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Comprehensive Income and Income Statement

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					Chapter 11:
The Income Statement
   Evolving definitions
   Future events
   Comprehensive
   income
   Earnings Per Share
   Earnings management
   New proposals
Definitions: Income
   Income and profit...results from the
   deduction from revenues, or from operating
   revenues, of COGS, other expenses, and
   losses
   Net income...the excess (deficit) of revenue
   over expenses for an accounting period
   Comprehensive income...
Definitions: Revenues
   Results from the sale of goods and
   rendering of services...
   Gross increases in assets and gross
   decreases in liabilities measured in
   conformity with GAAP...
   Inflows or other enhancements of assets of
   an entity or settlements of its liabilities...
Revenues versus Gains
   Typically have been displayed separately on
   financial statements
   Gains are . . . revenues . . . from other than sales of
   products, merchandise, or services. . . .
   Gains are increases in equity (net assets) from
   peripheral or incidental transactions . . . except
   those that result from revenues or investments by
   owners.
Definitions: Revenue Recognition
   Revenue should be identified during the period
   during which the major economic activities
   necessary to the creation and disposition of goods
   and services has been accomplished
   Alternative points in time
     During production
     At completion of production
     At time of sale
     When the cash is collected
Definitions: Expenses and Losses
   Includes all expired costs which are
   deductible from revenues
   Gross decreases in assets or gross increases
   in liabilities recognized and measured in
   conformity with GAAP...
   Are outflows or other using up of assets or
   incurrence of liabilities...
Cost Classifications
   Costs directly associated with the revenue
   of the period
   Costs associated with the period on some
   basis other than a direct relationship with
   revenue
   Costs that cannot, as a practical matter, be
   associated with any other period
Future Events
   Reporting process is grounded in recording events
   that have occurred, but these past events and their
   recording are very dependent upon our
   interpretation of future events either happening or
   not happening
   Every accrual and deferral is dependent upon
   future events
   Treatment of future events in asset, liability,
   expense, and revenue recognition has not been
   well systematized
Future Events
   Trade-off of
   qualitative               What is the future
   characteristics such as    of accounting?
   relevance and
   reliability?
   Answer may be
   largely qualitative in
   nature, which may add
   to the ever-burgeoning
   role of disclosure
Comprehensive Income
   Comprehensive income pushes the all-
   inclusive approach toward its logical
   conclusion
   In addition to net income as presently
   defined, comprehensive income includes
   those elements of profit and loss that
   bypassed the income statement
Reporting Comprehensive Income
 1. in a combined statement of financial
    performance (income in which the
    comprehensive income elements and total would
    appear below net income)
 2. in a separate statement of comprehensive income
    which would begin with net income
 3. reported within a statement of changes in equity
Nonoperating Items
   Nonoperating section of the income
   statement
    discontinued operations
    extraordinary items
    accounting principle changes

   Retained earnings statement reports prior
   period adjustments
Earnings Per Share (EPS)
   SFAS No. 128 , an improvement over APB
   Opinion No. 15
    increases EPS comparability with other nations
    simplifies the computational aspects of EPS
    revises disclosure requirements
   Calculations have to be shown right on the
   income statement itself for both basic and
   diluted earnings per share
Specialized Topics
   Development Stage Enterprises
     Any enterprise devoting substantially all of its efforts to
      establishing a new business
     Question as to what should be expensed or deferred

   Troubled Debt Restructuring
     When the creditor for economic or legal reasons related
      to the debtor’s financial problems grants a concession
      to the debtor
     Present value concept does not apply
Specialized Topics
   Early Extinguishment of Debt
     Gains and Losses, if material, are reported as
      extraordinary items net of the tax effects
     FASB conceded to the single-line financial statement
      item
   Stock Options
     Intent is to align management and stockholder interests
     Frequently lead to dysfunctional management behavior
Specialized Topics
   Stock Options
     Debate  as to whether they are an expense
     Nonqualified stock options
     Incentive stock options
     Stock options and equity theories
        Entity theory
        Proprietary theory
Reformat the Income Statement
   Entity Income
    Maintain the bottom line, but do not deduct interest
     expense
    Result is “entity income,” income to the firm itself

   Proprietary Income
    From entity income deduct interest costs and stock
     option costs
    Result is “proprietary income, income to the
     shareholder
Earnings Management
 ....purposeful
    intervention in the
    external financial
    reporting process,
    with the intent of
    obtaining some
    private gain
    (Schipper)
Earnings Management
   Managing income to affect management
   compensation
    Income might be managed by manipulating
     discretionary accruals
    Studies find that managers manage income when bonus
     plans are dependent on earnings levels
   Income smoothing
    Managers smooth income to facilitate better predictions
     of future cash flows on which firm value is based
    Studies’ tests confirm income-smoothing behavior
Developments
   Pre-FASB more time and effort was placed
   on refining the income statement to the
   detriment of the balance sheet
   Since FASB, a shift toward
    cleaning  up the balance sheet
    a movement toward more of an asset-liability
     approach to the financial statements consistent
     with the conceptual framework project
Developments
   Cash earnings
   Pro forma earnings
   Retrospective reports
   Quality of earnings
    Increasing emphasis on earnings sustainability
     and an absence of earnings management
    Accounting scandals
Chapter 11:
The Income Statement
  Evolving definitions
  Future events
  Comprehensive
  income
  Earnings Per Share
  Earnings management

				
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