Chapter 4 & 5

INCOME STATEMENT AND
RELATED INFORMATION
CHAPTER 4
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Income Statement and Related Information
Reporting Within
Format of Income Other Reporting
Income Statement the Income
Statement Issues
Statement
• Usefulness • Elements • Gross profit • Accounting changes

• Limitations • Minimum • Income from and errors
• Quality of disclosure operations • Retained earnings
Earnings • Intermediate • Income before statement
components income tax • Comprehensive
• Illustration • Net income income
• Condensed income • Non-controlling • Changes in equity
statements interests statement
• Earnings per share
• Discontinued
operations
• Intraperiod tax
allocation
• Summary
Income Statement
Usefulness
• Evaluate past performance.
• Predicting future performance.
• Help assess the risk or uncertainty of

achieving future cash flows.
LO 1 Understand the uses and limitations of an income statement.

Income Statement
Limitations
• Companies omit items that cannot

be measured reliably.
• Income is 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 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.
Format of the Income Statement
Elements of the Income Statement
Income – Increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other
than those relating to contributions from shareholders.
Income includes both revenues and gains.

• Revenues - ordinary activities of a company
• Gains - may or may not arise from ordinary activities.
Revenue Accounts Gain Accounts

• Sales • Gains on the sale of long-term
• Fee revenue assets
• Interest revenue • Unrealized gains on
• Dividend revenue available-for-sale securities.
• Rent revenue
Expenses – Decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to shareholders.
Examples of Expense Accounts
• Cost of goods sold • Rent expense

• Depreciation expense • Salary expense
• Interest expense
Expenses includes both expenses and losses.

• Expenses - ordinary activities of a company
• Losses - may or may not arise from ordinary activities.
Expense Accounts Loss Accounts

• Cost of goods sold • Losses on restructuring charges
• Depreciation expense • Losses on to sale of long-term
• Interest expense assets
• Rent expense • Unrealized losses on
available-for-sale securities.
• Salary expense
IFRS requires, at a minimum, the following be presented on

the income statement.
Intermediate
Components
Common for
companies to
present some or all
of these sections and
totals within the
income statement.
Illustration 4-1
Income Statement Format
LO 2
Format
Illustration
Includes all of the

major items in the list
above, except for
discontinued
operations.
Illustration 4-2
Income Statement
Condensed
More
representative
of the type
found in
practice.
Illustration 4-3
Condensed Income Statement
Reporting Within the Income Statement
Gross Profit
• Computed by deducting cost of goods sold from net sales

revenue.
• Disclosure of net sales revenue is useful.
• Unusual or incidental revenue is disclosed in other income

and expense.
• Analysts can more easily understand and assess trends in

revenue from continuing operations.
Income from Operations
• Determined by deducting selling and administrative

expenses as well as other income and expense from gross
profit.
• Highlights items that affect regular business activities.
• Used to predict the amount, timing, and uncertainty of

future cash flows.
Income from Operations
Expense Classification
• Reported by
Nature, or
Function
Expense Classification
Illustration: Assume that the accounting firm of Telaris Co.
provides audit, tax, and consulting services. It has the
following revenues and expenses.
Expense Classification (Nature-of-Expense Approach)
Illustration 4-5
Expense Classification (Function-of-Expense Approach)
Illustration 4-6
The function-of-expense method is generally used in practice although many

companies believe both approaches have merit.
Illustration 4-7
Gains and Losses Number of Unusual Items
Reported in a Recent Year
by 600 Large Companies
Gains and Losses
IASB takes the position that both
• revenues and expenses and
• other income and expense
should be reported as part of income from operations.
Companies can provide additional line items, headings, and subtotals when
such presentation is relevant to an understanding of the entity’s financial
performance.
Gains and Losses
Additional items that may need disclosure:
Losses on write-downs of inventories to net realizable value or of
property, plant, and equipment to recoverable amount, as well as
reversals of such write-downs.
Losses on restructurings of the activities and reversals of any
provisions for the costs of restructuring.
Gains or losses on the disposal of items of property, plant, and,
equipment or investments.
Litigation settlements.
Other reversals of liabilities.
Income before Income Tax
Financing costs must be reported on the income statement.
Illustration 4-8
Net Income
Represents the income after all

✔ revenues and
✔ expenses
for the period are considered.
Viewed by many as the most important measure of a

company’s success or failure for a given period of time.
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)
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Other Income
and Expense
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
€80,000
Solution on
notes page
Financing
Costs
Revenues €800,000 €800,000
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
Solution on
notes page
Income Tax
Revenues €800,000 €800,000
Income from continuing operations 100,000 - 100,000
Net income 90,000 90,000
€100,000
Solution on
notes page
Discontinued
Operations
Revenues €800,000 €800,000
Net income 90,000 - 90,000
- €10,000
Solution on
notes page
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.
Earnings Per Share (BE4-10): In 2010, Hollis Corporation
reported net income of $1,000,000. It declared and paid
preference share dividends of $250,000. During 2010, Hollis had
a weighted average of 190,000 ordinary shares outstanding.
Compute Hollis’s 2010 earnings per share.
Net income - Preference dividends

Weighted average number of ordinary shares
$1,000,000 - $250,000
= $3.95 per share
190,000
Discontinued Operations
A component of an entity that either has been disposed of, or is

classified as held-for-sale, and:
1. Represents a major line of business or geographical area of

operations, or
2. Is part of a single, co-coordinated plan to dispose of a major

line of business or geographical area of operations, or
3. Is a subsidiary acquired exclusively with a view to resell.

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.
Illustration: Multiplex Products, a highly diversified company,
decides to discontinue its electronics division. During the current
year, the electronics division lost $300,000 (net of tax). Multiplex
sold the division at the end of the year at a loss of $500,000 (net
of tax).
Income from continuing operations $20,000,000
Discontinued operations:
Loss from operations, net of tax 300,000
Loss on disposal, net of tax 500,000
Total loss on discontinued operations 800,000
Net income $19,200,000
Illustration 4-12
A company that
reports a
discontinued
operation must
report per share
amounts for the
line item either on
the face of the
income statement
or in the notes to
the financial
statements.
Intraperiod Tax Allocation
Relates the income tax expense to the specific items that give
rise to the amount of the tax expense.
On the income statement, income tax is allocated to:
(1)Income from continuing operations before tax
(2) Discontinued operations
“let the tax follow the income”

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.
Illustration 4-13
Illustration: Schindler Co. has income before income tax of

$250,000. It has a loss of $100,000 from a discontinued
operation. Assuming a 30 percent income tax rate, Schindler
presents the following information on the income statement.
Illustration 4-14
Summary
Summary
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.
Other Reporting Issues
Accounting Changes and Errors
Changes in Accounting Principle

• Company adopts a different accounting principle.
• Retrospective adjustment.
• Cumulative effect adjustment to beginning retained earnings.
• Approach preserves comparability.
• Examples include:
Change from FIFO to average cost.
Change from the percentage-of-completion to the
completed-contract method.
Retained Earnings Statement
Increase Decrease
• Net income • Net loss

• Change in • Dividends
accounting principle • Change in
• Prior period accounting principle
adjustment • Prior period
adjustment
Retained Earnings Statement
Illustration 4-20
Illustration
Before issuing the report for the year ended December 31, 2012, you
discover a $50,000 error (net of tax) that caused 2011 inventory to be
overstated (overstated inventory caused COGS to be lower and thus net
income to be higher in 2011). Would this discovery have any impact on
the reporting of the Statement of Retained Earnings for 2012?
Illustration
Solution on
notes page
Restrictions of Retained Earnings
Disclosed
• In notes to the financial statements.
• As Appropriated Retained Earnings.
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.
LO 9 Explain how to report other comprehensive income.

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

Review Question
Gains and losses that bypass net income but affect equity
are referred to as
a. comprehensive income.
b. other comprehensive income.
c. prior period income.
d. unusual gains and losses.

Two approaches to reporting Comprehensive Income:

1. A second income statement.
2. A combined statement of comprehensive income.

Illustration 4-21
Comprehensive
Income
Two-statement
format:
Comprehensive
Income

Illustration 4-22
Comprehensive
Income
Combined
statement format:
Comprehensive
Income

Statement of Changes in Equity
Required, in addition to a statement of comprehensive

income.
Generally comprised of
✔ share capital—ordinary,
✔ share premium—ordinary,
✔ retained earnings, and the
✔ accumulated balances in other comprehensive
items.

Reports the change in each equity account and in total

equity for the period.
1. Comprehensive income for the period.
2. Contributions (issuances of shares) and distributions

(dividends) to owners.
3. Reconciliation of the carrying amount of each component
of equity from the beginning to the end of the period.

Illustration 4-23

Regardless of the display format used, V. Gill reports the accumulated

other comprehensive income of $90,000 in the equity section of the
statement of financial position as follows.
Illustration 4-24

Presentation of the income statement under U.S. GAAP follows either a
single-step or multiple-step format. IFRS does not mention a single-step
or multiple-step approach. In addition, under U.S. GAAP, companies
must report an item as extraordinary if it is unusual in nature and
infrequent in occurrence. Extraordinary items are prohibited under
IFRS.
Under IFRS, companies must classify expenses by either nature or
function. U.S. GAAP does not have that requirement, but the U.S. SEC
requires a functional presentation.
IFRS identifies certain minimum items that should be presented on the
income statement. U.S. 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-U.S. GAAP/IFRS information.
U.S. GAAP does not require companies to indicate the amount of net
income attributable to non-controlling interest.
U.S. 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.
Both U.S. GAAP and IFRS have items that are recognized in equity as
part of comprehensive income but do not affect net income. U.S. GAAP
provides three possible formats for presenting this information: single
income statement, combined income statement of comprehensive
income, in the statement of shareholders’ equity. Most companies that
follow U.S. GAAP present this information in the statement of
shareholders’ equity. IFRS allows a separate statement of
comprehensive income or a combined statement.
Under IFRS, revaluation of property, plant, and equipment, and
intangible assets is permitted and is 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.
The terminology used in the IFRS literature is sometimes different than
what is used in U.S. GAAP.
STATEMENT OF FINANCIAL POSITION
AND STATEMENT OF CASH FLOWS
CHAPTER 5
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Learning Objectives
1. Explain the uses and limitations of a statement of financial position.
2. Identify the major classifications of the statement of financial position.
3. Prepare a classified statement of financial position using the report and account
formats.
4. Indicate the purpose of the statement of cash flows.
5. Identify the content of the statement of cash flows.
6. Prepare a basic statement of cash flows.
7. Understand the usefulness of the statement of cash flows.
8. Determine additional information requiring note disclosure.
9. Describe the major disclosure techniques for financial statements.

Statement of Financial Position
and Statement of Cash Flows
Statement of Statement of Cash Additional

Financial Position Flows Information
• Usefulness • Purpose • Notes

• Limitations • Content and format • Techniques of
• Classification • Preparation disclosure
• Usefulness • Other guidelines
Statement of Financial Position, also referred to as the
balance sheet:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to

creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of

future cash flows.
Usefulness
• Computing rates of return.
• Evaluating capital structure.
• Assess risk and future cash flows.
• Analyze company’s:
Liquidity
Solvency
Financial flexibility
Limitations
• Most assets and liabilities are reported at historical
cost.
• Use of judgments and estimates.
• Many items of financial value are omitted.
Classification
Subclassifications
Illustration 5-1
In some countries, such as Germany, companies often list current assets first.
IAS No. 1 requires companies to distinguish current assets and liabilities from
non-current ones, except in limited situations.
Classification
Non-Current Assets
Generally consists of:
• Long-term Investments
• Property, Plant, and Equipment
• Intangibles Assets
• Other Assets
Classification
Non-Current Assets
Long-term Investments
1. Securities (bonds, ordinary shares, or long-term notes).
2. Tangible assets not currently used in operations (land held

for speculation).
3. Special funds (sinking fund, pension fund, or plant

expansion fund.
4. Non-consolidated subsidiaries or associated companies.

Classification
Investments in Debt and Equity Securities
Portfolio Type Valuation Classification
Held-for-Collect Amortized Current or

Debt
ion Cost Noncurrent
Trading Debt or Equity Fair Value Current
Non-Trading Current or
Equity Fair Value
Equity Noncurrent
Classification
Long-Term Investments
Illustration 5-2
Statement of Financial
Position Presentation of
Long-Term Investments
Classification
Property, Plant, and Equipment
Tangible long-lived assets used in the regular operations
of the business.
• Physical property such as land, buildings, machinery,

furniture, tools, and wasting resources (minerals).
• With the exception of land, a company either depreciates

(e.g., buildings) or depletes (e.g., oil reserves) these
assets.
Classification
Illustration 5-3
Presentation of Property, Plant,
and Equipment
Classification
Intangible Assets
Lack physical substance and are not financial
instruments.
• Patents, copyrights, franchises, goodwill, trademarks,
trade names, and customer lists.
• Amortize limited-life intangible assets over their useful
lives.
• Periodically assess indefinite-life intangibles for
impairment.
Classification
Intangible Assets
Illustration 5-4
Intangible Assets
Classification
Other Assets
Items vary in practice. Can include:
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale
Restricted cash or securities
Classification
Current Assets
Cash and other assets a company expects to convert
into cash, sell, or consume either in one year or in the
operating cycle, whichever is longer.
Illustration 5-5
Classification
Inventories
Disclose:
• Basis of valuation (e.g., lower-of-cost-or-market).
• Cost flow assumption (e.g., FIFO or average cost).
Illustration 5-6
LO 2
Classification
Inventories Manufacturing Company
Illustration 5-8
Presentation of Inventories
LO 2
Classification
Receivables
Claims held against customers and others for

✔ money,
✔ goods, or
✔ services.
Major categories of receivables should be shown in the

statement of financial position or the related notes.
Classification
Receivables
Illustration 5-8
Presentation of Receivables
Classification
Prepaid Expenses
Payment of cash, that is recorded as an asset because service or
benefit will be received in the future.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:

• insurance • rent
• supplies • maintenance on equipment
• advertising
Classification
Prepaid Expenses Illustration 5-9
Presentation of Prepaid Expenses
LO 2
Classification
Short-Term Investments
Portfolios Type Valuation Classification
Held-to-Maturit Current or
Debt Amortized Cost
y Noncurrent
Trading Debt or Equity Fair Value Current
Available- Current or
Debt or Equity Fair Value
for-Sale Noncurrent
Classification
Short-Term Investments
Illustration 5-10
Presentation of Short-Term Investments
Classification
Cash
• Generally any monies available “on demand.”
• Cash equivalents - short-term highly liquid investments
that mature within three months or less.
• Restrictions or commitments must be disclosed.
Illustration 5-11
Classification
Cash Illustration 5-12
Position—Restricted Cash
Classification
Equity
Classification
Equity
Ordinary shares and preference shares - must disclose
the par value and the authorized, issued, and outstanding
amounts.
Share premium - company usually presents one amount

for ordinary and preference shares.
Retained earnings - amount may be divided between the

unappropriated and restricted amounts.
Treasury shares - shown as a reduction of equity.

Classification
Equity
Illustration 5-13
Position—Equity
Classification
Non-Current Liabilities
Obligations that a company does not reasonably expect to
liquidate within the longer of one year or the normal
operating cycle. Three types:
1. Obligations arising from specific financing situations.
2. Obligations arising from the ordinary operations of the
company.
3. Obligations that depend on the occurrence or
non-occurrence of one or more future events to confirm the
amount payable, or the payee, or the date payable.
Classification
Illustration 5-15
Classification
Current Liabilities
Obligations that a company generally expects to settle in its
normal operating cycle or one year, whichever is longer.
This concept includes:
1. Payables resulting from the acquisition of goods and
services: accounts payable, wages payable, and so on.
2. Collections received in advance for the delivery of goods or
performance of services, such as unearned rent revenue.
3. Other liabilities whose liquidation will take place within the
operating cycle or one year.
Classification
Current Liabilities
Illustration 5-16
Current Liabilities
Classification
Statement of Financial Position Format

• IFRS does not specify the order or format in which
a company presents items in the statement of
financial position.
• Account form or report form.
Classification
Account Form Illustration 5-17
LO 3 Prepare a classified statement of financial position

using the report and account formats.
Classification
Report Form
Illustration 5-17
LO 3
The Statement of Cash Flows
One of the three basic objectives of financial

reporting is
“assessing the amounts, timing, and

uncertainty of cash flows.”
IASB requires the statement of cash flows

(also called the cash flow statement).
Purpose of the Statement of Cash Flows
Primary Purpose: To provide relevant information
about the cash receipts and cash payments of an
enterprise during a period.
The statement provides answers to the following
questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?
LO 4 Indicate the purpose of the statement of cash flows.

Content and Format
Operating Investing Financing

Cash inflows Cash inflows Cash inflows
and outflows and outflows and outflows
from from from
operations. non-current non-current
assets. liabilities and
equity.
Statement helps users evaluate liquidity, solvency, and

financial flexibility.
LO 5 Identify the content of the statement of cash flows.

Content and Format
Illustration 5-19
LO 5 Identify the content of the statement of cash flows.

Preparation of the Statement of Cash Flows
Sources of Information
Information obtained from several sources:
(1) comparative statement of financial position,
(2) current income statement, and
(3) selected transaction data.
LO 6 Prepare a basic statement of cash flows.

Statement of Cash Flows: On January 1, 2011, in its first
year of operations, Telemarketing Inc. issued 50,000 ordinary
shares ($1 par value) for $50,000 cash. The company rented
its office space, furniture, and telecommunications equipment
and performed marketing services throughout the first year.
In June 2011 the company purchased land for $15,000.
Illustration 5-20 shows the company’s comparative statement
of financial position at the beginning and end of 2011.

Illustration 5-20
Illustration 5-21
LO 6
Preparing the Statement of Cash Flows
Determine:
1. Cash provided by (or used in) operating activities.
2. Cash provided by or used in investing and financing
activities.
3. Determine the change (increase or decrease) in
cash during the period.
4. Reconcile the change in cash with the beginning
and the ending cash balances.

Illustration 5-20 Illustration 5-21
Cash provided by operating activities

Illustration 5-22

Illustration 5-20 Illustration 5-21
Illustration 5-29
The Statement
of Cash Flows
Next, the company
determines its investing
and financing activities.
Statement of Cash Flows (BE 5-12): Keyser Beverage
Company reported the following items in the most recent year.
Activity
Net income $40,000 Operating
Dividends paid 5,000 Financing
Increase in accounts receivable 10,000 Operating
Increase in accounts payable 7,000 Operating
Purchase of equipment 8,000 Investing
Depreciation expense 4,000 Operating
Issue of notes payable 20,000 Financing
Required: Prepare a Statement of Cash Flows

Statement of Cash Flows (BE 5-12)
Noncash credit to
revenues.
Noncash charge to
expenses.

Review
In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable.

Significant Non-Cash Activities
Significant financing and investing activities that do not
affect cash are reported in either a separate schedule at
the bottom of the statement of cash flows or in the notes.
Examples include:
• Issuance of ordinary shares to purchase assets.
• Conversion of bonds into ordinary shares.
• Issuance of debt to purchase assets.
• Exchanges on long-lived assets.

Illustration 5-24
Comprehensive Statement
of Cash Flows
Usefulness of the Statement of Cash Flows
Without cash, a company will not survive.

Cash flow from Operations:
• High amount - company able to generate sufficient

cash to pay its bills.
• Low amount - company may have to borrow or

issue equity securities to pay bills.
LO 7 Understand the usefulness of the statement of cash flows.

Financial Liquidity
Illustration 5-26
Net Cash Provided by

Current Cash Operating Activities
Debt Coverage =
Ratio Average Current Liabilities
Ratio indicates whether the company can pay off its

current liabilities from its operations. A ratio near 1:1 is
good.

Financial Flexibility
Illustration 5-27
Net Cash Provided by

Cash Debt Operating Activities
Coverage =
Ratio Average Total Liabilities
This ratio indicates a company’s ability to repay its

liabilities from net cash provided by operating activities,
without having to liquidate the assets employed in its
operations.

Free Cash Flow

Illustration 5-29
The amount of discretionary cash flow a company has for

purchasing additional investments, retiring its debt,
purchasing treasury stock, or simply adding to its
liquidity.
Review
The current cash debt coverage ratio is often used to
assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

Financial Statements and Notes
IFRS requires that a complete set of financial statements be
presented annually. Comprised of the following:
1. Statement of financial position at the end of the period;

2. Statement of comprehensive income for the period to be
presented either as:
a) One single statement of comprehensive income.
b) A separate income statement and statement of comprehensive
income.
3. Statement of changes in equity;
4. Statement of cash flows; and
5. Notes, comprising a summary of significant accounting policies
and other explanatory information.
LO 8 Determine additional information requiring note disclosure.

Notes to the Financial Statements

Accounting policies
• Specific principles, bases, conventions, rules, and
practices applied by a company in preparing and
presenting financial information.
• First note generally titled, “Summary of Significant

Accounting Policies.”

Additional Notes to the Financial Statements
In many cases, IFRS requires specific disclosures. Examples
include:
Items of property, plant, and equipment are disaggregated into

classes.
Receivables are disaggregated into amounts receivable from trade

customers, receivables from related parties, prepayments, and other
amounts.
Inventories are disaggregated into classifications such as

merchandise, production supplies, work in process, and finished
goods.

Techniques of Disclosure
Parenthetical Explanations
Illustration 5-37
Cross-Reference and Contra Items

Illustration 5-38
LO 9 Describe the major disclosure techniques for financial statements.

Other Guidelines
Offsetting
IAS No. 1 indicates that it Consistency
is important that IAS No. 8, for example, notes
assets and liabilities, that users of the financial
and income and statements need to be
expense, be reported able to compare the financial
separately. statements of a company
Fair Presentation
over time to identify
Faithful representation of trends
transactions and events in financial position, financial
using the definitions and performance, and cash
recognition criteria in the flows.
Framework.
LO 9 Describe the major disclosure techniques for financial statements.
IFRS requires that specific items be reported on the statement of
financial position. No such general standard exists in U.S. GAAP.
However under U.S. GAAP, public companies must follow U.S. SEC
regulations, which require specific line items.
U.S. GAAP statements report current assets first, followed by
non-current assets. Current liabilities, noncurrent liabilities, and
shareholders’ equity then follow.
While the use of the term “reserve” is discouraged in U.S. GAAP,
there is no such prohibition in IFRS.
There are many similarities between IFRS and U.S. GAAP related to
statement of financial position presentation. For example:
✔ U.S. GAAP specifies minimum note disclosures, similar to IFRS
on accounting policies and judgments. These must include
information about (1) accounting policies followed, (2)
judgments that management has made in applying the entity’s
accounting policies, and (3) key assumptions and estimation
uncertainty that could result in a material adjustment to the
carrying amounts of assets and liabilities.
✔ Financial statements must be prepared annually.
Using Ratios to Analyze Performance
Analysts and other interested parties can gather qualitative
information from financial statements by examining
relationships between items on the statements and identifying
trends in these relationships.
LO 10 Identify the major types of financial ratios and what they measure.
Illustration 5A-1
A Summary of Financial Ratios
Illustration 5A-1
Illustration 5A-1

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INCOME STATEMENT AND

• Usefulness • Elements • Gross profit • Accounting changes

• Evaluate past performance.

• Predicting future performance.

• Help assess the risk or uncertainty of

LO 1 Understand the uses and limitations of an income statement.

• Companies omit items that cannot

• Income is affected by the accounting

• Income measurement involves

Companies have incentives to manage income to meet

Quality of earnings is reduced if earnings management

Income – Increases in economic benefits during the accounting

Income includes both revenues and gains.

Revenue Accounts Gain Accounts

Examples of Expense Accounts

• Cost of goods sold • Rent expense

Expenses includes both expenses and losses.

Expense Accounts Loss Accounts

IFRS requires, at a minimum, the following be presented on

Includes all of the

• Computed by deducting cost of goods sold from net sales

• Disclosure of net sales revenue is useful.

• Unusual or incidental revenue is disclosed in other income

• Analysts can more easily understand and assess trends in

• Determined by deducting selling and administrative

• Highlights items that affect regular business activities.

• Used to predict the amount, timing, and uncertainty of

The function-of-expense method is generally used in practice although many

• revenues and expenses and

• other income and expense

should be reported as part of income from operations.

Financing costs must be reported on the income statement.

Represents the income after all

Viewed by many as the most important measure of a

If a company prepares a consolidated income statement that

Net income - Preference dividends

• Important business indicator.

Net income - Preference dividends

A component of an entity that either has been disposed of, or is

1. Represents a major line of business or geographical area of

2. Is part of a single, co-coordinated plan to dispose of a major

3. Is a subsidiary acquired exclusively with a view to resell.

Companies report as discontinued operations

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

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

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

“let the tax follow the income”

Illustration: Schindler Co. has income before income tax of

Illustration: Schindler Co. has income before income tax of

Changes in Accounting Principle

• Net income • Net loss

All changes in equity during a period except those

LO 9 Explain how to report other comprehensive income.

LO 9 Explain how to report other comprehensive income.

LO 9 Explain how to report other comprehensive income.

Two approaches to reporting Comprehensive Income:

2. A combined statement of comprehensive income.

LO 9 Explain how to report other comprehensive income.

LO 9 Explain how to report other comprehensive income.