SB-BMGT310-sess06_ch_4bnew

8/8/2019 SB-BMGT310-sess06_ch_4bnew

1/23

Chapter4-1

Income Statement andIncome Statement andRelated InformationRelated Information

ChapterChapter4b4b

Initially preparedby Coby Harmon,University ofCalifornia,Santa Barbara,modified by Stephen Brown


2/23

Chapter4-2

1.1. Explain and present changes in accounting principles.Explain and present changes in accounting principles.

2.2. Explain and present changes in estimates.Explain and present changes in estimates.

3.3. Explain and present corrections of errors.Explain and present corrections of errors.

4.4. Explain intraperiod tax allocation.Explain intraperiod tax allocation.

5.5. Identify where to report earnings per shareIdentify where to report earnings per shareinformation.information.

6.6. Prepare a retained earnings statement.Prepare a retained earnings statement.7.7. Explain how to report other comprehensive income.Explain how to report other comprehensive income.

Learning ObjectivesLearning Objectives


3/23

Chapter4-3

Emphasis on non-GAAP numbers

Press release often highlights non GAAPnumbers

e.g. adobe 2008 Q4 results

Reporting Special ItemsReporting Special Items

LO 4 Explain how to report irregular items.LO 4 Explain how to report irregular items.


4/23

Chapter4-4

Changes in Accounting Principles

Retrospective adjustment

Cumulative effect adjustment to beginning

retained earningsApproach preserves comparability

Examples include:

change from FIFO to average cost change from the percentage-of-completion to

the completed-contract method

Reporting Irregular ItemsReporting Irregular Items



5/23

Chapter4-5

Changes inEstimate

Accounted for in the period of change andfuture periods

Nothandled retrospectivelyNot considered errors or extraordinary items

Examples include:

Useful lives and salvage values of depreciableassets

Allowance for uncollectible receivables

Inventory obsolescence




6/23

Chapter4-6

Arcadia HS, purchased equipment for $510,000 whichArcadia HS, purchased equipment for $510,000 whichwas estimated to have a useful life of 10 years with awas estimated to have a useful life of 10 years with asalvage value of $10,000 at the end of that time.salvage value of $10,000 at the end of that time.Depreciation has been recorded for 7 years on aDepreciation has been recorded for 7 years on a

straightstraight--line basis. In 2010 (year 8), it is determinedline basis. In 2010 (year 8), it is determinedthat the total estimated life should be 15 years with athat the total estimated life should be 15 years with asalvage value of $5,000 at the end of that time.salvage value of $5,000 at the end of that time.

Questions:Questions:

What is the journal entry to correctWhat is the journal entry to correctthe prior years depreciation?the prior years depreciation?

Calculate the depreciation expenseCalculate the depreciation expensefor 2010.for 2010.

NoEntryNoEntryRequiredRequired

Change inEstimateExampleChange inEstimateExample

LO 4 Explain how to report irregular items.LO 4 Explain how toreport irregular items.


7/23

Chapter4-7

EquipmentEquipment $510,000$510,000

Fixed Assets:Fixed Assets:

Accumulated depreciationAccumulated depreciation 350,000350,000

Net book value (NBV)Net book value (NBV) $160,000$160,000

Balance SheetBalance Sheet (Dec.31, 2009)(Dec.31, 2009)

Change in Estimate ExampleChange in Estimate Example After 7 yearsAfter 7 years

Equipment costEquipment cost $510,000$510,000

Salvage valueSalvage value -- 10,00010,000

Depreciable base 500,000Depreciable base 500,000

Useful life (original)Useful life (original) 10 years10 years

Annual depreciationAnnual depreciation $ 50,000$ 50,000 x 7 years =x 7 years = $350,000$350,000

First, establishFirst, establishNBV at date ofNBV at date of

change in estimate.change in estimate.



8/23

Chapter4-8

Change in Estimate ExampleChange in Estimate Example After 7 yearsAfter 7 years

Net book valueNet book value $160,000$160,000

Salvage value (new)Salvage value (new) 5,0005,000

Depreciable baseDepreciable base 155,000155,000

Useful life remainingUseful life remaining 8 years8 yearsAnnual depreciationAnnual depreciation $ 19,375$ 19,375

DepreciationDepreciationExpense calculationExpense calculation

for 2010.for 2010.

Depreciation expense 19,375

Accumulated depreciation 19,375

Journal entry for 2010



9/23

Chapter4-9

CorrectionsofErrors

Result from: mathematical mistakes

mistakes in application of accounting principles oversight or misuse of facts

Corrections treated as prior periodadjustments

Adjustment to the beginning balance of retainedearnings


LO 4 Explain how toreport irregular items.LO 4 Explain how toreport irregular items.


10/23

Chapter4-10

Relates the income tax expense to the specific itemsthat give rise to the amount of the tax expense.

Income tax is allocated to the following items:

(1) Income from continuing operations before tax(2) Discontinued operations

(3) Extraordinary items

(4) Changes in accounting principle

(5) Correction of errors

Intraperiod Tax AllocationIntraperiod Tax Allocation

LO5 Explain intraperiod tax allocation.LO5 Explain intraperiod tax allocation.


11/23

Chapter

4-11

Interest expense (21,000)

Total other (4,000)

Income from cont. oper. before taxes 79,000

Income tax expense 24,000

Income from continuing operations 55,000

Discontinued operations:

Loss on operations, net of $135 tax 315

Loss on disposal, net of $61 tax 189Total loss on discontinued operations 504

Income before extraordinary item 54,496

Extraordinary loss, net of $231 tax 539

Net income 53,957$

Income Statement i u dSales 85,000$

C g d d 49,000

xx

A c edA c ed

Example of Intraperiod Tax AllocationExample of Intraperiod Tax Allocation

$ 4,000$ 4,000

35)(135)

(61)(61)

(231)(231)

$23,573$23,573

N e: e reduceN e: e reduce

e xthetotaltax

LO5 Explain intraperiod tax allocation.LO5 Explain intraperiod tax allocation.


12/23

Chapter

4-12

An important business indicator.

Measures the dollars earned by each share of

common stock.Must be disclosed on the the income statement.

Earnings Per ShareEarnings Per Share

LO 6 Identify where to report earningsper share information.LO 6 Identify where to report earningsper share information.

Net income - Preferred dividends

Weighted average number of shares outstanding

Calculation


13/23

Chapter

4-13

BriefExercise 4-8 In 2011, Kirby Puckett Corporationreported net income of $1,200,000. It declared and paidpreferred stock dividends of $250,000. During 2011,Puckett had a weighted average of 190,000 common shares

outstanding. Compute Pucketts 2007 earnings per share.

Earnings Per ShareEarnings Per Share

- $250,000$1,200,000

190,000= $5.00 per share

LO 6 Identify where to report earningsper share information.LO 6 Identify where to report earningsper share information.

Net income - Preferred dividends

Weighted average number of shares outstanding


14/23

Chapter

4-14

Retained Earnings StatementRetained Earnings Statement

LO 7 Prepare a retained earnings statement.LO 7 Prepare a retained earnings statement.

IncreaseIncrease

Net incomeNet income

Change inaccountingrinci le

Error corrections

DecreaseDecrease

Net lossNet loss

Divi ends

Change inaccountingrinci lesError corrections

Changes in RetainedEarnings


15/23

Chapter

4-15

Before issuing the report for the year ended December 31, 2011, you

discover a $50,000 error (net of tax) that caused the 2010 inventoryto be overstated (overstated inventory caused COGS to be lower andthus net income to be higher in 2010). Would this discovery have anyimpact on the reporting of the Statement of Retained Earnings for2011?



Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1 $1,050,000Net income 360,000Dividends (300,000)

Balance, December 31 $1,060,000


16/23

Chapter

4-16



Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1, as previously reported $1,050,000Prior period adjustment - error correction (50,000)Balance, January 1, as restated 1,000,000Net income 360,000

Dividends (300,000)Balance, December 31 $1,060,000


17/23

Chapter

4-17

RestrictedRetainedEarnings

Disclosed

In notes to the financial statements

As Appropriated Retained Earnings




18/23


19/23

Chapter

4-19

Three approaches to reporting ComprehensiveThree approaches to reporting ComprehensiveIncome (SFAS No.130, June 1997):Income (SFAS No.130, June 1997):

1.1. A second separate income statement;A second separate income statement;

2.2. A combined income statement ofA combined income statement ofcomprehensive income; orcomprehensive income; or

3.3. As part of the statement of stockholdersAs part of the statement of stockholders

equityequity

Comprehensive IncomeComprehensive Income

LO 8 Explain how to report other comprehensive income.LO 8 Explain how to report other comprehensive income.


20/23

Chapter

4-20

Two-StatementFormat forComprehensiveIncome



Illustration 4Illustration 4--1919


21/23

Chapter

4-21

V. Gill Inc.

Combined Statement of Comprehensive Income

For the Year Ended ecember 31, 2007

Sales revenue 800,000$

Cost of goods sold 600,000

Gross profit 200,000

Operating expenses 90,000

Net income 110,000

Unrealized holding gain, net of tax 30,000

Comprehensive income 140,000$

Combined Income Statement




22/23

Chapter

4-22



Statement of Stockholders Equity (most common)Illustration 4Illustration 4--2020


23/23

Chapter

4-23



Balance Sheet PresentationBalance Sheet PresentationIllustration 4Illustration 4--2121

Regardless of the display format used, theRegardless of the display format used, the accumulated otheraccumulated othercomprehensive incomecomprehensive income of $90,000 is reported in the stockholdersof $90,000 is reported in the stockholdersequity section of the balance sheet.equity section of the balance sheet.

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