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Kultur Dokumente
18th
The Income
Edition Statement
Intermediate
Financial Accounting
Earl K. Stice James D. Stice
4-2
Financial Capital Maintenance
Concept of Income Determination
The financial capital maintenance
concept assumes that a company has
income only if the dollar amount of an
enterprises net assets at the end of the
period exceeds the dollar amount of net
assets at the beginning of the period
after excluding the effects of
transactions with owners.
(continued)
4-3
Financial Capital Maintenance
Concept of Income Determination
Kreidler, Inc. had the following assets and
liabilities at the beginning and at the end of a
period.
Beginning End of
of Period Period
Total assets $510,000 $560,000
Total liabilities 430,000 390,000
Income is $90,000
Net assets
(owners equity) $ 80,000 $170,000
(continued)
4-4
Financial Capital Maintenance
Concept of Income Determination
If the owners invested $40,000 in the
business and received dividends of $15,000,
what would be the income?
Net assets, end of period $170,000
Net assets, beginning of period 80,000
Change (increase) in net assets $ 90,000
Deduct investment by owners (40,000)
Add dividends to owners 15,000
Income $ 65,000
4-5
Physical Capital Maintenance
Concept of Income Determination
Income per physical capital maintenance
occurs only if physical production capacity
at the end of the period exceeds the
physical production capacity at the
beginning of the period.
This concept requires that productive
assets be valued at fair market value.
Productive capital is maintained only if the
current costs of these capital assets are
maintained.
4-6
Physical Capital Maintenance
Concept of Income Determination
Practical Difficulties
a) Difficulty in estimating depreciation lives
b) Difficulty in implementing internal control
procedures
c) Difficulty in providing cash flow information
d) Difficulty in obtaining fair market values of
assets and liabilities
The FASB adopted the financial capital maintenance
concept as part of the conceptual framework.
4-7
Why is a Measure of
Income Important?
The recognition, measurement, and
reporting (display) of business income and
its components are considered by many to
be the most important tasks of accountants.
For example:
Has the activity been profitable?
What is the trend of profitability?
Is it increasing profitable, or is there a
downward trend?
(continued)
4-8
Why is a Measure of
Income Important?
In the United States, the FASB has
specified that financial accounting
information is designed with investors and
creditors in mind, while at the same time
recognizing that many other groups will find
the resulting information useful as well.
Accrual-based financial
accounting information is not
suited for every possible use.
(continued)
4-9
Why is a Measure of
Income Important?
In code law countries, such as Germany
and Japan, accounting standards have
historically been set by legal processes.
In a common law country, such as the
United States and the United Kingdom,
accounting standards are set in response
to market forces.
4-10
Transaction Approach
(continued)
4-12
Revenue and Gain Recognition
Direct Matching
Relating expenses to specific revenues is
often referred to as the matching process.
For example, shipping costs and sales
commissions usually relate directly to
revenues.
Certain expenses have to be estimated to be
matched against recognized revenue for the
period.
(continued)
4-14
Expense and Loss Recognition
Systematic and
Rational Allocation
4-15
Expense and Loss Recognition
Immediate Recognition
4-17
Form of the Income Statement
(continued)
4-18
Form of the Income Statement
4-20
Income from Continuing
Operations
Determining Subtotals
Gross profit =
(Revenue Cost of goods sold)
Operating income =
(Gross profit Operating expenses)
(continued)
4-21
Income from Continuing
Operations
Determining Subtotals
4-22
Income from Continuing
Operations
Revenue
4-23
Income from Continuing
Operations
(continued)
4-25
Income from Continuing
Operations
Gross Profit
Revenue from net sales Cost of goods
sold = Gross profit
Gross profit percentage is computed by
dividing gross profit by revenue from net
sales.
The gross profit percentage provides a
measure of profitability that allows
comparisons for a firm from year to year.
(continued)
4-26
Income from Continuing
Operations
Operating Expenses
Operating expenses may be reported in two
parts:
Selling expenses
Sales salaries and commissions
Related payroll taxes
Advertising and store displays
Store supplies used
Depreciation on store furniture
(continued) 4-27
Income from Continuing
Operations
General and administrative expenses
Officers and office salaries
Related payroll taxes
Office supplies used
Telephone, business licenses, etc.
Depreciation on office furniture
(continued)
4-28
Income from Continuing
Operations
Operating Income
(continued)
4-31
Income from Continuing
Operations
Income Taxes on Continuing
Operations
(continued)
4-32
Income from Continuing
Operations
Transitory, Irregular, and
Extraordinary Items
4-33
Discontinued Operations
(continued)
4-35
Discontinued Operations
The reporting requirements for
discontinued operations are contained in
FASB ASC Subtopic 205.
On the balance sheet, assets and liabilities
associated with discontinued components
that have not been completely disposed of
as of the balance sheet date are to be
listed separately in the asset and liability
sections of the balance sheet.
(continued)
4-36
International Accounting for
Discontinued Operations
According to IFRS 5, companies with
discontinued operations must disclose the
following:
The amount of revenue, expenses, and
pretax profit or loss attributed to the
discontinued operations and related income
tax expense.
A separate disclosure of the assets, liabilities,
and cash flows of the discontinued
operations.
(continued)
4-37
Extraordinary Items
(continued)
4-38
Not Extraordinary
The write-down or write-off of receivables,
inventories, equipment leased to others, etc.
The gains or losses from exchange or
remeasurement of foreign currencies
The gains or losses on disposal of business
segment
Other gains or losses from sale or abandonment
of productive assets
The effects of a strike
Adjustment of accruals on long-term contracts
(continued)
4-39
Changes in Accounting
Principles
The conditions of some occasions justify
a change from one accounting principle
to another.
Occasionally a company will change an
accounting principle because a change
in economic conditions suggests that an
accounting change will provide better
information.
(continued)
4-40
Changes in Accounting
Principles
More frequently, a change in accounting
principle occurs because the FASB
issues a new pronouncement requiring a
change in principle.
To improve compatibility, income
statements for all years presented must
be restated using the new accounting
method.
(continued)
4-41
Changes in Estimate
In reporting periodic revenues and in
attempting to properly match those expenses
incurred to generate current-period revenues,
accountants must continually make judgments.
Estimates are required for such factors as the
number of years of useful life for depreciable
assets, the amount of uncollectible accounts
expected, and the amount of warrant liability to
be recorded on the books.
No retroactive adjustments.
(continued) 4-42
Net Income or Loss
4-43
Earnings Per Share
(continued)
4-44
Earnings Per Share
4-45
Price-Earnings (P/E) Ratio
(continued)
4-46
Price-Earnings (P/E) Ratio
(continued)
4-47
Price-Earnings (P/E) Ratio
4-48
Comprehensive Income
The End
$
4-51
4-52