F1.03 – Income Statement (1.2) Flashcards
Single Step Income Statement
Total expenses (including income tax expense) are subtracted from total revenues.
Revenues and other items: Sales of goods \+ Sales of services \+ Interest income \+ Rental income \+ Gain on sale of fixed assets \+ Other Income = Total Revenue and Other Items
Expenses and other items
Cost of Goods Sold
\+ Cost of services sold
\+ Cost of rental income
\+ Selling expenses
\+ General and administrative expenses
\+ Interest expense
\+ Depreciation expense
\+ Loss on sale of fixed assets
\+ Loss on sale of available-for-sale securities
\+ Income tax expenses
= Total Expenses and Other Items
NET INCOME FROM CONTINUING OPERATIONS
Presentation order of the major components of an income and retained earnings statement
Reported on income statement:
- Income from continuing operations
- Income from discontinued operations, net of tax
- Extraordinary items, net of tax
Reported on statement of retained earnings
- Cumulative effect of change in accounting principle
Multiple Step Income Statement
Reports operating revenue and expenses separately from non operating revenues and expenses and other gains and losses
Net Sales
– Cost of Goods Sold)
= GROSS MARGIN
– Selling expenses
– General and administrative expenses
– Depreciation expense
= INCOME (LOSS) FROM OPERATIONS
+ Other revenue and gains
– Other expenses and losses
= INCOME BEFORE UNUSUAL OR INFREQUENT ITEMS AND INCOME TAX
± Income (loss) from unusual items
± Income (loss) from infrequent items
= INCOME BEFORE INCOME TAX
– Provision for Income taxes
= NET INCOME (LOSS) FROM CONTINUING OPERATIONS
Discontinued Operations
Discontinued operations reported separately from a continuing operations.
Complement = discontinued if it (1) has been disposed of, or (2) is classified as held for sale
- Component held for sale measured at lower of
(i) carrying value, or (ii) fair value less costs to sell
A component is “held for sale” when:
- Management commits to plan to sell
- Component can be sold as-is
- Activity looking for buyer
- Sales expected within 1 year
- Sale actively marketed, and
- Significant changes to, or withdrawal of, plan unlikely
Discontinued Operations – Measurement and Valuation, Presentation, and Disclosure
Component classified as held for sale is measured at the lower of (1) its carrying amount or (2) fair value less costs to sell
Assets within the discontinued component are no longer depreciated or amortized
The results of discontinued operations, net of tax, are reported as a separate component of income before extraordinary items
Recognize gain or loss on disposal on face of the income statement or in notes to the financial statements
Exit or Disposal Activities
US GAAP (and IFRS) require the recognition of a liability for the costs associated with an exit or disposal activity
Exit and Disposal Costs
– Involuntary employee termination benefits
– Costs to terminate a contract that is not a capital lease
– Other costs associated with exit or disposal activities, including costs to consolidate facilities or relocate employees
The liability should be measured at fair value
– Revisions are accounted for prospectively (change in estimate)
Exit or Disposal Activities – Criteria for Liability Recognition
An entity’s commitment to an exit or disposal plan, by itself, is not enough to result in liability recognition.
All the following criteria must be met
- An obligating event has occurred
- The event results in a present obligation to transfer asset or to provide services in the future
- The entity has little or no discretion to avoid the future transfer of asset or providing of services
Extraordinary Items
ALL the following criteria must be met
- Material in nature
- Unusual vis-a-vis customary business activities
- Not expected to recur in the foreseeable future, 4. Not normally considered in evaluating the ordinary operating results of an enterprise
Extraordinary items must be separately disclosed in the income statement, net of any related tax effects.
Extraordinary items are listed after income from discontinued operations.
Extraordinary items are unusual AND infrequent
– Items that are unusual OR infrequent are not extraordinary items, and are listed as a separate line item as part of income from continuing operations, not net of tax
Under IFRS, an entity can not present any item of income or expense as extraordinary on the statement of comprehensive income, or the separate income statement (if presented), or in the notes to the financial statements.
Accounting Changes and Error Corrections
- Change in Accounting Estimate – applied prospectively
- Change in Accounting Principles – applied retrospectively
- Change in Accounting Entity (GAAP only) – applied retrospectively
Error Correction ≠ Accounting Changes
Change in Accounting Estimate
Prospectively applied
Events resulting in estimate changes
- Changes in lives of fixed assets
- Adjustments of year-end accrual of officers’ salaries and/or bonuses
- Write-downs of obsolete inventory
- Material nonrecurring IRS adjustments
- Settlement of litigation
- A Changes in accounting principle that are inseparable form a change in estimate (e.g. change from the installment method to immediate recognition method because uncollectible accounts can now be estimated)
If the change affects several future periods, the effect on income before extraordinary items, net income, and the related per share information for the current year should be disclosed in the notes to the financial statements
Changes in ordinary accounting estimates (e.g. uncollectible accounts and inventory adjustments) usually made each period do not have to be disclosed unless they are material.
Change in Accounting Principle
Retrospectively applied
Change in accounting principle is a change in a counting from one accounting principle to another acceptable accounting principle i.e. GAAP to GAAP or IFRS to IFRS
Can only change accounting principle if required by GAAP/IFRS or if the alternative principle is preferable and more fairly presents the information.
Accounting change should not be made for a transaction or event in the past that has been terminated or is nonrecurring.
Cumulative Effect of Accounting change
Non-comparative financial statement presented cumulative effect = difference between beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retroactively applied to all prior affected periods
– Comparative financial statements presented: cumulative effect = difference between beginning retained earnings in the first period presented and what retained earnings would have been if the new principle had been applied to all prior periods.
Retrospective Application
Changes in accounting principle recognized by
- adjusting beginning retained earnings in the earliest period presented for the cumulative effect of the change, and
- restatement of any prior period financial statements presented
Exceptions
1. Impracticable to accurately calculate the cumulative effect (e.g. change to LIFO) ››› Apply change prospectively
2. Change in depreciation method ››› Apply change prospectively
– change in depreciation method considered to be a change in accounting principle and a change in estimate
Changes in Accounting Entity
Entity being reported on has changed composition
Examples
– Consolidated or combinated financial statements presented in place of statements of the individual companies
– Changes in the companies included in the consolidated or combined financial statements from year to year
Retrospective application
–Restate all previous financial statements presented to reflect the information for the new entity
Disclose fully the cause and nature of change, including changes in income before extraordinary items, net income, and retained earnings.
IFRS doesn’t include concept of a change in accounting entity
Error Correction
Error Correction ≠ Accounting Change
Error corrections include
– Corrections of errors in recognition, measurement, presentation, or disclosure in financial statement resulting from mathematical mistakes, mistake sin the application of US GAAP/IFRS, or oversight or misuse of facts that existed at the time the financial statements were prepared.
– non-GAAP/non-IFRS to GAAP/IFRS method of accounting
