4.5: Statement of Income and Statement of Comprehensive Income

Question 1

What is the main objective of financial reporting?

Answer 1

The main objective of financial reporting is to communicate information to users about the company and give them the information they need to make decisions.

Question 2

How should gains and losses generally be presented in the statement of income/comprehensive income?

Answer 2

Gains and losses should generally be shown separately and not as a net item.

Question 3

What is the distinction between revenues/expenses and gains/losses?

Answer 3

Revenues and expenses are part of ordinary or typical business activities, while gains and losses are related to peripheral or non-typical activities.

Question 4

Give an example of a gain that would be considered part of peripheral activities.

Answer 4

The sale of a deep fryer machine by McDonald’s is considered a gain from peripheral activities, as it’s not part of its regular operations (selling hamburgers).

Question 5

What is Underlying Concept 4.7 in financial reporting?

Answer 5

Any items that are material and/or relevant to understanding financial performance should be presented separately under the full disclosure principle.

Question 6

How should unusual gains and losses that are material in amount be presented?

Answer 6

Unusual gains and losses should be presented separately in the income statement if they are material, allowing greater transparency for users to see the cause of major gains and losses.

Question 7

What is the purpose of showing income statement elements in detail?

Answer 7

Showing income statement elements in detail allows decision-makers to assess whether a company generates cash flows from its normal ongoing business activities and to see if it is improving or deteriorating.

Question 8

What items are required to be included in the Statement of Income/Comprehensive Income under ASPE Section 1520?

Answer 8

• Revenue
• Income from investments
• Income tax expense (before discontinued operations)
• Income or loss before discontinued operations
• Results of discontinued operations
• Net income or loss
• Net income attributable to noncontrolling interest and owners

Question 9

What items are required to be included in the Statement of Income/Comprehensive Income under IFRS per IAS 1?

Answer 9

• Revenue
• Finance costs
• Share of profit/loss for investments accounted for using the equity method
• Expenses by nature or function
• Tax expense
• Results of discontinued operations
• Profit or loss
• Other comprehensive income
• Share of other comprehensive income from investments accounted for using the equity method
• Total other comprehensive income
• Profit or loss and comprehensive income attributable to noncontrolling interest and owners
• Comprehensive income

Question 10

What is the significance of separating ordinary from peripheral activities in financial statements?

Answer 10

Separating ordinary from peripheral activities helps users understand the core business performance and the impact of non-core or non-recurring activities, which is crucial for accurate assessment of a company’s financial health.

Question 11

How is the statement of comprehensive income presented under IFRS?

Answer 11

The statement of comprehensive income is presented either:

In a single combined statement, which includes revenues, expenses, gains, losses, net income, other comprehensive income, and comprehensive income.

In two separate statements, with one showing the traditional income statement and the other displaying the components of other comprehensive income, as well as comprehensive income.

Question 12

What is the key point of Alternative Terminology 4.2 in relation to comprehensive income under IFRS?

Answer 12

A company is not required to use the terms “other comprehensive income” or “comprehensive income” under IFRS.

Instead, they can use more specific terminology, such as revaluation adjustments on property, plant, and equipment.

Question 13

What is the purpose of providing information on the components of comprehensive income?

Answer 13

The purpose is to communicate changes in net assets, helping users predict the amounts, timing, and uncertainty of future cash flows, and to better understand the quality of a company’s earnings.

Question 14

What are some formats used for presenting income statements by convention?

Answer 14

Income statements may be presented using various formats, such as:

Single-step

Multiple-step

Condensed formats

These formats are not required by GAAP and can emphasize different activities or functions depending on the company’s preferences.

Question 15

What is a single-step income statement?

Answer 15

A single-step income statement reports revenues, gains, expenses, and losses in two main groupings: revenues and expenses.

Expenses and losses are deducted from revenues and gains to arrive at net income.

Question 16

What is the key advantage of a single-step income statement?

Answer 16

The main advantage of the single-step format is simplicity, as no one type of revenue or expense item is given priority over another.

This avoids classification problems.

Question 17

What is the key disadvantage of a single-step income statement?

Answer 17

The key disadvantage is oversimplification, which may result in less detailed financial information for users.

Question 18

How are operating revenues categorized in a single-step income statement for TELUS Corporation (Illustration 4.7)?

Answer 18

• Service
• Equipment
• Other income

Question 19

What are the typical operating expenses shown in a single-step income statement for TELUS Corporation (Illustration 4.7)?

Answer 19

• Goods and services purchased
• Employee benefits expense
• Depreciation
• Amortization of intangible assets

Question 20

What are the typical categories for comprehensive income items that may subsequently be reclassified to income?

Answer 20

• Change in unrealized fair value of derivatives designated as cash flow hedges
• Foreign currency translation adjustment from foreign operations

Question 21

What are the typical categories for comprehensive income items that will never be reclassified to income?

Answer 21

• Change in measurement of investment financial assets
• Employee defined benefit plan remeasurements

Question 22

What is the primary focus of a single-step income statement for decision-makers?

Answer 22

The primary focus is on net income derived from deducting expenses and losses from revenues and gains, offering a simple presentation of financial results.

Question 23

What is a multiple-step income statement?

Answer 23

A multiple-step income statement separates operating transactions from non-operating transactions, matching costs and expenses with related revenues, and highlights certain intermediate components of income, such as gross profit.

Question 24

What does the gross profit margin in a multiple-step income statement indicate?

Answer 24

Gross profit margin provides a useful measure for assessing the company’s performance by showing how well the company uses its resources to generate profits from core business activities.

Question 25

What is the significance of Underlying Concept 4.8?

Answer 25

Separate disclosure helps users recognize that incidental or irregular activities are unlikely to continue at the same level in future periods, thus enhancing predictive value.

Question 26

What are the key sections of a multiple-step income statement?

Answer 26

Continuing Operations:
a. Operating section (Sales or revenue, cost of goods sold, selling and administrative expenses)
b. Non-operating section (Other revenues, other expenses)
c. Income tax

Discontinued Operations

Other Comprehensive Income (for IFRS reporting)

Question 27

What is the primary difference between regular and irregular activities highlighted in a multiple-step income statement?

Answer 27

Regular activities reflect ongoing business performance, while irregular or incidental activities are nonrecurring and have little predictive value for future earnings.

Question 28

How does Underlying Concept 4.9 help improve financial statement readability?

Answer 28

By reducing the level of detail, financial statements become more understandable and prevent information overload, making it easier for users to focus on key financial performance indicators.

Question 29

What are condensed financial statements and how is the detail presented?

Answer 29

Condensed financial statements present only the totals of expense groups in the statement of income, with detailed expenses provided in supplementary schedules.

This reduces complexity while supporting full disclosure.

Question 30

What is Underlying Concept 4.10?

Answer 30

The use of supplementary schedules is a trade-off between understandability and full disclosure.

Question 31

What is the difference between expenses presented by nature versus function?

Answer 31

Nature: Refers to the type of expense, such as depreciation or employee benefits.

Function: Refers to the business activity, such as production or selling. It requires grouping expenses by the activities they support.

Question 32

How does IFRS handle the presentation of expenses by nature or function?

Answer 32

Under IFRS, expenses may be presented either by nature or by function. Information about the nature of expenses, including depreciation, amortization, and employee benefits, must still be disclosed.

Question 33

How does ASPE handle the presentation of expenses by nature or function?

Answer 33

ASPE does not mandate whether companies must present expenses by nature or by function, but entities may choose to do so if the information is decision-relevant.

Question 34

What are the benefits of presenting expenses by function for companies in the retail and manufacturing industries?

Answer 34

Presenting expenses by function, such as cost of sales, helps assess pricing and costs.

Manufacturing and retail companies often use this method to better communicate their operational efficiency.

Question 35

What is intraperiod tax allocation?

Answer 35

Intraperiod tax allocation refers to the allocation of income tax expense or benefit to different items within a fiscal period, including income from continuing operations, discontinued operations, and other comprehensive income.

Question 36

What are the three types of items that use intraperiod tax allocation?

Answer 36

Income from continuing operations

Discontinued operations

Other comprehensive income

Question 37

How does IFRS allow companies to present tax amounts for other comprehensive income?

Answer 37

IFRS allows companies to present items included as other comprehensive income either net of tax or before tax with one amount shown for taxes related to all other comprehensive income items.

Question 38

What is the formula to calculate basic earnings per share (EPS)?

Answer 38

EPS = (Net income - Preferred dividends) / Weighted average number of common shares outstanding

Question 39

What is the EPS for Lancer Inc. if the net income is $350,000, preferred dividends are $50,000, and the weighted average number of common shares outstanding is 100,000?

Answer 39

EPS = (350,000 - 50,000) / 100,000 = 3.00

Question 40

What does the earnings per share (EPS) figure represent?

Answer 40

EPS measures the amount of net income earned for each common share, indicating a company’s profitability on a per-share basis.

Question 41

Are companies required to report EPS under ASPE?

Answer 41

No, ASPE does not require private companies to report EPS as most shares are closely held.

Question 42

Why is EPS considered a key indicator of company performance?

Answer 42

EPS is widely used by analysts and investors because it provides a simplified measure of profitability relative to the number of common shares outstanding, making it a sensitive and significant financial metric.