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Intermediate accounting 17e by kieso ch04

Intermediate Accounting
Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 4

Income Statement and Related Information
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Learning Objectives
After studying this chapter, you should be able to:

1.

Understand the uses and limitations of an income statement.

2.

Describe the content and format of the income statement.


3.

Discuss how to report various income items.

4.

Explain the reporting of accounting changes and errors.

5.

Describe related stockholders’ equity statements.

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 4 (1 of 5)
Income Statement and Related Information
Income Statement



Usefulness



Limitations



Quality of earnings

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 4 (2 of 5)
Income Statement and Related Information
Content and Format of the Income Statement



Elements



Intermediate components



Condensed income statements



Single-step income statements

Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 4 (3 of 5)
Income Statement and Related Information
Reporting Various Income Items



Unusual and infrequent gains and losses



Discontinued operations



Noncontrolling interest in income



Earnings per share



Summary

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5


Preview of Chapter 4 (4 of 5)
Income Statement and Related Information
Accounting Changes and Errors



Changes in accounting principle



Change in accounting estimates



Corrections of errors



Summary

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Preview of Chapter 4 (5 of 5)
Income Statement and Related Information
Related Stockholders’ Equity Statements



Retained earnings statement



Comprehensive income



Statement of stockholders’ equity



Balance sheet presentation

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Learning Objective 1
Identify the Uses and Limitations of an Income Statement

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Income Statement
Usefulness

LO 1



Evaluate past performance of the company



Provide a basis for predicting future performance



Help assess the risk or uncertainty of achieving future cash flows

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Income Statement
Limitations

LO 1



Companies omit items they cannot measure reliably



Income is affected by the accounting methods employed



Income measurement involves judgment

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Income Statement
Quality of Earnings

Companies have incentives to manage income to meet or beat Wall Street expectations, so that



market price of stock increases and



value of stock options increase.

Quality of earnings is reduced if earnings management results in information that is less useful for
predicting future earnings and cash flows.

LO 1

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Learning Objective 2
Describe the Content and format of the Income Statement

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Content and Format of the Income Statement

Elements of the Income Statement
Revenues – Inflows or other enhancements of assets of an entity or settlements of its liabilities
during a period from delivering or producing goods, rendering services, or other activities that
constitute the entity’s ongoing major or central operations.
Examples include sales, fees, interest, dividends, and rents.

LO 2

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Elements of the Income Statement (Expenses)

Expenses – Outflows or other using-up of assets or incurrences of liabilities during a period from
delivering or producing goods, rendering services, or carrying out other activities that constitute the
entity’s ongoing major or central operations.
Examples include cost of goods sold, depreciation, interest, rent, salaries and wages, and taxes.

LO 2

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Elements of the Income Statement
(Gains and Losses)

Gains – Increases in equity (net assets) from peripheral or incidental transactions of an entity
except those that result from revenues or investments by owners.
Losses – Decreases in equity (net assets) from peripheral or incidental transactions of an entity
except those that result from expenses or distributions to owners.
Gains and losses result from the sale of investments or plant assets, settlement of liabilities, and
write-offs of assets due to impairments or casualty.

LO 2

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Intermediate Components of the Income Statement

Multiple-Step Income Statement

LO 2



Separates operating transactions from nonoperating transactions



Matches costs and expenses with related revenues



Highlights certain components of income that analysts use assessing financial performance

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Intermediate Components
Common to present some or all of the following sections and totals within the income statement.

LO 2

1.

Operating section

2.

Nonoperating section

3.

Income tax

4.

Discontinued operations

5.

Noncontrolling interest

6.

Earnings per share

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Multiple-Step
CABRERA COMPANY
Income Statement
For The Year Ended December 31, 2020

1. Operating Section

2. Nonoperating Section

3. Income tax
LO 2


Condensed Income Statements

LO 2

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Single-Step Income Statements

Revenues

SingleSingle- Step
Step

Expenses
Net Income

No implication that one type of revenue or
expense item has priority over another.

LO 2

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P. Bride Company

Income Statement

Income Statement ($000 omitted)
For the Year Ended December 31, 2020

Exercise E4.5: Prepare a income statement from the data
Sales revenue

below using the multiple-step form.

$4,900

Depreciation

3,960

Cost of goods sold

60,570

Rent revenue

17,230

Selling expense
2,690

Sales commissions

7,980

Depreciation

6.480
96,500

Income tax

9.070

Interest expense

1,860

LO 2

60,570

Gross profit

35,930

Selling expense
Administrative expense
Total operating expenses
Income from operations

17,250
8,860
26,010
9,920

Other revenue (expense):
Rent revenue

Delivery expense

Sales revenue

Cost of goods sold

Operating expenses:

Administrative expense
Officers’ salaries

$96,500

Interest expense

17,230
(1,860)

Total other

15,370

Income before tax

25,290

Income tax
Net income

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9,070
$16,220

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Format of the Income Statement
Review Question

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

LO 2

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.

Copyright ©2019 John Wiley & Sons, Inc.

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Format of the Income Statement
Review Question Answer

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

LO 2

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.

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Learning Objective 3
Discuss How to Report Various Income Items

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Reporting Various Income Items
Companies are required to report unusual and infrequent items as part of net income so users can
better determine the long-run earning power of the company.
These income items fall into four general categories:

LO 3

1.

Unusual gains and losses

2.

Discontinued operations

3.

Noncontrolling interest

4.

Earnings per share

Modified all inclusive concept

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