UNIT-5Acct - 103

(1)

UNIT-5

Acct - 103

(2)

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 Income Statement and Related Information

Elements Single-step Multiple-step

Condensed income statements

(3)

Evaluate past performance.

Predicting future performance.

Help assess the risk or uncertainty of achieving future cash flows.

Income Statement

Usefulness of the Income Statement

(4)

Companies omit items that cannot be measured reliably.

Income is affected by the accounting methods employed.

Income measurement involves judgment.

Income Statement

Limitations of the Income Statement

(5)

Elements of the Income Statement

Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations.

Sales

Fee revenue

Interest revenue Dividend revenue Rent revenue

Examples of Revenue Accounts

(6)

Elements of the Income Statement

Expenses – Outflows or other using-up of assets or 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

Examples of Expense Accounts

(7)

Elements of the Income Statement

Gains – Increases in equity (net assets) from peripheral or incidental transactions.

Losses - Decreases in equity (net assets) from peripheral or incidental transactions.

Gains and losses can result from

sale of investments or plant assets, settlement of liabilities,

write-offs of assets.

(8)

Income Statement (in thousands) Revenues:

Sales $ 285,000

Interest revenue 17,000 Total revenue 302,000 Expenses:

Cost of goods sold 149,000 Advertising expense 10,000 Depreciation expense 43,000 Interest expense 21,000 Income tax expense 24,000 Total expenses 247,000 Net income $ 55,000 Earnings per share $ 0.75

Single-Step Income Statement

The single-step statement consists of just two

groupings:

Revenues Expenses Net Income

Single- Step Single- Step

No distinction between

Operating and Non-operating categories.

(9)

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

Single-Step Income Statement

(10)

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

Background

(11)

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

(12)

Multiple-Step Income Statement

The presentation divides information into major sections.

Income Statement (in thousands)

Sales $ 285,000

Cost of goods sold 149,000 Gross profit 136,000 Operating expenses:

Advertising expense 10,000 Depreciation expense 43,000 Total operating expense 53,000 Income from operations 83,000 Other revenue (expense):

Interest revenue 17,000 Interest expense (21,000)

Total other (4,000) Income before taxes 79,000 Income tax expense 24,000

Net income $ 55,000

Earnings per share $ 0.75

1. Operating Section 1. Operating Section

2. Nonoperating Section

3. Income tax 3. Income tax

(13)

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.

Learning Objectives

(14)

Evaluating the capital structure.

Assess risk and future cash flows.

Analyze the company’s:



Liquidity,



Solvency, and



Financial flexibility.

Balance Sheet

Usefulness of the Balance Sheet

(15)

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

Balance Sheet

(16)

Three General Classifications

Assets, Liabilities, and Stockholders’ Equity Companies further divide these classifications:

Classification in the Balance Sheet

Balance Sheet

(17)

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

Balance Sheet

(18)

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.

Balance Sheet

(19)

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

Balance Sheet – “Current Assets”

(20)

Portfolios

Short-Term Investments

Type Valuation Classification Held-to-

Maturity Debt Amortized

Cost Current or

Noncurrent Trading Debt or Equity Fair Value Current

Available-

for-Sale Debt or Equity Fair Value Current or Noncurrent

Balance Sheet – “Current Assets”

(21)

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

Balance Sheet – “Current Assets”

(22)

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 11

22

Balance Sheet – “Current Assets”

(23)

Company discloses:

basis of valuation (e.g., lower-of-cost-or- market) and

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

Inventories

Balance Sheet – “Current Assets”

(24)

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

Balance Sheet – “Current Assets”

(25)

Generally consists of four types:

Securities Fixed assets Special funds

Nonconsolidated subsidiaries or affiliated companies.

Long-Term Investments

Balance Sheet – “Noncurrent Assets”

(26)

Securities

Investments:

Invesment in ABC bonds 321,657 Investment in UC Inc. 253,980 Notes receivable 150,000 Land held for speculation 550,000 Sinking fund 225,000 Pension fund 653,798 Cash surrender value 84,321 Investment in Uncon. Sub. 457,836 Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778

Land 975,000

Balance Sheet – “Noncurrent Assets”

bonds,

stock, and

long-term notes

For marketable securities, management’s intent

determines current or noncurrent classification.

(27)

Fixed Assets Fixed Assets

Investments:

Building 1,375,778

Land 975,000

Balance Sheet – “Noncurrent Assets”

Land held for speculation

(28)

Special Funds Special Funds

Investments:

Building 1,375,778

Land 975,000

Balance Sheet – “Noncurrent Assets”

Sinking fund Pensions fund Cash surrender value of life

insurance

(29)

Nonconsolidated Subsidiaries or Affiliated

Companies

Nonconsolidated Subsidiaries or Affiliated

Companies

Investments:

Building 1,375,778

Land 975,000

Balance Sheet – “Noncurrent Assets”

(30)

Property, Plant, and Equipment

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778

Land 975,000

Machinery and equipment 234,958 Capital leases 384,650 Leasehold improvements 175,000 Accumulated depreciation (975,000)

Total PP&E 2,170,386 Intangibles

Goodwill 3,000,000

Patents 177,000

Trademarks 40,000

Balance Sheet – “Noncurrent Assets”

Assets of a durable

nature used in the

regular operations

of the business.

(31)

Intangibles

Accumulated depreciation (975,000) Total PP&E 2,170,386 Intangibles

Goodwill 2,000,000

Patents 177,000

Trademark 40,000

Franchises 125,000

Copyright 55,000

Total intangibles 2,397,000 Other assets

Prepaid pension costs 133,000 Deferred income tax 40,000 Total other 173,000

Balance Sheet – “Noncurrent Assets”

Lack physical

substance and are not financial instruments.

Limited life

intangibles amortized.

Indefinite-life

intangibles tested for impairment.

(32)

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 10,000Total

SR130,000

(33)

Other Assets

Balance Sheet – “Noncurrent Assets”

This section should include only unusual items sufficiently

different from assets in the other

categories.

(34)

“Obligations that a company reasonably expects to liquidate

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

current liabilities.”

Balance Sheet

Current Liabilities

(35)

“Obligations that a company does not

reasonably expect to liquidate within the

normal operating cycle.”

All covenants and restrictions must be disclosed.

Balance Sheet

Long-Term Liabilities

(36)

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

(37)

Companies usually divide equity into three parts,

(1) Capital Stock, (2) Additional Paid-In Capital,

and (3) Retained Earnings.

Balance Sheet

Owners’ Equity

(38)

(a) Investment in preferred stock

Balance Sheet Classification Exercise

Account

(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

Classification

(39)

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.”

(40)

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: