Introduction to Financial Reporting

1. Chapter 4
Income Statement

2. 2
The Income Statement
(Profit & Loss)
• It shows/report a company's financial performance (Profit/Loss)
over a specific accounting period.
• Covers a period of time
– For the Year/Quarter/Month Ended...
• Multiple-step format
– Gross profit (sales – cost of goods sold)
– Operating income (income before taxes, interest, and other
revenues and expenses)
– Income before taxes
– Net income
• Single-step format
– Total of all revenues and gains
– Less the total of all expenses and losses
– No operating Income in this analysis

3. 3
Multiple-Step Single Step
Sales 496,120
$
Cost of Goods Sold 234,972
Gross Profit 261,148
Operating Expenses:
General & Administrative 131,409
$
Advertising 128,325
Uncollectible Accounts 22,664 282,398
Operating Income (21,250)
Interest Income 122,757
Other Revenue 44,715 167,472
Income Before Taxes 146,222
Income Taxes 8,498
Net Income 137,724
$
Multiple-Step Company
Income Statement
For the Year Ended December 31, 20XX
Sales 496,120
$
Interest Income 122,757
Other Income 44,715
663,592
Costs and Expenses:
Cost of Goods Sold 234,972
$
General & Administrative 131,409
Advertising 128,325
Uncollectible Accounts 22,664 517,370
Income Before Taxes 146,222
Income Taxes 8,498
Net Income 137,724
$
Single-Step Company
Income Statement
For the Year Ended December 31, 20XX

4. 4
Net Sales
• Revenue from the sale of principal goods or
services sold to customers
• Shown net of
– Discounts
– Returns
– Allowances

5. 5
Cost of Goods Sold
• The cost of goods that were sold to produce
revenue
Retailer
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
Manufacturer
Beginning Inventory
+ Cost of Goods Manufactured
– Ending Inventory
= Cost of Goods Sold

6. 6
Other Operating Revenue
• Reflects/depends on the nature of the business
• Examples
– Lease/ rent revenue
– Royalty revenue
A payment made to an individual or company for the ongoing
use of their assets, including copyrighted works, franchises etc.
– Finance charges (interest)
– Commission revenue

7. 7
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

8. 8
Other Income or Expense
• Secondary activities not directly related to
operations
– Dividend income
– Interest income
– Gains (losses) from sale of assets
– Interest expense

9. 9
Reconciliation of Retained Earnings
Beginning of year balance of retained earnings
+ Prior period adjustments
± Cumulative effect of a change in accounting principle
= Beginning balance as adjusted
+ Net income
– Dividends
= End-of-year balance of retained earnings
Reported as part of the Statement of Owners' Equity or
combined with the Income Statement

10. 10
Retained Earnings
• The accumulated undistributed earnings of the
corporation reported on the balance sheet
• Appropriated (specified by the board of directors for a
particular use.)
– Restricted by law, contract, or management decision
– Not available for dividends
• Unappropriated (the portion of retained earnings not assigned
to a specific business purpose.)
– Available for dividends
– Does not represent cash or any other asset

11. 11
Dividends
• Cash dividends
– Date of declaration: create liability and reduce
retained earnings
– Date of payment: reduce liability and cash

12. 12
Comprehensive Income
• It is the variation in the value of a company's net assets
from non-owner sources during a specific period.
• provides a complete view of a company's income, some of
which may not be fully captured on the income statement.
Net income
+ Changes in other income
= Comprehensive income
• Unrealized holding gains and losses on available-for-sale
marketable securities
• Changes to owners' equity resulting from additional
minimum pension liability adjustments

13. 13
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

14. 14
Comprehensive Income –
Combined with Income Statement
Sales 230,000
$
Cost of goods sold 140,000
Gross profit 370,000
Operating expenses 40,000
Operating income 330,000
Other income 4,000
Income before income taxes 326,000
Income taxes 20,000
Net income 306,000
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 310,000
$
Earnings per share (for net income only) 2.80
$
XYZ Corporation
Statement of Income and Comprehensive Income
For the Year Ended December 31, 20XX

15. 15
Comprehensive Income – As Part of the
Statement of Owners' Equity
Retained
Accumulated Other
Comprehensive
Total Earnings Income
Beginning Balance $180,000 $60,000 $10,000
Net Income 34,000 34,000
Available-for-sale security adjustment, net of tax 5,500 5,500
Minimum pension liability adjustment, net of tax 3,500 3,500
Foreign currency transaction adjustment, net of tax (5,000) (5,000)
Comprehensive income 38,000
Ending Balance $218,000 $94,000 $14,000
XYZ Corporation
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 20XX

16. 16
Comprehensive Income (cont’d)
• Analysis issues:
– Typically, it is more volatile (unpredictable, unstable)
than net income
– A better indication of long-run profitability

17. 17
Exercise
Maintenance exp 2,400
Fuel exp 1,500
Utility exp 200
Wages Exp 4,700
Rent Exp 5,500
Ad Expense 1,250
Shop Supplies expense 1,200
Depriciation expense Aircraft 1,000
Service & Maintenance Revenue 51,420
Depreciation expense Building 300
Depreciation expense Tools & Equipment 250

18. 18
Exercise
Business Name
Income statement
For the period ended on Dec 31, 2020
Service & Maintenance Revenue 51,420
Maintenance exp 2,400
Fuel exp 1,500
Utility exp 200
Wages Exp 4,700
Rent Exp 5,500
Ad Expense 1,250
Shop Supplies expense 1,200
Depreciation expense Aircraft 1,000
Depriciation expense Building 300
Depreciation expense Tools & Equipment 250 (18,300)
Net income for the period closing Dec 31, 2020 33,120

19. Homework
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20. Thank you
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