Accountants are also concerned with developing reliable (verifiable) evidence of the company's revenue production and other business activities reported in its financial statements. These recommendations are made to increase the predictive and feedback value of the information reported in a company's income statement and related notes.
Expenses
In the absence of a direct cause-and-effect relationship, a portion of the cost of each of these assets is rationally recognized as an expense each period. Sometimes it is difficult to determine whether costs should be recorded as expenses or as assets, and, if the costs are recorded as assets, when the costs should be recognized.
Gains and Losses
The results of the main operating activities, as well as peripheral activities, are reported on the income statement. The income statement consists of four elements or building blocks: income, expenses, gains and losses.
I NCOME S TATEMENT C ONTENT
Profits and losses are similar to revenues and expenses, with a major distinction that profits and losses arise from peripheral or incidental activities not directly related to the operations of the company and are reported net.
All-Inclusive versus Current Operating
154 narrowed the interpretation of prior period adjustments so that the comprehensive content of the income statement is currently as shown in the previous outline. Although the FASB agrees with the comprehensive concept of net income, it requires a company to exclude certain "gains" and "losses" from its net income.
Condensed Income Statements
I NCOME S TATEMENT : I NCOME FROM C ONTINUING O PERATIONS
Sales Revenue (Net)
Cost of Goods Sold
Cost of goods sold is subtracted from net sales to determine gross profit, as shown in Example 5-1. Note that we have shown a cost of goods sold summary assuming Banner Corporation is a merchandising company.
Operating Expenses
If Banner were a manufacturing company, cost of goods manufactured would replace net purchases in the plan. Total operating expenses are subtracted from gross profit to determine operating income, as shown earlier in Example 5-1.
Other Items
Total other items are added or subtracted from operating income to determine pretax income from continuing operations.
Income Tax Expense Related to Continuing Operations
Single-Step and Multiple-Step Formats
Significant, non-operating revenues, expenses, gains and losses not related to the company's core activities are then summarized in the next section called "Other items". The net total of this section is added to (or subtracted from) operating income to determine income before taxes from continuing operations. The relevant income tax expense is then deducted from this pre-tax income to determine income from continuing operations.
Alternative Income Captions
I NCOME S TATEMENT : R ESULTS FROM D ISCONTINUED O PERATIONS
What components of its operations did Pfizer dispose of in 2004?
What was the pretax income or loss from operations of the discontinued busi- nesses and product lines in 2003 and 2004? Why would a company sell profitable
How much income would you use to compute the company’s return on total assets (income average total assets)?
Sale of a component. The company decides to exit the bicycle business and sells the division. Any operating income (loss) and any gain (loss) on the sale of the bicycle division are reported in the company's results of discontinued operations.
Operating Income (or Loss)
Although these examples are helpful, an accountant must use good judgment in determining whether the sale of part of a company's operations is considered a sale of a component and reported in its results of discontinued operations.
Gain or Loss on Sale
For example, assume that Elmo Company classifies Division M (a component of its operations) as "held for sale" at the end of 2007. The entity cannot increase the carrying amount of the component to an amount higher than the carrying amount of the component before it was classified as held for sale.
Disclosures
The entity records these changes as gains or losses and as further adjustments (increases or decreases) to the carrying amount of the component, with one exception. The company combines these quarterly gains (losses) and reports only one net gain (loss) in its financial statements.
I NCOME S TATEMENT : E XTRAORDINARY I TEMS
Unusual nature—the underlying event or transaction possesses a high degree of abnormality and is of a type clearly unrelated to, or only incidentally related to, the usual and typical activities of the company, taking into account the environment in which the company functions. Infrequency of occurrence—the underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates.
Criteria
The criterion of rarity of occurrence, given the environment in which the company operates, is not met because the history of losses due to frost damage provides evidence that such damage is expected to recur in the future. The criterion that such sales are infrequent is not met because past experience shows that such sales are expected to occur in the future.
Reporting Procedures
What was the pretax amount of the extraordinary loss? Provide an estimate of CenterPoint’s tax rate
If you were attempting to assess the operating performance of CenterPoint Energy, how would this extraordinary loss affect your evaluation?
The APB required a company to report material unusual or infrequent gains or losses as a separate component of income from continuing operations. As these items are a component of income from continuing operations for which a related tax expense is calculated, unusual or infrequent gains or losses are not shown net of income tax.
I NCOME S TATEMENT : E ARNINGS P ER S HARE
The APB also addressed the disclosure of material gains and losses from events that are either unusual in nature or infrequent, but not both. 199 . statements).23 We present a list of an earnings per share schedule that shows the per share amounts (after tax) for each of the main components of net income and sums to the per share amount related to net income.
I NCOME S TATEMENT : R ELATED I SSUES
Change in Accounting Estimate
- How did the earnings from discontinued operations affect basic and diluted earnings per share for the year ended January 30, 2004?
- What caused the adjustment in the weighted average number of shares in the calculation of diluted earnings per share?
- What do you think about the trend in earnings per share over the time period presented? What are potential causes of this change in earnings per share?
What caused the adjustment in the weighted average number of shares in the calculation of diluted earnings per share. What do you think of the trend in earnings per share over the period presented.
Summary of Selected Financial Information
Limitations of the Income Statement
In addition, much of a company's income statement content is similar in that international accounting standards require disclosure of income, operating expenses, financing costs, tax expense, income (loss) from ordinary activities, results of discontinued operations, extraordinary items, net. income (loss), and earnings per share. When it treats them as a reduction in the book value of an asset, it recognizes them in later periods on the income statement as a reduction in depreciation expense.
S TATEMENT OF R ETAINED E ARNINGS
Income from current operations is a summary of income, expenses (eg cost of goods sold, business expenses, income tax expenses) and other items that are expected to continue into the future. Discontinued operations (an integral part of the company's operations that has been or will be excluded from current operations) are reported tax-free directly after income from current operations.
Net Income and Dividends
Operating income can be reported in a single-level format that classifies all items as either revenue or expense, or it can be reported in a more useful multi-level format that contains additional classifications of income statement items. In their income statements, companies must report earnings per share amounts that relate to operating income and net income.
Adjustments of Beginning Retained Earnings
The amount of the cumulative effect of the change in accounting principle is reported (net of taxes) directly after the initial amount of retained earnings in the company's statement of retained earnings. Since accounting for a change in accounting principle is similar to the correction of an error, we will not discuss it further here.
Combined Statements
The correction in 2007 includes a debit to retained earnings and a credit to accumulated depreciation for the amount of the unreported depreciation. The company describes and reports the prior period adjustment (net of income taxes) as a decrease in beginning retained earnings on its statement of retained earnings.
C OMPREHENSIVE I NCOME
If a company has no components of other comprehensive income, it does not have to report comprehensive income. When reporting comprehensive income, a company must add its other comprehensive income components to its net income.
Reporting Alternatives
If Sara Company reports its comprehensive income on a separate statement of comprehensive income, its 2007 income statement would show net income of $14,000. If Sara Company reports its comprehensive income on the statement of changes in equity, its 2007 income statement would show a net income of $14,000.
Conceptual Evaluation
We show the relationship between a company's total income (or loss) components and its "flow" into the company's balance sheet accounts in the following diagram:
S TATEMENT OF C ASH F LOWS
19. This opinion required a company to prepare a statement of changes in financial position along with its balance sheet and income statement. Therefore, the cash flow statement provides information about the cash effects of a company's operating, investing and financing activities in an accounting period.
Overview and Uses of the Statement of Cash Flows
The statement allowed companies flexibility in their choice of definition of funds, classifications and formats for the statement. This statement requires a company to present a statement of cash flows for the accounting period along with its income statement and balance sheet. The primary purpose of a cash flow statement is to provide relevant information about a company's cash receipts and cash payments during an accounting period.
Reporting Guidelines and Practices
Similarly, the Cash Flows from Financing Activities section includes all incoming and outgoing cash flows involved in the company's financing activities. Example 5-7 shows Trevor Corporation's statement of cash flows for 2007 (using the indirect method for operating activities).
Operating Cash Flows: Direct Method
The statement of cash flows of the Coca-Cola Company, as presented in its 2004 annual report, is presented in Appendix A. The statement of cash flows provides information about a company's cash inflows and outflows over a period by classifying the flows monetary in one of three categories: operating, investing or financing activities.
S UMMARY OF D ISCLOSURES
Prepare the net cash flow from operating activities section of Tyrone Company's 2007 cash flow statement. Use the direct method to prepare the cash flows from the operating activities section of Lexie Company's 2007 cash flow statement. -20 Statement of Cash Flows The following are several items relating to Mueller Company's cash flow activities for 2007:.
-21 Statement of Cash Flows: Direct Method Following are various cash flows and other information of the Trainer Company for 2007:.
