UNIT-5Acct - 103

UNIT-5

Acct - 103

Income Statement • Usefulness • Limitations • Quality of Earnings Format of the Income Statement Reporting Irregular Items Special Reporting Issues • Intraperiod tax allocation

• Earnings per share • Retained earnings statement • Comprehensive income • Discontinued operations • Extraordinary items • Unusual gains and

losses • Changes in accounting principles • Changes in estimates • Corrections of errors

Income Statement and Related Information

• Elements • Single-step • Multiple-step

• Condensed income

• Evaluate past performance.

• Predicting future performance.

• Help assess the risk or uncertainty of achieving

future cash flows.

Income Statement

• Companies omit items that cannot be measured

reliably.

• Income is affected by the accounting methods

employed.

• Income measurement involves judgment.

Income Statement

Elements of the Income Statement

Revenues

• Sales

• Fee revenue

• Interest revenue • Dividend revenue • Rent revenue

Elements of the Income Statement

Expenses

incurrence of liabilities that constitute the entity’s ongoing major or central operations.

• Cost of goods sold

• Depreciation expense • Interest expense

• Rent expense • Salary expense

Elements of the Income Statement

Gains

peripheral or incidental transactions.

Losses

Gains and losses can result from

• sale of investments or plant assets, • settlement of liabilities,

Single-Step Income Statement

The single-step statement consists of just two

groupings: Revenues Expenses Net Income Single- Step No distinction between

Operating and Non-operating categories.

The single-step income statement emphasizes a. the gross profit figure.

b. total revenues and total expenses.

c. extraordinary items more than it is emphasized in the multiple-step income statement.

d. the various components of income from continuing operations.

Review

• Separates operating transactions from

nonoperating transactions.

• Matches costs and expenses with related

revenues.

• Highlights certain intermediate components of

income that analysts use.

Multiple-Step Income Statement

Review

A separation of operating and non operating activities of a company exists in

a. both a multiple-step and single-step income statement.

b. a multiple-step but not a single-step income statement.

c. a single-step but not a multiple-step income statement.

d. neither a single-step nor a multiple-step income statement.

Multiple-Step Income Statement

divides information into major sections.

1. Operating Section 2. Nonoperating

Section

1. Explain the uses and limitations of a balance sheet.

2. Identify the major classifications of the balance sheet. 3. Prepare a classified balance sheet using the report and

account formats.

4. Determine which balance sheet information requires

supplemental disclosure.

5. Describe the major disclosure techniques for the balance

sheet.

• Evaluating the capital structure. • Assess risk and future cash flows. • Analyze the company’s:

Liquidity,

Solvency, and

Financial flexibility.

Balance Sheet

• Most assets and liabilities are reported at

historical cost.

• Use of judgments and estimates.

• Many items of financial value are omitted.

Limitations of the Balance Sheet

Three General Classifications

• Assets, Liabilities, and Stockholders’ Equity

Companies further divide these classifications:

Classification in the Balance Sheet

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.

Current Assets

Review

The correct order to present current assets is a. Cash, accounts receivable, prepaid items, inventories.

b. Cash, accounts receivable, inventories, prepaid items.

c. Cash, inventories, accounts receivable, prepaid items.

d. Cash, inventories, prepaid items, accounts receivable.

• Generally any monies available “on demand.”

• Cash equivalents are short-term highly liquid

investments that will mature within three months or less.

• Any restrictions or commitments must be

disclosed.

Cash

Portfolios

Short-Term Investments

Type Valuation Classification

Held-to-Matur ity Debt Amortized Cost Current or Noncurrent Trading Debt or Equity Fair Value Current

Available-

for-Sale Debt or Equity Fair Value

Current or Noncurrent

Claims held against customers and others for money, goods, or services.

• Accounts receivable – oral promises • Notes receivable – written promises

Major categories of receivables should be shown in the balance sheet or the related notes.

Receivables

Accounts Receivable – Presentation Options

Current Assets:

Cash SR 346

Accounts receivable 500

Less allowance for doubtful accounts 25 475

Inventory 812

Total current assets SR1,633

Current Assets:

Cash SR 346

Accounts receivable, net of SR.25 allowance 475 Inventory 812

Total current assets SR1,633

1

2

Company discloses:

• basis of valuation (e.g.,

lower-of-cost-or-market) and

• the method of pricing (e.g., FIFO or LIFO).

Inventories

Payment of cash, that is recorded as an asset because service or benefit will be received in the future.

• insurance • supplies • advertising

Cash Payment BEFORE Expense Recorded

• rent

• maintenance on equipment

Prepayments often occur in regard to:

Prepaid Expenses

Generally consists of four types:

Securities

Fixed assets

Special funds

Nonconsolidated subsidiaries

or

affiliated companies.

Long-Term Investments

Securities

Balance Sheet – “Noncurrent Assets”

• bonds,

• stock, and

• long-term notes

For marketable securities, management’s intent

determines current or noncurrent classification.

Fixed Assets

Balance Sheet – “Noncurrent Assets”

• Land held for

speculation

Special Funds

Balance Sheet – “Noncurrent Assets”

• Sinking fund • Pensions fund • Cash surrender value of life insurance Long-Term Investments

Nonconsolidated

Subsidiaries or

Affiliated

Companies

Balance Sheet – “Noncurrent Assets”

Property, Plant, and Equipment

Balance Sheet – “Noncurrent Assets”

Assets of a durable

nature used in the

regular operations

of the business.

Intangibles

Balance Sheet – “Noncurrent Assets”

Lack physical

substance and are not financial instruments.

• Limited life

intangibles amortized.

• Indefinite-life

intangibles tested for impairment.

Balance Sheet – “Exercise”

BE5-6 Mickey Snyder Corporation’s adjusted trial balance

contained the following asset accounts at December 31, 2007: Prepaid Rent SR12,000; Goodwill SR40,000; Franchise Fees Receivable SR2,000; Franchises SR47,000; Patents SR33,000; Trademarks SR10,000. Prepare the intangible assets section of the balance sheet.

Intangibles Goodwill SR 40,000 Franchises 47,000 Patents 33,000 Trademarks 10,000 Total SR130,000

Other Assets

Balance Sheet – “Noncurrent Assets”

This section should include only unusual items sufficiently

different from assets in the other

“Obligations that a company reasonably expects to liquidate

either through the use of current assets or the creation of other

current liabilities.”

Balance Sheet

“Obligations that a company does not

reasonably expect to liquidate within the

normal operating cycle.” All covenants and

restrictions must be disclosed.

Balance Sheet

Balance Sheet – “Exercise”

BE5-9 Included in Ewing Company’s December 31, 2007, trial

balance are the following accounts: Accounts Payable SR240,000; Pension Liability SR375,000; Discount on Bonds Payable SR24,000; Advances from Customers SR41,000; Bonds Payable SR400,000; Wages Payable SR27,000; Interest Payable SR12,000; Income Taxes Payable SR29,000. Prepare the long-term liabilities section of the balance sheet.

Long-term liabilities

Pension liability SR375,000 Bonds payable 400,000

Discount on bonds payable (24,000) Total 751,000

Companies usually divide equity into three parts,

(1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings.

Balance Sheet

(a) Investment in preferred stock

Balance Sheet Classification Exercise

(b) Treasury stock (c) Common stock

(d) Cash dividends payable (e) Accumulated depreciation (f) Interest payable

(g) Deficit

(h) Trading securities (i) Unearned revenue

(a) Current asset/Investment (b) Equity (c) Equity (d) Current liability (e) Contra-asset (f) Current liability (g) Equity (h) Current asset (i) Current liability

Classified Balance Sheet

•

Account form

•

Report form

Balance Sheet - Format

Accounting Trends and Techniques—2004 (New York:

AICPA) indicates that all of the 600 companies surveyed use either the “report form” (506) or the “account

form” (94), sometimes collectively referred to as the “customary form.”

•

Contingencies

•

Accounting Policies

•

Contractual Situations

•

Fair Values

Additional Information Reported

There are normally four types of information that are

supplemental to account titles and amounts presented in the balance sheet: