090 Costs and Expenses: Cost of Goods Sold 243,709 General & Administrative (8,114) Advertising Uncollectible Accounts (7,664)
(450) (Loss) Income Before Taxes Income Taxes (Benefit) (666) 216

$ 190,831 116,902 126,120 687

434,540 (450) (666) $ 216

Net Income

Chapter 4, Slide #5

Multi-Step Format
Net Sales Cost of Sales Gross Income Selling, General and Administrative Expenses (SG&A) Operating Income Other Income & Expenses

Single-Step Format
Net Sales Materials and Production Marketing and Administrative Research and Development Expenses (R&D) Other Income & Expenses Pretax Income

Pretax Income*
Taxes Net Income (after tax)

Taxes
Net Income -Chapter 4, Slide #6

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

Chapter 4, Slide #7

Net Sales
Revenue from the sale of principal goods or services sold to customers Shown net of
Discounts Returns Allowances

Chapter 4, Slide #8

Cost of Goods Sold

The cost of goods that were sold to produce revenue
Retailer Beginning Inventory Manufacturer Beginning Inventory

+ Purchases
Ending Inventory = Cost of Goods Sold

+ Cost of Goods Manufactured

Ending Inventory

= Cost of Goods Sold

Chapter 4, Slide #9

Other Operating Revenue

Reflects the nature of the business Examples
Lease revenue Royalty revenue Finance charges Commission revenue

Chapter 4, Slide #10

Operating Expenses
Selling expenses
Result from the companys effort to create sales Examples
Advertising Sales commissions Sales supplies used

Administrative expenses

Relate to the general administration of the companys operation Examples

Salaries Insurance Bad debt expense

Chapter 4, Slide #11

Other Income or Expense

Secondary activities not directly related to operations
Dividend income Interest income Gains (losses) from sale of assets Interest expense

Chapter 4, Slide #12

Special Income Statement Items

Unusual or Infrequent Items Disclosed Separately
Included with normal recurring revenues and expenses If material, disclosed separately, before income taxes Relate to operations

Ex. The unusual or infrequent item in 2006 would be removed as follows:

Shareholder litigation settlement expense Less estimated tax effect ( 17.98% $ 17,650,000) Net expense of litigation settlement $ 17,650,000 3,173,470 $ 14,476,530

Chapter 4, Slide #13

Special Income Statement Items (contd)

Equity in Earnings of Nonconsolidated Subsidiaries
Are the investors proportional share of the investees net income (losses) Does not represent cash flow to the investor
Cash dividends received represent cash flow

Analysis issues:
Investors net income includes revenue of other entity May misrepresent ratios Presented before tax; tax consequences typically immaterial

Chapter 4, Slide #14

Special Income Statement Items (contd)

Discontinued Operations
Reported net of income tax Analysis issues:
Inadequate disclosure of associated assets Lack of historical profit and loss information on the discontinued operations

Chapter 4, Slide #15

Special Income Statement Items (contd)

Extraordinary Items
Unusual and infrequent (major casualty) Reported net of income tax Analysis issues:
Exclude from primary analysis Include for supplementary analysis

Chapter 4, Slide #16

Special Income Statement Items (contd)

Minority Share of Earnings
Earnings of a partially-owned consolidated subsidiary that would accrue to the minority owners Presentation may be either pre-tax or net-of-tax

Chapter 4, Slide #17

Retained Earnings
The accumulated undistributed earnings of the corporation reported on the balance sheet Appropriated (restricted)
Restricted by law, contract, or management decision Not available for dividends

Unappropriated
Available for dividends Does not represent cash or any other asset

Chapter 4, Slide #18

Stock Dividends
Cash dividends
Date of declaration: create liability and reduce retained earnings Date of payment: reduce liability and cash

Stock dividends
Small (less then 25%): capitalize the market value of the stock Material: capitalize the par value of the stock Total equity is unaffected by a stock dividend

Chapter 4, Slide #19

Stock Dividend Example

100,000 shares outstanding; $1 par; $5 market
Common stock par value Shares outstanding Total par value Additional paid-in capital Total paid-in capital Retained earnings Total stockholders' equity Before $1.00 100,000 $100,000 750,000 850,000 1,000,000 $1,850,000 10% stock dividend 40% stock dividend effect of dividend balance after effect of dividend balance after $1.00 $1.00 issue 10,000 sh 110,000 issue 40,000 sh 140,000 10,000 $110,000 40,000 $140,000 40,000 790,000 750,000 (50,000) 900,000 950,000 $1,850,000 (40,000) 890,000 960,000 $1,850,000

10% stock dividend on 100,000 shares: issue 10,000 additional shares recorded at $5 per share

40% stock dividend on 100,000 shares: issue 40,000 additional shares recorded at $1 per share
Chapter 4, Slide #20

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

Chapter 4, Slide #21

Comprehensive Income
Net income + The periods change in accumulated other comprehensive income = 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
Chapter 4, Slide #22

Comprehensive Income (contd)

Required disclosures
Comprehensive income Other comprehensive income from each category Reclassification adjustments for each category of other comprehensive income Tax effects for each category of other comprehensive income Balances for each category of other comprehensive income
Chapter 4, Slide #23

Comprehensive Income (contd)

Presentation
In a separate financial statement Combined with the income statement As part of the schedule of changes in stockholders equity

Chapter 4, Slide #24

Comprehensive Income Separate Statement

XYZ Corporation Statement of Comprehensive Income For the Year Ended December 31, 20XX Net income Other comprehensive income Available-for-sale security adjustment, net of tax Minimum pension liability adjustment, net of tax Foreign currency transaction adjustment, net of tax Total other comprehensive income Comprehensive income $ 34,000 5,500 3,500 (5,000) 4,000 $ 38,000

Chapter 4, Slide #25

Comprehensive Income Combined with Income Statement

XYZ Corporation Statement of Income and Comprehensive Income For the Year Ended December 31, 20XX Sales Cost of goods sold Gross profit Operating expenses Operating income Other income Income before income taxes Income taxes Net income Other comprehensive income Available-for-sale security adjustment, net of tax Minimum pension liability adjustment, net of tax Foreign currency transaction adjustment, net of tax Other comprehensive income Comprehensive income Earnings per share (for net income only) $ 230,000 140,000 370,000 40,000 330,000 4,000 326,000 20,000 306,000 5,500 3,500 (5,000) 4,000 $ 310,000 $ 2.80
Chapter 4, Slide #26

Comprehensive Income As Part of the Statement of Stockholders Equity

XYZ Corporation Statement of Changes in Stockholders' Equity For the Year Ended December 31, 20XX Accumulated Other Comprehensive Common Stock Income Amount Shares $10,000 $110,000 55,000

Beginning Balance Net Income Available-for-sale security adjustment, net of tax Minimum pension liability adjustment, net of tax Foreign currency transaction adjustment, net of tax Comprehensive income Ending Balance

Retained Total Earnings $180,000 $60,000 34,000 34,000

5,500

5,500

3,500

3,500

(5,000) 38,000 $218,000 $94,000

(5,000) $14,000 $110,000 55,000

Chapter 4, Slide #27

Reference
Gibson, C.H. (2009). Financial Reporting & Analysis: Using Financial Accounting Information. 11th ed. Norwalk, Connecticut: South-Western Cengage Learning.