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4-1 Chapter The Income Statement and Statement of Cash Flows 4-2 Learning Objectives Explain the difference between net income and comprehensive income and how we report components of the difference 4-3 An income statement for a hypothetical manufacturing company that you can refer to as we proceed through the chapter 4-4 Learning Objectives Discuss the importance of income from continuing operations and describe its components 4-5 Income Income from from Continuing Continuing Operations Operations Revenues Expenses Inflows of resources resulting from providing goods or services to customers Outflows of resources incurred in generating revenues Gains and Losses Income Tax Expense Increases or decreases in equity from peripheral or incidental transactions of an entity Because of its importance and size, income tax expense is a separate item 4-6 Operating Income Versus Nonoperating Income Operating Income Nonoperating Income Includes revenues and expenses directly related to the principal revenuegenerating activities of the company Includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company 4-7 Income Statement (Single-Step) { Proper Heading Revenues & Gains Expenses & Losses { { 4-8 Income Statement (Multiple-Step) Proper Heading Gross Profit Operating Expenses Nonoperating Items { { { { 4-9 Learning Objectives Describe earnings quality and how it is impacted by management practices to manipulate earnings 4-10 Earnings Quality Earnings quality refers to the ability of reported earnings to predict a company’s future earnings Transitory Earnings versus Permanent Earnings 4-47 The Statement of Cash Flows Provides relevant information about a company’s cash receipts and cash disbursements Helps investors and creditors to assess future net cash flows liquidity long-term solvency Required for each income statement period presented 4-48 Learning Objectives Identify and describe the various classifications of cash flows presented in a statement of cash flows 4-49 Operating Activities Inflows Inflows from: from: Sales Salesto tocustomers customers Interest and dividends Interest and dividends received received + Outflows Outflows to: to: Purchase Purchaseof of inventory inventory Salaries, wages, and other Salaries, wages, and other operating operatingexpenses expenses Interest Intereston on debt debt Income Incometaxes taxes _ Cash Cash Flows Flows from from Operating Operating Activities Activities 4-50 Direct and Indirect Methods of Reporting Two Formats for Reporting Operating Activities Direct Method Indirect Method Reports the cash effects of each operating activity Starts with accrual net income and converts to cash basis 4-51 Direct and Indirect Methods Direct Method Indirect Method 4-52 Investing Activities Inflows Inflows from: from: Sale Saleof oflong-term long-termassets assetsused usedin in the thebusiness business Sale Saleof ofinvestment investmentsecurities securities (stocks (stocksand andbonds) bonds) Collection Collectionof ofnontrade nontrade receivables receivables + Outflows Outflows to: to: Purchase Purchaseof oflong-term long-termassets assets used usedin in the thebusiness business Purchase Purchaseof ofinvestment investment securities securities(stocks (stocksand andbonds) bonds) Loans Loansto toother otherentities entities _ Cash Cash Flows Flows from from Investing Investing Activities Activities 4-53 Financing Activities Inflows Inflows from: from: Sale Saleof of shares sharesto toowners owners Borrowing from creditors Borrowing from creditors through through notes, notes,loans, loans, mortgages, mortgages,and andbonds bonds + Outflows Outflows to: to: Owners Ownersin in the theform formof of dividends dividends or orother otherdistributions distributions Owners Ownersfor for the thereacquisition reacquisition of of shares sharespreviously previouslysold sold Creditors Creditorsas asrepayment repaymentof ofthe the principal principal amounts amountsof of debt debt _ Cash Cash Flows Flows from from Financing Financing Activities Activities 4-54 Cash Flow Examples 4-55 Cash Flow Examples 4-56 Cash Flow Examples 4-57 The following are the 2013 Income Statement and Comparative Balance Sheets of Dublin Enterprises($ in millions): Income Statement For the Year Ended December 31, 2013 Revenue …………………………………… $2,100 Cost of goods sold…………………………(1,400) Gross profit ………………………………… 700 Operating expenses: Selling and administrative … (355) Depreciation expense ………………… (85) Total operating expenses ……………… (440) Income before income taxes ……………… 260 Income tax expense …………………………… (78) Net income …………………………………… 182 4-58 The following are the 2013 Income Statement and Comparative Balance Sheets of Dublin Enterprises($ in millions): Comparative Balance Sheets 12/31/13 12/31/12 Assets: Cash ………………………………………… $ 300 ………………$ 220 Accounts receivable (net) ……………………227 ……………… 240 Inventory ……………………………………….160 ……………… 120 Property, plant & equipment ……………… 960 ……………… 800 Less: Accumulated depreciation …………(405) …………… (320) Total assets …………………………………….1,242 …………… 1,060 Liabilities and shareholders’ equity: Accounts payable ……………………………145 ……………… 130 Payables for S&A expenses ……………….147 ……………… 170 Income taxes payable ……………………… 95 ………………… 50 Long-term debt …………………………… –0– ……………… 100 Common stock …………………………………463 ……………… 400 Retained earnings …………………………… 392 ……………… 210 Total liabilities and shareholders’ equity 1,242 …………….$1,060 (S&A: Selling & Administrative) Required: Prepare DEI’s 2013 statement of cash flows using the direct method & indirect method 4-59 Noncash Investing and Financing Activities Significant investing and financing transactions not involving cash also are reported Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity) 4-60 Remember Read the text book Do all examples in text book Do Review Exercise Do homework 4-61 End of Chapter ... Nonoperating Income Includes revenues and expenses directly related to the principal revenuegenerating activities of the company Includes gains and losses and revenues and expenses related to peripheral... asset impairment • In-process research and development 4-12 Nonoperating Income and Earnings Quality Gains and losses from the sale of operational assets and investments often can significantly...4-2 Learning Objectives Explain the difference between net income and comprehensive income and how we report components of the difference 4-3 An income statement for a hypothetical