COM670 Chapter 4

 

Chapter 4 Income Statement Chapter 4, Slide #1

 

What is income stat statement ement (profit & loss statement)? • Is a summary of a company’s profit or loss during any one given period of time.

Chapter 4, Slide #2

 

What are income statements used for? • Track revenues and expenses expenses • Find out what areas of the business are over budget or under budget

Chapter 4, Slide #3

 

The Income Statement 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

Single Step

Multiple-Step Company Company Income Income Statement S tatement For the Year Ended December 31, 20XX

Single-Step Company Income Statement For the Year Ended December 31, 20XX

Sales Cos t of Goods Sold

$426,426   190,831

Gros s Profit Operating Oper ating Expenses: Ex penses: General & Adm Administr strativ tive  Advertising  Adv ertising Unc ollec tible Ac c ount s

  235,595

Net Inc ome

$ 426,426   1,293   6,371   434,090

$ 116,9 ,90 02   126,120 126,120   687

Operat ing (Los s ) Inc ome Interes t (I (Inc ome) Ex pens e   Oth the er ((R Revenue)Exp Expe ense (n (net   (Los s ) Inc ome Before Tax es Inc ome Tax es (Benefit)

Sales Interes t Inc ome Other Inc ome

Costs and Expenses: Cos t of Goods Sold $ 190,831   243,709 General & Ad Adm ministr strativ tive   116,90 ,902   (8, 114)  Advertising  Adv ertising   126,120 (1,293) Unc ollec tible Ac c ount s   687 (6,3 ,37 71)   (7,664)   (450) (Los s ) Inc ome Before Tax es Inc ome Tax es (Benefit )   (666) $

216

Net Inc ome

  434,540    

(450) (666)

$

216

Chapter 4, Slide #5

 

Multi-Step Format 

Single-Step Format 

Net Sales

Net Sales 

Cost of Sales 

Materials and Production 

Gross Income 

Marketing and Administrative 

Selling, General and Administrative Expenses  (SG&A) 

Research and Development Expenses  (R&D) 

Operating Income 

Other Income & Expenses 

Other Income & Expenses 

Pretax Income 

Pretax Income* 

Taxes 

Taxes 

Net Income 

Net Income (after tax) 

--  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 Beginnin g Inventory + Purchases  –  Ending Inventory

= Cost of Goods Sold

Manufacturer

Beginning Inventory + Cost of Goods Manufactured  –  Ending Inventory

= Cost of Goods Sold

Chapter 4, Slide #9

 

Other Opera Operating ting 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 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 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 Income Statement Items • Unusual or Infrequent Infrequent Items Disclosed Separa Separately tely  – 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 (cont’d)   (cont’d) • Equity in Earnings of Nonconsolidated Subsidiaries  – Are the investor’s proportional share of the investee’ss net income (losses) investee’ (los ses) 

 – Does not represent cash flow to the investor • Cash dividends received represent cash flow

 – Analysis issues: Invest or’’s net income includes revenue of other entity  •• Investor May misrepresent ratios • Presented before tax; tax consequences typically immaterial

Chapter 4, Slide #14

 

Special Income Statement Items (cont’d)   (cont’d) • 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 (cont’d)   (cont’d) • Extraordinary Items  – Unusual and  infrequent  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 (cont’d)   (cont’d) • Minority Share of Earnings  – Earnings of a partially-owned consolidat consolidated ed subsidiary owners that would accrue to the minority

 – Presentation may be either pre-tax or net-of-tax

Chapter 4, Slide #17

 

Retained Ret ained 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 create liability and reduce retained earnings  – Date of payment: payment: reduce liability and cash

• Stock dividends  – Small (less then 25%): capitalize the market value of the stock  – Material: capitalize 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

10% stock dividend 40% stock dividend Beffore Be effect of div ivid ide end bala lan nce afte terr effect of div ivid ide end bala lan nce afte ter  r  $1.00 $1.00 $1.00

Shares outstanding Total par value  Additiona  Add itionall paid-in paid-in capital capital

  100,000 $100,000   75 750,00 0,000 0

Total paid-in capital Retained earnings

  850,000   1,000,000

Total stockholders' equity

$1,850,000

issue 10,000 sh   10,000   40,000  

(50,000)

 

110,000 $1 $ 110,000   790,000    

900,000 950,000

$1,850,000

issue 40,000 sh   40,000

 

(40,000)

 

140,000 $140,000   750,000    

890,000 960,000

$1,850,000

10% stock dividend on 100,000 shares: issue 10,000 additional shares

40% stock dividend on 100,000 shares: issue 40,000 additional shares

recorded at $5 per share

recorded at $1 per share Chapter 4, Slide #20

Chapter 4, Slide #20  

Stock Splits • 2-for-1 split  – Doubles the quantity of sto stock ck  – Par or stated value is halved

• No effect on retained earnings, additional paid-in capital, or capital stock accounts • Analysis issues:  – Rest Restate ate share quantities to reflect split activity

Chapter 4, Slide #21  

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 • Cha Change nges s to stockh sto ckhold olders ers’’ equ equity ity res result ulting ing fro from m additional minimum pension liability

adjustments • Unrealized gains and losses from derivative instruments

Chapter 4, Slide #22  

Comprehensive Income (cont’d)  • Required disclosures  – Comprehensive income  – Other comprehensive income from each category category  – Reclassification adjustments adjustments for ea each ch category of other comprehensive income  – Tax effects for each category of other comprehensive comprehensiv e income  – Balances for each category of other comprehensive income

Chapter 4, Slide #23  

Comprehensive Income (cont’d)  • Presentation  – In a separate financial statement  – Combined with the income sta statement tement  – As part of the schedule of changes in stockholders’ equity 

Chapter 4, Slide #24  

Comprehensive Income – Income –   Separate Separat e Statement XYZ Corporation Statement of Comprehensive Income For the Year Ended December 31, 20XX Net inc ome

$ 34, 000

Other Ot her comprehe comprehens nsive ive income

 Available-f  Av ailable-foror-sale sale security sec urity adjustment, adjust ment, net of tax

  5,500

Minimum pens ion liabilit y adjus t ment , net of t ax Foreign cur currency tr transact sactiion adjustm stment, net of of tax tax

  3, 500  (5,0 ,00 00)

Total other comprehensive income

Comprehens ive inc ome

  4,000 $ 38, 000

Chapter 4, Slide #25  

Comprehensive Income – Income –   Combined with Income Statement XYZ Corporation Statement of Income and Comprehensive Income For the Year Ended December 31, 20XX S ales Cos t of goods s old

$ 230, 000   140, 000

Gros s profit

  370, 000

Operat ing ex pens es Operat ing inc ome

  40, 000   330, 000

Ot her inc ome

 

Inc ome before inc ome t ax es

  326, 000

Inc ome t ax es

  20, 000

Net inc ome

  306, 000

Other comprehensive income

 Available-f  Availab le-foror-sale sale security s ecurity adjust adjustment, ment, net of tax Minimum pens ion liabilit y adjus t ment , net of t ax Foreign cur currency tr tra ansact sactiion adjustm stment, net of tax tax Ot her c omprehens ive inc ome

4, 000

     

5,500 3, 500 (5,00 ,000)

 

4, 000

Comprehens ive inc ome

$ 310, 000

E arnings per s hare (for net inc ome only )

$

2. 80

Chapter 4, Slide #26  

Comprehensive Income – Income – As  As Part of the Statement of Stockholders’ Equity  Equity  XYZ Corporation Statement of Changes in Stockholders' Equity For the Year Ended December 31, 20XX

Tota l

Beginning Balanc e Net Inc ome  Available  Av ailable-f -foror-sale sale security adjustment, net of tax Minimum pension liability adjustment, net of tax Foreign currency transaction adjustment, net of tax Comprehensiv sive inco com me Ending Balance

$180,000 34,000

Retained Ea rni ngs

$60,000 34,000

Accumulated Other Comprehensive Incom e

$10,000 $110,000   55,000

5,500

5,500

3,500

3,500

(5,000) 38,0 ,00 00

(5,000)

$218,000

$94,000

Common Stock Am ount Sha re s

$14,000 $110,000   55,000

Chapter 4, Slide #27  

Reference • Gibson, C.H. (2009). Financial Reporting &  Analysis: Using Using Financ Financial ial Accoun Accounting ting th

Information.  11  ed. Norwalk, Connecticut:

South-Western Cengage Learning.