Income Statement and Related Information

INCOME STATEMENT AND RELATED
INFORMATION
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 available-
Dividend revenue for-sale securities.
Rent revenue
LO 2 Understand the content and format of the income statement.

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
LO 3 Income Statement
Condensed
More
representative
of the type
found in
practice.
Illustration 4-3
Condensed Income Statement
LO 3 Prepare an 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.
LO 4 Explain how to report items in the income statement.

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)
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.
LO 5 Identify where to report earnings per share information.

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 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”
LO 6 Explain intraperiod tax allocation.

Summary

Summary

Other Reporting Issues
Retained Earnings Statement
Increase Decrease
Net income Net loss
Change in Dividends
accounting principle Change in
Prior period accounting principle
adjustment Prior period
adjustment
LO 8 Prepare a retained earnings statement.

Restrictions of Retained Earnings
Disclosed
In notes to the financial statements.
As Appropriated Retained Earnings.
LO 8 Prepare a retained earnings statement.

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

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

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INCOME STATEMENT AND RELATED

Evaluate past performance.

Predicting future performance.

Help assess the risk or uncertainty

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

Income is affected by the accounting

Income measurement involves

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

Companies have incentives to manage income to meet

Quality of earnings is reduced if earnings management

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

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

Revenues - ordinary activities of a company

Revenue Accounts Gain Accounts

LO 2 Understand the content and format of the income statement.

Examples of Expense Accounts

Cost of goods sold Rent expense

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

Expense Accounts Loss Accounts

LO 2 Understand the content and format of the income statement.

Includes all of the

LO 3 Prepare an income statement.

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

LO 4 Explain how to report items in the income statement.

Highlights items that affect regular business activities.

Used to predict the amount, timing, and uncertainty of

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

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

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

IASB takes the position that both

revenues and expenses and

other income and expense

should be reported as part of income from operations.

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

LO 4 Explain how to report items in the income statement.

Viewed by many as the most important measure of a

LO 4 Explain how to report items in the income statement.

Earnings Per Share

Important business indicator.

LO 5 Identify where to report earnings per share information.

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.

LO 5 Identify where to report earnings per share information.

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

LO 5 Identify where to report earnings per share information.

LO 5 Identify where to report earnings per share information.

“let the tax follow the income”

LO 6 Explain intraperiod tax allocation.