income statement

1. Income Statement
Chapter 4, Slide #1

2. The Income Statement
• Shows the results of a company’s operations
over a period of time.
• What goods were sold or services performed
that provided revenue for the company?
• What costs were incurred in normal operations
to generate these revenues?
• What are the earnings or company profit?

3. The Income Statement
Revenues
• Assets (cash or AR) created through business
operations
Expenses
• Assets (cash or AP) consumed through
business operations
Net Income or (Net Loss)
• Revenues - Expenses

4. The Example Company
Income Statement
For the Years Ended December 31, 2010 and
2011
2011 2010
Revenues:
Sales $100 $ 85
Other revenue 30 15
Total revenues $130 $100
Expenses:
Cost of goods sold $ 62 $ 58
Operating & admin. 16 12
Income tax 20 18
Total expenses $ 98 $ 88
Net Income $ 32 $ 12

5. An additional financial
statement that identifies
changes in retained
earnings from one
accounting period to the
next.
Statement of Retained Earnings
Beginning retained earnings
+ Net income
– Dividends paid
= Ending retained earnings
Net income results in:
Increase in net assets
Increase in retained earnings
Increase in owners’ equity
Dividends result in:
Decrease in net assets
Decrease in retained
earnings
Decrease in owners’ equity

6. The Income Statement
• Dated for a period of time
– For the Year Ended...
• Multiple-step format
– Gross profit
– Operating income
– Income before taxes
– Net income
• Single-step format
– Total of all revenues and gains
– Less the total of all expenses and losses

7. Multiple-Step Single Step
Net revenue $37,586
Cost of sales 16,742
Gross margin 20,844
Operating Expenses:
General & administrative 5,458$
Resaarch & development 5,722
Restructuring charges 710 11,890
Operating income 8,954
Interest income (expense) 488
Other gains (losses) (net) (1,756) (1,268)
Income before taxes 7,686
Provision for taxes 2,394
Net Income 5,292$
Multiple-Step Company
Income Statement
For the Year Ended December 31, 20XX
Net revenue 37,586$
Interest income 488
Other income -
38,074
Costs and Expenses:
Cost of sales 16,742$
General & administrative 5,458
Research & development 5,722
Other losses 1,756
Restructuring charges 710 30,388
Income before taxes 7,686
Provision for taxes 2,394
Net income 5,292$
Single-Step Company
Income Statement
For the Year Ended December 31, 20XX

8. Basic Elements of the Income Statement
• Net Sales (Revenues)
• Cost of Goods Sold (Cost of Sales)
• Other Operating Revenue
• Research and Development
• Restructuring Charges
• Impairment Charges
• Operating Expenses
• Other Income or Expense ( gains or losses)

9. • Revenue from the sale of principal goods or
services sold to customers
• Shown net of
– Discounts
– Returns
– Allowances
Net Sales

10. • The cost of goods that were sold to produce revenue
(cost of services in a service company)
Retailer
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
Manufacturer
Beginning Inventory
+ Cost of Goods
Manufactured
– Ending Inventory
= Cost of Goods Sold
Cost of Goods Sold

11. • Reflects the nature of the business
• Examples
– Lease revenue
– Royalty revenue
– Finance charges
– Commission revenue
Other Operating Revenue

12. Operating Expenses
• Selling expenses
– Result from the company’s effort to create sales
– Examples
• Advertising
• Sales commissions
• Sales supplies used
• Administrative expenses
– Relate to the general administration of the
company’s operation
– Examples
• Salaries
• Insurance
• Bad debt expense

13. Other Income or Expense
• Secondary activities not directly related to
operations
– Dividend income
– Interest income
– Gains (losses) from sale of assets
– Interest expense

14. Special Income Statement Items
• Unusual or Infrequent Items Disclosed
Separately
– Included with normal recurring revenues and
expenses
– If material, disclosed separately, before income
taxes
– Relate to operations
– Treatment for analysis
• Primary analysis: include
• Supplementary analysis: exclude

15. Special Income Statement Items (cont’d)
• Equity in Earnings of Nonconsolidated
Subsidiaries
– The investor’s proportional share of the investee’s
net income
– Does not represent cash flow to the investor
• Cash dividends received represent cash flow
– Analysis issues:
• Investor’s net income includes revenue of other entity
• May distort ratios
• Presented before tax; tax consequences typically
immaterial

16. Special Income Statement Items (cont’d)
• Income Taxes Related to Operations
– Federal, state, and local
– Includes both paid and deferred taxes
• Discontinued Operations
– Reported net of income tax
– Analysis issues:
• Inadequate disclosure of associated assets
• Lack of historical profit and loss information on the
discontinued operations

17. Special Income Statement Items (cont’d)
• Extraordinary Items
– Unusual and infrequent
– Reported net of income tax
– Analysis issues:
• Exclude from primary analysis
• Include for supplementary analysis

18. Special Income Statement Items (cont’d)
• Cumulative Effect of a Change in Accounting
Principle
– For fiscal years beginning before 12/15/05
• Cumulative effect of the change shown net of tax on the
income statement of the period in which change was
made
• Earlier statements not restated to reflect application of the
new principle
– Effective for fiscal years beginning after 12/15/05
• All comparative statements are retrospectively restated to
reflect application of the new accounting principle
• The cumulative effect on income of earlier years is shown
as a net-of-tax adjustment to the beginning Retained
Earnings balance of the earliest period presented

19. Special Income Statement Items (cont’d)
• Net Income-Noncontrolling Interest (prior to
Dec. 31,2009 is was called Minority Share of
Earnings)
– Earnings of a partially-owned consolidated
subsidiary that would accrue to the minority owners
– Presentation may be either pre-tax or net-of-tax
• Earnings per Share
Net income ÷ Number of shares outstanding

20. Reconciliation of Retained Earnings
Beginning of year balance of retained earnings
+ Prior period adjustments (net of tax)
± Cumulative effect of a change in accounting
principle (net of tax)
= Beginning balance as adjusted
+ Net income
– Dividends
= End-of-year balance of retained earnings
Reported as part of the Statement of Stockholders’
Equity or combined with the Income Statement

21. Retained Earnings
• The accumulated undistributed earnings of the
corporation reported on the balance sheet
• Appropriated
– Restricted by law, contract, or management
decision
– Not available for dividends
• Unappropriated
– Available for dividends
– Does not represent cash or any other asset

22. Stock Dividends
• Cash dividends
– Date of declaration: create liability and reduce
retained earnings
– Date of payment: reduce liability and cash
• Stock dividends
– Small (less then 25%): capitalize the market value
of the stock
– Material: capitalize the par value of the stock
– Total equity is unaffected by a stock dividend
– Analysis issues:
• Restate share quantities to reflect stock dividend activity

23. Stock Splits
• 2-for-1 split
– Doubles the quantity of stock
– Par or stated value is halved
• No effect on retained earnings, additional paid-
in capital, or capital stock accounts
• Analysis issues:
– Restate share quantities to reflect split activity

24. Legality of Distributions to Shareholders
• Per various state laws
– Distributions are acceptable as long as the firm has
the ability to pay debts as they come due in the
normal course of business
– Distributions to stockholders are acceptable as long
as the firm is solvent and the distributions do not
exceed the fair value of the assets
– Distributions consist of solvency and balance sheet
test of liquidity and risk

25. Comprehensive Income
Net income
+ The period’s change in accumulated other comprehensive income
= Comprehensive income
• Foreign currency translation adjustments
• Unrealized holding gains and losses on
available-for-sale marketable securities
• Changes to stockholders’ equity resulting from
additional minimum pension liability
adjustments
• Unrealized gains and losses from derivative
instruments

26. Comprehensive Income (cont’d)
• Required disclosures
– Comprehensive income
– Other comprehensive income from each category
– Reclassification adjustments for each category of
other comprehensive income
– Tax effects for each category of other
comprehensive income
– Balances for each category of other comprehensive
income

27. Comprehensive Income –
Combined with Income Statement
Sales 230,000$
Cost of goods sold 140,000
Gross profit 90,000
Operating expenses 40,000
Operating income 50,000
Other income 4,000
Income before income taxes 54,000
Income taxes 20,000
Net income 34,000
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Other comprehensive income 4,000
Comprehensive income 38,000$
Earnings per share (for net income only) 2.80$
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 20XX

28. Comprehensive Income –
Separate Statement
Net income 34,000$
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Total other comprehensive income 4,000
Comprehensive income 38,000$
XYZ Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 20XX

29. Comprehensive Income (cont’d)
• Presentation
– In a separate financial statement
– Combined with the income statement
– As part of the schedule of changes in stockholders’
equity

30. Comprehensive Income (cont’d)
• Analysis issues:
– Typically more volatile than net income
– A better indication of long-run profitability

31. Question
• Hausa Inc has sales of RM 275 000, costs of
RM 175 000, depreciation expense RM 15
000, interest expense RM 6000, and a tax
rate at 35%.
• What is the net income of Hausa Inc?
Chapter 4, Slide #31

32. Answer
• Net Sales RM 275 000
• Cost RM (175 000)
• Depreciation RM (15 000)
• Earning before tax RM 85 000
• Interest paid RM (6000)
• Taxable Income RM 79 000
• Tax 35 % RM (27 650)
• Net Income RM 51 350
Chapter 4, Slide #32