CHAPTER 4
THE INCOME STATEMENT, COMPREHENSIVE INCOME, AND THE
STATEMENT OF CASH FLOWS
Overview
The purpose of the income statement is to summarize the profit-generating activities that occurred
during a particular reporting period. Comprehensive income includes net income as well as a few
gains and losses that are not part of net income and are considered other comprehensive income
items instead.
Learning Objectives
LO4-1 Discuss the importance of income from continuing operations and describe its
components.
LO4-2 Describe earnings quality and how it is impacted by management practices to manipulate
earnings.
LO4-3 Discuss the components of operating and nonoperating income and their relationship to
Lecture Outline
Part A: The Income Statement and Comprehensive Income
I. Income from Continuing Operations
A. Income from continuing operations includes the revenues, expenses, gains, and losses that
will probably continue in future periods.
1. Income tax expense always is shown as a separate expense.
II. Earnings Quality
A. Earnings quality refers to the ability of reported earnings (income) to predict a company’s
future earnings.
1. To enhance predictive value, analysts try to separate a company’s transitory earnings
B. Not all items included in operating income should be considered indicative of a company’s
permanent earnings. (T4-5)
1. Restructuring costs include costs associated with shutdown or relocation of facilities
or downsizing of operations. GAAP requires these costs to be expensed in the
III. Discontinued operations
A. Discontinued operations involve the disposal or planned disposal of a component of an
entity.
1. Discontinued operations must be reported separately, below income from continuing
operations. (T4-7)
B. What constitutes a component of an entity? (T4-8)
1. A component is any part of the company, such as an operating segment or subsidiary,
that includes operations and cash flows that can be clearly distinguished, operationally
C. Reporting discontinued operations,
1. When the component has been sold, the income effects of a discontinued operation
includes (1) the operating income or loss of the component from the beginning of the
IV. Accounting Changes
A. Accounting changes fall into one of three categories: (1) a change in an accounting
principle, (2) a change in estimate, or (3) a change in reporting entity.
B. Most voluntary changes in accounting principles are accounted for retrospectively by
revising prior years’ financial statements. (T4-11)
1. The comparative financial statements are revised.
C. A change in depreciation, amortization, or depletion method is considered to be a change
in accounting estimate that is achieved by a change in accounting principle. These
V. Correction of Accounting Errors
A. Errors discovered in the same year they are made are simply corrected by journal entry.
B. Treatment of errors discovered in a year subsequent to the year the error is made depends
VI. Earnings per Share Disclosures
A. Earnings per share (EPS) is the amount of income reported during a period for each share
of common stock outstanding.
VII. Comprehensive Income
4-4 Intermediate Accounting, 8/e
A. The purpose of the income statement is to summarize the profit-generating activities that
occurred during a particular reporting period.
B. Comprehensive income is the total change in equity for a reporting period other than from
Part B: The Statement of Cash Flows
I. Usefulness of the Statement of Cash Flows
A. The purpose of the statement of cash flows (SCF) is to provide information about cash
II. Classifying Cash Flows
A. The SCF classifies all transactions affecting cash into one of three categories: (T4-16)
1. Operating activities are inflows and outflows of cash related to the transactions
entering into the determination of net operating income. (T4-17)
a. The Direct Method
Appendix4: Interim Reporting
A. Interim reports are issued for periods of less than a year, typically as quarterly financial
statements.
B. With only a few exceptions, the same accounting principles applicable to annual reporting
are used for interim reporting.
PowerPoint Slides
A PowerPoint presentation of the chapter is available in the Connect library.
Teaching Transparency Masters
The following can be reproduced on transparency film as they appear here, or
4-6 Intermediate Accounting, 8/e
INCOME STATEMENTS —
URBAN OUTFITTERS INC.
.
Consolidated Statements of Income
(In thousands, except per share data)
Fiscal Year Ended January 31
2014
2012
Net sales
$3,086,608
$2,473,801
Cost of sales
1,925,266
1,613,265
Gross profit
1,161,342
860,536
Selling, general and administrative expenses
Operating income
426,831
284,725
Interest income
Other income
Other expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Illustration 4-2
SINGLE-STEP INCOME STATEMENT
➢ An advantage of the single-step format is its simplicity.
MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2016
Revenues and gains:
Sales ………………………………………………………………….
$573,522
Interest and dividends ………………………………………….
26,400
Gain on sale of investments ………………………………….
Total revenues and gains …………………………………
Expenses and losses:
Selling ……………………………………………………………….
General and administrative …………………………………..
Research and development …………………………..………
Interest ……………………………………………………………….
14,522
Total expenses and losses ………………………………..
405,422
Income before income taxes ……………………………………
200,000
Income tax expense ……………………………………………….
Net income ……………………………………………………………
$120,000
Illustration 4-3
T4-2
4-8 Intermediate Accounting, 8/e
MULTIPLE-STEP INCOME STATEMENT
➢ An advantage of the multiple-step format is that it separately
reports operating and nonoperating activities.
MAXWELL GEAR CORPORATION
Income Statement
For the Year Ended December 31, 2016
Sales revenue ……………………………………………………….
$573,522
Cost of goods sold …………………………………………………
302,371
Gross profit ………………………………………………………….
271,151
Operating expenses:
Selling ………………………………………………………………..
General and administrative ……………………………………
88,529
Operating income ………………………………………………….
182,622
Other income (expense):
Interest and dividend revenue ………………………………..
26,400
Gain on sale of investments ……………………………………
5,500
Interest expense ……………………………………………………
(14,522)
17,378
Income before income taxes …………………………………..
200,000
Income tax expense …………………………..…………………..
80,000
Net income …………………………..………………………………
$120,000
Illustration 4-4
T4-3
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Income Statement Presentation. There are more similarities than
differences between income statements prepared according to U.S. GAAP
and those prepared applying international standards. Some of the
differences are:
• International standards allow expenses to be classified either by
function (e.g., cost of goods sold, general and administrative, etc), or
by natural description (e.g., salaries, rent, etc.). SEC regulations
require that expenses be classified by function.
T4-4
4-10 Intermediate Accounting, 8/e
OPERATING INCOME AND EARNINGS QUALITY
Income Statements – GameStop Corp.
Income Statements (in part)
($ in millions)
Year Ended
February 1,
2014
February 2,
2013
Net sales
$9,039.5
$8,886.7
Cost of sales
6,378.4
6,235.2
Gross profit
Selling, general and administrative expenses
Goodwill impairments
Operating income (loss)
Illustration 4-5
NONOPERATING INCOME AND EARNINGS
QUALITY
➢ Some nonoperating items have generated considerable
Income Statements – Intel Corporation
Income Statements (in part)
Years Ended December 30
(in millions)
2000
1999
Illustration 4-6
T4-6
4-12 Intermediate Accounting, 8/e
DISCONTINUED OPERATIONS
► Discontinued operations must be reported separately, below
income from continuing operations.
Income from continuing operations before income taxes XXX
➢ The income tax effect of discontinued operations is included in
the separate presentation rather than as part of the amount
T4-7
4-14 Intermediate Accounting, 8/e
DISCONTINUED OPERATION
► A component is any part of the company, such as an operating
segment or subsidiary, that includes operations and cash flows
that can be clearly distinguished, operationally and for
DISCONTINUED OPERATIONS —
When the component has been sold
➢ When the component has been sold, the income effects of a
discontinued operation includes:
1. Operating income or loss (revenues, expenses, gains and losses)
2. Gain or loss on disposal.
The Duluth Holding Company has several operating divisions. In October 2016, management
decided to sell one of its divisions that qualifies as a separate component according to generally
Duluth’s income statement for the year 2016, beginning with income from continuing
operations, would be reported as follows:
Income from continuing operations $22,350,000
Illustration 4-7
T4-9
4-16 Intermediate Accounting, 8/e
DISCONTINUED OPERATIONS —
When the component is considered held for sale
➢ When the component is considered held for sale, the income
effects of a discontinued operation includes:
1. Operating income or loss (revenues, expenses, gains and losses)
The Duluth Holding Company has several operating divisions. In October of 2016, management
decided to sell one of its divisions that qualifies as a separate component according to generally
accepted accounting principles. On December 31, 2016, the end of the company’s fiscal year, the
Duluth’s income statement for 2016, beginning with income from continuing operations, would
be reported as follows:
Income from continuing operations $22,350,000
Discontinued operations:
Illustration 4-8
T4–10
CHANGE IN ACCOUNTING PRINCIPLE
► Most voluntary changes in accounting principles are
► The steps used to account for changes are as follows:
1. The comparative financial statements are revised.
► A change in depreciation, amortization, or depletion method
is considered to be a change in accounting estimate that is