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Chapter 4, Slide #1
Chapter 4, Slide #2
Chapter 4, Slide #3
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
Chapter 4, Slide #4
Multiple-Step
Multiple-Step Company Income Statement For the Year Ended December 31, 20XX Sales Cost of Goods Sold Gross Profit Operating Expenses: General & Administrative Advertising Uncollectible Accounts Operating (Loss) Income Interest (Income) Expense Other (Revenue)Expense (net) (Loss) Income Before Taxes Income Taxes (Benefit) Net Income $ $426,426 190,831 235,595 $ 116,902 126,120 687 (1,293) (6,371)
Single Step
Single-Step Company Income Statement For the Year Ended December 31, 20XX Sales Interest Income Other Income $ 426,426 1,293 6,371 434,090 Costs and Expenses: Cost of Goods Sold 243,709 General & Administrative (8,114) Advertising Uncollectible Accounts (7,664)
(450) (Loss) Income Before Taxes Income Taxes (Benefit) (666) 216
Net Income
Chapter 4, Slide #5
Multi-Step Format
Net Sales Cost of Sales Gross Income Selling, General and Administrative Expenses (SG&A) Operating Income Other Income & Expenses
Single-Step Format
Net Sales Materials and Production Marketing and Administrative Research and Development Expenses (R&D) Other Income & Expenses Pretax Income
Pretax Income*
Taxes Net Income (after tax)
Taxes
Net Income -Chapter 4, Slide #6
Chapter 4, Slide #7
Net Sales
Revenue from the sale of principal goods or services sold to customers Shown net of
Discounts Returns Allowances
Chapter 4, Slide #8
+ Purchases
Ending Inventory = Cost of Goods Sold
Chapter 4, Slide #9
Operating Expenses
Selling expenses
Result from the companys effort to create sales Examples
Advertising Sales commissions Sales supplies used
Administrative expenses
Analysis issues:
Investors net income includes revenue of other entity May misrepresent ratios Presented before tax; tax consequences typically immaterial
Retained Earnings
The accumulated undistributed earnings of the corporation reported on the balance sheet Appropriated (restricted)
Restricted by law, contract, or management decision Not available for dividends
Unappropriated
Available for dividends Does not represent cash or any other asset
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
10% stock dividend on 100,000 shares: issue 10,000 additional shares recorded at $5 per share
40% stock dividend on 100,000 shares: issue 40,000 additional shares recorded at $1 per share
Chapter 4, Slide #20
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
Comprehensive Income
Net income + The periods 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
Chapter 4, Slide #22
Beginning Balance Net Income Available-for-sale security adjustment, net of tax Minimum pension liability adjustment, net of tax Foreign currency transaction adjustment, net of tax Comprehensive income Ending Balance
5,500
5,500
3,500
3,500
Reference
Gibson, C.H. (2009). Financial Reporting & Analysis: Using Financial Accounting Information. 11th ed. Norwalk, Connecticut: South-Western Cengage Learning.