Income Statement
Chapter 4
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duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
After studying this chapter the student will be
able to :
• To identity Basic Elements of the Income
Statement
• To understand income statement items that
require special disclosure.
Chapter 3, Slide #2
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #3
The Income Statement
• The income statement is often considered to
be the most important financial statement.
• Frequently used titles for this statement
include:
 Statement of Operations
 Statement of income
 Statement of Earnings
 Profit or loss statement
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #4
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #5
Multiple-Step Single Step
Net revenue $37,586
Cost of sales 16,742
Gross margin 20,844
Operating Expenses:
General & administrative 5,458
$
Resaarch & development 5,722
Restructuring charges 710 11,890
Operating income 8,954
Interest income (expense) 488
Other gains (losses) (net) (1,756) (1,268)
Income before taxes 7,686
Provision for taxes 2,394
Net Income 5,292
$
Multiple-Step Company
Income Statement
For the Year Ended December 31, 20XX
Net revenue 37,586
$
Interest income 488
Other income -
38,074
Costs and Expenses:
Cost of sales 16,742
$
General & administrative 5,458
Research & development 5,722
Other losses 1,756
Restructuring charges 710 30,388
Income before taxes 7,686
Provision for taxes 2,394
Net income 5,292
$
Single-Step Company
Income Statement
For the Year Ended December 31, 20XX
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #6
Basic Elements of the Income Statement
• Net Sales (Revenues)
• Cost of Goods Sold (Cost of Sales)
• Other Operating Revenue
• Research and Development
• Restructuring Charges
• Impairment Charges
• Operating Expenses
• Other Income or Expense ( gains or losses)
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #7
• Revenue from the sale of principal goods or
services sold to customers
• Shown net of
– Discounts
– Returns
– Allowances
Net Sales
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #8
• The cost of goods that were sold to produce revenue
(cost of services in a service company)
Retailer
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
Manufacturer
Beginning Inventory
+ Cost of Goods
Manufactured
– Ending Inventory
= Cost of Goods Sold
Cost of Goods Sold
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Chapter 4, Slide #9
• Reflects the nature of the business
• Examples
– Lease revenue
– Royalty revenue
– Finance charges
– Commission revenue
Other Operating Revenue
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #10
Operating Expenses
• Selling expenses
– Result from the company’s effort to create sales
– Examples
• Advertising
• Sales commissions
• Sales supplies used
• Administrative expenses
– Relate to the general administration of the
company’s operation
– Examples
• Salaries
• Insurance
• Bad debt expense
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duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #12
Special Income Statement Items
• Certain income statement items are either unusual or occur infrequently.
They might include such items as a gain on sale of securities, write-
downs of receivables, or write-downs of inventory. These items are
shown with normal, recurring revenues and expenses, and gains and
losses.
• Unusual or Infrequent Items Disclosed Separately
– Included with normal recurring revenues and expenses
– If material, disclosed separately, before income taxes
– Relate to operations
– Treatment for analysis
• Primary analysis: include
• Supplementary analysis: exclude
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #13
Special Income Statement Items (cont’d)
• Equity in Earnings of Nonconsolidated
Subsidiaries
– The investor’s proportional share of the investee’s
net income
– Does not represent cash flow to the investor
• Cash dividends received represent cash flow
– Analysis issues:
• Investor’s net income includes revenue of other entity
• May distort ratios
• Presented before tax; tax consequences typically
immaterial
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #14
Special Income Statement Items (cont’d)
• Income Taxes Related to Operations
– Federal, state, and local
– Includes both paid and deferred taxes
• 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
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #15
Special Income Statement Items (cont’d)
• Extraordinary Items
– Unusual and infrequent
– Reported net of income tax
– Analysis issues:
• Exclude from primary analysis
• Include for supplementary analysis
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #16
Special Income Statement Items (cont’d)
• Cumulative Effect of a Change in Accounting
Principle
– For fiscal years beginning before 12/15/05
• Cumulative effect of the change shown net of tax on the
income statement of the period in which change was
made
• Earlier statements not restated to reflect application of the
new principle
– Effective for fiscal years beginning after 12/15/05
• All comparative statements are retrospectively restated to
reflect application of the new accounting principle
• The cumulative effect on income of earlier years is shown
as a net-of-tax adjustment to the beginning Retained
Earnings balance of the earliest period presented
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #17
Special Income Statement Items (cont’d)
• Net Income-Noncontrolling Interest (prior to
Dec. 31,2009 is was called 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
• Earnings per Share
Net income ÷ Number of shares outstanding
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Chapter 4, Slide #18
Reconciliation of Retained Earnings
Beginning of year balance of retained earnings
+ Net income
– Dividends
= End-of-year balance of retained earnings
Reported as part of the Statement of Stockholders’
Equity or combined with the Income Statement
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #19
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
• Unappropriated
– Available for dividends
– Does not represent cash or any other asset
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #20
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
– Analysis issues:
• Restate share quantities to reflect stock dividend activity
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #21
Stock Dividend Example
100,000 shares outstanding; $1 par; $5 market
Before effect of dividend balance after effect of dividend balance after
Common stock par value $1.00 $1.00 $1.00
Shares outstanding 100,000 issue 10,000 sh 110,000 issue 40,000 sh 140,000
Total par value $100,000 10,000 $110,000 40,000 $140,000
Additional paid-in capital 750,000 40,000 790,000 750,000
Total paid-in capital 850,000 900,000 890,000
Retained earnings 1,000,000 (50,000) 950,000 (40,000) 960,000
Total stockholders' equity $1,850,000 $1,850,000 $1,850,000
10% stock dividend 40% stock dividend
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
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #22
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
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #23
Legality of Distributions to Shareholders
• Per various state laws
– Distributions are acceptable as long as the firm has
the ability to pay debts as they come due in the
normal course of business
– Distributions to stockholders are acceptable as long
as the firm is solvent and the distributions do not
exceed the fair value of the assets
– Distributions consist of solvency and balance sheet
test of liquidity and risk
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #24
Comprehensive Income
Net income
+ The period’s 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
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #25
Comprehensive Income (cont’d)
• 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
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #26
Comprehensive Income –
Combined with Income Statement
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
$
Earnings per share (for net income only) 2.80
$
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 20XX
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #27
Comprehensive Income –
Separate Statement
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)
Total other comprehensive income 4,000
Comprehensive income 38,000
$
XYZ Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 20XX
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #28
Comprehensive Income (cont’d)
• Presentation
– In a separate financial statement
– Combined with the income statement
– As part of the schedule of changes in stockholders’
equity
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #29
Comprehensive Income – As Part of the
Statement of Stockholders’ Equity
Retained
Accumulated
Other
Comprehensive
Total Earnings Income Amount Shares
Beginning Balance $180,000 $60,000 $10,000 $110,000 55,000
Net Income 34,000 34,000
Available-for-sale
security adjustment,
net of tax 5,500 5,500
Minimum pension
liability adjustment, net
of tax 3,500 3,500
Foreign currency
transaction adjustment,
net of tax (5,000) (5,000)
Comprehensive income 38,000
Ending Balance $218,000 $94,000 $14,000 $110,000 55,000
XYZ Corporation
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 20XX
Common Stock
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #30
Comprehensive Income (cont’d)
• Analysis issues:
– Typically more volatile than net income
– A better indication of long-run profitability
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 4, Slide #31
Income Statement IFRS vs GAAP
• Income Statements are similar with some
presentation differences
-IFRS has no required format of the Income
Statement.
-IFRS equipment may be revalued which has
impact on depreciation expense
-IFRS allows for alternative performance
measures to be presented in Income
Statement.
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duplicated, or posted to a publicly accessible website, in whole or in part.