56 STUDY GUIDE 2112 Income Statement

Question 1

2112.01

Answer 1

Reference: 2112.01
An example of a comparative income statement (statement of profit or loss) for Tiger Co. for the years 20X2 and 20X1 is presented as follows.

Question 2

Answer 3

Question 4

Reference: 2112.02
The income statement illustrated in section 2112.01 assumes that Tiger Co. elects to report items of other comprehensive income in a financial statement other than the income statement. As demonstrated in section 2112.03, Tiger Co. elects to report items of other comprehensive income in a separate comprehensive income statement.

Answer 4

The income statement illustrated in section 2112.01 assumes that Tiger Co. elects to report items of other comprehensive income in a financial statement other than the income statement. As demonstrated in section 2112.03, Tiger Co. elects to report items of other comprehensive income in a separate comprehensive income statement.

Question 5

2112.03

Question 6

2112.04

Answer 6

Enterprises are required to report items of other comprehensive income in a formal financial statement. One of the acceptable alternative methods is that shown in section 2112.03 for Tiger Co. Another method that Tiger Co. could have chosen is to include another comprehensive income section at the bottom of its income statement following the caption “net income,” with the final caption at the bottom of the statement being “comprehensive income.” A third method that Tiger Co. could have chosen is to report the items of other comprehensive income in its statement of changes in stockholders’ equity.

Question 7

2112.05

Answer 7

Several definitions of the basic elements of an income statement are as follows:

a. Revenue: Inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
b. Expenses: Outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
c. Gains: Increases in net assets other than from revenues or investments by owners
d. Losses: Decreases in net assets other than from expenses or withdrawals by owners
e. Income: The result of combining these four concepts for a specified period of time (sometimes referred to as earnings):

Income = Revenues − Expenses + Gains − Losses

Question 8

2112.06

Answer 8

The concepts of gains and losses, as illustrated, relate to peripheral or secondary activities rather than to the major or central operations of the enterprise. While revenues and expenses are presented in gross amounts in the income statement, gains and losses are presented in the income statement in net amounts (i.e., they are measured by subtracting two or more other measures or they involve only an increase or decrease in an asset or liability with no offsetting decrease or increase in another asset or liability).

Question 9

2112.07

Answer 9

The income statement may be presented in either of two formats—single step or multiple step.

Single step: The single-step income statement is a simple and relatively straightforward presentation whereby all revenues and gains are combined at the top of the statement. From this subtotal, a total amount of all expenses and losses is deducted to render a net income figure. A popular variation of the single-step income statement is the separation of income taxes from the other expenses, resulting in an income figure before taxes (when revenues and gains are reduced by all other expenses and losses). Income tax is then deducted as a separate item, resulting in a net income figure.
Multiple step: Under the multiple-step income statement, a distinction is made between operating and nonoperating items. The typical format is that illustrated previously in the example of Tiger Co. (section 2112.01), wherein cost of goods sold is deducted from revenues to yield gross profit; selling and administrative expenses are then deducted to yield operating income; other income and expense items are then added and deducted to yield net income.

Question 10

2112.08

Answer 10

Discontinued operations are presented in a separate section of the income statement, just below income from continuing operations. To be reported as discontinued operations, a disposal must represent a strategic shift. A strategic shift must have a major effect on the entity’s operations and financial results. The following are among notable criteria applied when assessing the appropriate classification of discontinued operations:

1. The disposal must be of a component or group of components that:

• meets the requirements to be classified as “held for sale,”
• is disposed of by sale,
• is disposed of in some other manner.

2. The entity must qualitatively assess whether a strategic shift has occurred. Examples of a strategic shift include:

• a sale of a product line that represents 15% of the entity’s total revenues;
• a sale of a geographical area that represents 20% of the entity’s total assets;
• a sale of all of one type of a reporting entity’s store formats that historically provided 30% to 40% of the reporting entity’s net income and 15% of the current-period net income;
• the sale of an equity method investment representing 20% of the entity’s total assets; or
• the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest.

3. If a business or nonprofit activity is acquired to be held for sale, its disposal is considered a disposal of a discontinued operation. The initial criteria for classification as “held for sale” include:

• management has committed to a plan to sell the component;
• the entity is available for immediate sale;
• an active program to sell has been initiated;
• the sale is expected to be complete within one year;
• the entity is being actively marketed; or
• it is unlikely the plan to sell will be withdrawn.
  If criteria above are no longer true, the component formerly held for sale must be reclassified and reported as “held and used.” If the entity does not dispose of the component within one year because of events out of the entity’s control, the one-year
  requirement can be extended.

4. A component consists of the operations and cash flows that can be clearly distinguished from the other operations of the entity. This includes a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group. The results of the discontinued operations amount must be presented net of any related income tax effect. The discontinued operations amount includes the following:

• Any results of operations of the component during the period (differences between revenues and expenses)
• Any impairment loss recognized in writing down the component to its fair value less cost to sell
• Any gain for any subsequent increase in the fair value less cost to sell (However, these gains cannot exceed the cumulative loss previously recognized for a write-down.)
• A gain or loss not previously recognized that results from the sale of a component (This particular gain or loss must be separately disclosed, either on the face of the income statement or in the notes to the financial statements.)

The results of all operations of a component of an entity that either has been disposed of or is classified as held for sale must be reported in discontinued operations. The results of operations of the component in any prior years presented must be reclassified and presented in discontinued operations. Adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of a component of an entity in a period should be classified separately in the current period in discontinued operations.

5. A discontinued operation must be presented separately, either on the balance sheet or in the footnotes, in the period it is classified as held for sale and for all prior periods presented. The assets and liabilities of a disposal group (i.e., a component of an entity that is comprised of a group of assets) must be presented separately in the asset and liability sections, respectively. Those assets and liabilities may not be offset and presented as a single amount. A gain or loss recognized for a long-lived asset classified as held for sale that is not a component of an entity must be included in income from continuing operations.