B. GENERAL PURPOSE FINANCIAL STATEMENTS - 2a. INCOME STATEMENT/STATEMENT OF PROFIT OR LOSS

Question 1

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_{^{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 2. INCOME STATEMENT/STATEMENT OF PROFIT OR LOSS}}

2. INCOME STATEMENT/STATEMENT OF PROFIT OR LOSS

What does it report?

Answer 1

On the income statement, revenues and expenses are from direct business activities,

and gains or losses result from non-business activities such as a manufacturing company selling old equipment.

The income statement is organized to show a company’s activities for the year with the end result being net income.

Question 2

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Here’s how a multiple step income statement is organized:

Answer 2

Sales

• COGS

= Gross income

• Selling, general & admin expenses
• Depreciation

= Operating income

+/- Misc. revenue/gains/expenses/losses (interest income, misc. expenses)

= Income before tax

• Income tax expense

= Income from continuing operations

+/- Income from discontinued operations

= Net income

Question 3

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Multiple Step Income Statement vs Single Step Income Statement

Answer 3

A single step income statement is very simplified and just lumps revenues and gains together and then expenses and losses together, netting the two leaving net income.

The multiple step income statement breaks things out so that investors can see gross profit, operating income, and then non-operating revenue/gains/losses separate from operating income, which all together is income from continuing operations. The last item is income from discontinued operations - if there is any - and then finally net income.

Question 4

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Discontinued Operations

How presented in multi-step Income Statement?

Answer 4

The discontinued operations portion (if any) appears below continuing operations on the income statement.

The important thing to know about discontinued operations on the income statement, is that they are presented net of tax.

Also, the “results of operations” are presented on one line,

and then the gain or loss on the “disposal of the business segment” is reported on a separate line.

Question 5

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Example: Discontinued Operations

During 2018 ABC decides to dispose of business segment B. At the end of the year, segment B has generated $100,000 in income, and the result of disposing of B is a loss of $300,000. ABC’s tax rate is 20%.

Here’s what would appear on the income statement:

Answer 5

Here’s what would appear on the income statement:

Discontinued Operations:

Results of Operations of Segment B (less income tax of $20,000): $80,000

Loss on disposal of Segment B (less tax savings of $60,000): ($240,000)

This results in an overall loss of $160,000 (240,000 - 80,000).

Question 6

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Income Statement: Other things to know

Understand Information on Amortization of a discount on a note payable?

Answer 6

Amortization of a discount on a note payable is an interest expense (it is a contra liability on the balance sheet and as it’s amortized it’s recognized on the income statement as an interest expense).

Know how to do problems where you’re given amounts from different accounts that flow into each other to determine an ending amount being asked in the question.

Question 7

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COGS =

Answer 7

beginning inventory

+ purchases

- ending inventory

= COGS

Question 8

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COGS Example:

ABC had the following transactions in year 1:

● Disbursements for inventory purchases: $300,000
● Increase in accounts payable: $20,000
● Decrease in inventory: $30,000

To determine the cost of goods sold for the year, you know that beginning inventory + purchases - ending inventory = COGS.

Purchase s are $300,000, and accounts payable increasing $20,000 for the year means that purchases exceeded cash payments by $20,000, so you’d add the $20,000.

Inventory decreasing $30,000 would mean more inventory was sold than was purchased, so this would also be added, for COGS of $350,000.

Question 9

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Income Statement Other:

You could be given the basic facts about a transaction and then asked where it would be reported on the income statement.

Example:
ABC purchased new sales software to run its stores. ABC expects to use the software for 10 years. How would this be reported on a multiple step income statement?

This is a simple depreciation question. ABC would include 1/10th the cost in the SG&A section of the income statement because it’s simply the depreciation amount for one year. It wouldn’t be in COGS, nor would the full amount of the purchase be included all in the first year.