Income Statement Other Items

Key Things to Know

Key Things To Know

 

Other Comprehensive Income (OCI)
Includes gains and losses not included in net income

Represents the total change to equity (net worth) during the period with the exception of owner contributions and payments to owners

Current comprehensive income items include:
1. Unrealized gains/losses from holding investments long-term
2. Gains/losses from employee benefit plans
3. Gains/losses on derivatives
4. Foreign currency gains/losses

OCI G/L are not included in net income and are recorded directly to “other comprehensive income”, a component of stockholder’s equity.

Comprehensive Income can be reported in any of the following ways:
1. at the bottom of the income statement after “net income”
2. a separate statement of comprehensive income, usually footnote

These items can be reported net of tax or with a separate tax line item

Earnings Quality: the ability of reported earnings to predict future earnings

Transitory earnings: not likely to occur in the future
Permanent earnings: likely to occur in the future (often called Pro forma)

Management can vary earnings and remain within GAAP

Managers manipulate income by
1. Income shifting: to future periods
2. Income statement classification: show separately and imply that it is not an item
that will continue in the future

Restructuring Costs:
Reorganize operations to increase efficiency and profitability
Examples: Closing facilities and employee layoffs

Restructuring costs must be recorded in the period they are incurred or when they are expected to be incurred if a commitment has been made.

Discontinued Operations:

A component of an entity whose operations and cash flows are clearly distinguished and managed separately from the rest of the entity

A component can be an operating segment, a reporting unit, a subsidiary, an asset group, or a geographic region.

Report the operations of a component of an entity that is being disposed of or is held for sale separately as “discontinued operations” when both

1. the operations and cash flows of the component is or will be eliminated from the ongoing business

2. the entity will not have any significant continuing involvement in the operations of the component after disposal of the component

“The company will no longer be involved in this part of the business”

A discontinued operations component must meet one of the following situations:

1. Elimination of a business component
• operations and cash flows can be clearly distinguished for operations and for financial reporting from the rest of the entity
• reportable segment
• operating segment
• reporting unit
• asset groups

2. Existence of a strategic shift
• major geographic area
• major line of business
• major equity method investment
• other major parts of an entity

Reporting Discontinued Operations

Earnings from discontinued operations are reported separately for all years presented to assist with projecting future earnings.

Gains and losses are reported net of tax on the income statement because these items are reported below the income tax expense line item.

Gains and losses from discontinued operations are taxable.

The before tax amount of the gain or loss is multiplied by 1 less the tax rate to get an after tax (net of tax) amount.

Example:
A company, with a tax rate of 35% earned $500,000 before income tax expense and before an extraordinary gain of $100,000 is reported as follows:

Income before income taxes $500,000
Income tax expense ($175,000)
Income from continuing operations $325,000
Discontinued Ops (net of tax expense of $35,000) $ 65,000*
Net Income $390,000

3 Things are Reported for Discontinued Operations
All amounts are net of tax

1. Impairment of Assets Held for Sale
(Future Cash Flows are < Cost)
2. Income or Loss from Operations
3. Gain or Loss on the Sale

Examples of Presentation on the Income Statement

1. The component is sold in the current year:
Report the gain/loss on sale of assets separately from operating income/loss
during the period

Income from continuing operations: $X,XXX
   
Discontinued Operations:  
Income from discontinued operations, net of tax $XXX $X,XXX
Gain/loss on sale of XYZ, net of tax of $XXX $X,XXX
   
    Net Income $X,XXX

2. The component is held for sale:

Report the gain/loss on impairment of assets separately from operating income or loss during the period

Income from continuing operations: $X,XXX
   
Discontinued Operations:  
Income from discontinued operations, net of tax $XXX $X,XXX
Gain/loss on sale of XYZ, net of tax of $XXX $X,XXX
   
    Net Income $X,XXX

Changes to Accounting Estimates:
Reported in the year the estimate is revised

Do not change prior year amounts.
Change only the accounts with revised estimates in the current year

Earnings Per Share:

Earnings per share must be reported at the bottom of the income statement
A “Basic” and a “Diluted” EPS is reported

Basic: uses current actual common shares outstanding
Diluted: uses all potential common shares outstanding

Earnings per Share =

Net Income – Preferred Dividends
Common average shares outstanding

Separate earnings per share must be reported for:
Income from continuing operations
Discontinued operations
Net Income

Divide each amount by common average shares outstanding to compute an EPS for each category