Items Reported on a Corporate Income Statement - Lumen ...

Most discontinued operations, extraordinary items, changes in accounting principle, and prior period adjustments affect the amount of income taxes a ... Skiptomaincontent FinancialAccounting Unit14:Stockholders’Equity,EarningsandDividends Searchfor: ItemsReportedonaCorporateIncomeStatement Netincomeinclusionsandexclusions Accountinghaslongfacedtheproblemofwhattoincludeinthenetincomereportedforaperiod.Shouldnetincomeincludeonlytherevenuesandexpensesrelatedtonormaloperations?Orshoulditincludetheresultsofdiscontinuedoperationsandunusual,nonrecurringgainsandlosses?Andfurther,shouldthedeterminationofnetincomeforthisyear,includeanitemthatcanbeclearlyassociatedwithaprioryear,suchasadditionalfederalincometaxesforlastyear?Orshouldsuchitems,includingcorrectionsoferrors,becarrieddirectlytoretainedearnings?Howaretheeffectsofmakingachangeinaccountingprincipletobereported? APBOpinionNo.9(December1966)soughttoprovideanswerstosomeofthesequestions.TheOpiniondirectedthatunusualandnonrecurringitemshavinganearningsorlosseffectareextraordinaryitems(reportedintheincomestatement)orpriorperiodadjustments(reportedinthestatementofretainedearnings).Extraordinaryitemsarereportedseparatelyafternetincomefromregularcontinuingactivities. AssumethattheAnsonCompanyhas1,000,000sharesofcommonstockoutstandingandthecompany’searningsaretaxedat40%.Also,assumethefollowing: AnsonsolditsCosmeticsDivisiononAugust1,atalossof $500,000.ThenetoperatinglossofthatdivisionthroughJuly31,was $2,000,000. Ansonhadataxablegainin of$40,000fromasaleofasubsidiaryatanamountgreaterthanwhatwasonthecompany’sbalancesheet(extraordinaryitem). Ansondiscoveredthatthe $200,000costoflandacquiredin lastyear hadbeenexpensedforbothfinancialaccountingandtaxpurposes.Apriorperiodadjustmentwasmadethisyear. Next,weexplaintheeffectsoftheseassumptionsingreaterdetail(welearnedthepriorperiodadjustmentearlierbutwillreviewitspresentationhere). Adiscontinuedoperationoccurswhenabusinesssellsasegment(usuallyanunprofitabledepartmentordivision)toanothercompanyorabandonsit.Whenacompanydiscontinuesasegment,itshowstherelevantinformationinaspecialsectionoftheincomestatementimmediatelyafterincomefromcontinuingoperationsandbeforeextraordinaryitems.Twoitemsofinformationappear: Theincomeorloss(netoftaxeffect)fromthesegment’soperationsfortheportionofthecurrentyearbeforeitwasdiscontinued. Thegainorloss(netoftaxeffect)ondisposalofthesegment. Toillustrate,Anson’ssaleofitsCosmeticsDivisiononAugust1ledtoabefore-taxlossof $500,000.Theafter-taxlosswas $500,000x60%= $300,000.TheoperatinglossbeforetaxesthroughJuly31was$2,000,000.Theafter-taxoperatinglossforthatperiodwas$2,000,000 x60%= $1,200,000. Priorto1973,companiesreportedagainorlossasanextraordinaryitemifitwaseitherunusualinnatureoroccurredinfrequently.Asaresult,companieswereinconsistentinthefinancialreportingofcertaingainsandlosses.ThisinconsistencyledtotheissuanceofAPBOpinionNo.30(September1973).OpinionNo.30redefinedextraordinaryitemsasthoseunusualinnatureandoccurringinfrequently.Notethatbothconditionsmustbemet—unusualnatureandinfrequentoccurrence.Accountantsdeterminewhetheranitemisunusualandinfrequentinlightoftheenvironmentinwhichthecompanyoperates.Examplesofextraordinaryitemsincludegainsorlossesthatarethedirectresultofamajorcatastrophe(afloodorhurricanewherefewhaveoccurredbefore),aconfiscationofpropertybyaforeigngovernment,oraprohibitionunderanewlyenactedlaw. Extraordinaryitemsareincludedinthedeterminationofperiodicnetincome,butaredisclosedseparately(netoftheirtaxeffects)intheincomestatementbelow“Incomefromcontinuingoperations”.Asshownbelow,Ansonreportedtheextraordinaryitemsafterreportingthelossfromdiscontinuedoperations. Gainsorlossesrelatedtoordinarybusinessactivitiesarenotextraordinaryitemsregardlessoftheirsize.Forexample,materialwrite-downsofuncollectiblereceivables,obsoleteinventories,andintangibleassetsarenotextraordinaryitems.However,suchitemsmaybeseparatelydisclosedaspartofincomefromcontinuingoperations. Changesinaccountingprinciplecanmateriallyalteracompany’sreportednetincomeandfinancialposition.Changesinaccountingprinciplearechangesinaccountingmethodspertainingtosuchitemsasinventory.SuchachangeincludesachangeininventoryvaluationmethodfromFIFOtoLIFO. AccordingtoAPBOpinionNo.20,acompanyshouldconsistentlyapplythesameaccountingmethodsfromoneperiodtoanother.However,acompanymaymakeachangeifthenewlyadoptedmethodispreferableandifthechangeisadequatelydisclosedinthefinancialstatements.Intheperiodinwhichacompanymakesachangeinaccountingprinciple,itmustdiscloseonthefinancialstatementsthenatureofthechange,itsjustification,anditseffectonnetincome.Also,thecompanymustshowontheincomestatementfortheyearofthechangeandthecumulativeeffectofthechangeonprioryears’income(netoftax). Mostdiscontinuedoperations,extraordinaryitems,changesinaccountingprinciple,andpriorperiodadjustmentsaffecttheamountofincometaxesacorporationmustpay.Toreporttheincometaxeffect,FASBStatementNo.96requiresreportingalloftheseitemsnetoftheirtaxeffects.[5]Net-of-taxeffectmeansthatitemsappearatthedollaramountsremainingafterdeductingtheincometaxeffects.Thus,thetotaleffectofadiscontinuedoperation,anextraordinaryitem,achangeinaccountingprinciple,orapriorperiodadjustmentappearsinoneplaceintheappropriatefinancialstatement.Thereferenceto“Incomefromcontinuingoperations”ontheincomestatementrepresentstheresultsoftransactions(includingincometaxes)thatarenormalforthebusinessandmaybeexpectedtorecur.Notethatthetaxeffectofanitemmayappearseparately,asitdoesforthegainonvoluntaryearlyretirementofdebtbeloworthecompanymaymentionitparentheticallywithonlythenetamountshown. AnsonCompany IncomeStatement FortheYearEndedDecember31 Netsales $41,000,000 Otherrevenues 2,250,000  Totalrevenue $43,250,000 Costofgoodssold $22,000,000 Administrative,selling,andgeneralexpenses 12,000,000 34,000,000 Incomebeforefederalincometaxes $9,250,000  Deduct:Federalincometaxes(40%)  (3,700,000) Incomefromcontinuingoperations $5,550,000 Discountedoperations: LossfromoperationsofdiscontinuedCosmeticsDivision(netof40%taxeffectof$800,000)  $(1,200,000) LossondisposalofCosmeticsDivision(netof40%taxeffectof$200,000) (300,000) (1,500,000) Incomebeforeextraordinaryitemandthecumulativeeffectofachangeinaccountingprinciple $4,050,000 Extraordinaryitem:  Gainonsaleofsubsidiaryoverbookvalue $40,000  Less:Taxeffect(40%) (16,000) 24,000 Incomeafterextraordinaryitem $4,074,000 Netincome $4,074,000 Earningspershareofcommonstock:  Incomefromcontinuingoperations $5.550  Discontinuedoperations (1.500)  Extraordinaryitem 0.024 Netincome $4.074  Incomefromcontinuingoperationsof$5,550,000 ismorerepresentativeofthecontinuingearningpowerofthecompanythanisthenetincomefigureof $4,077,600. Followingincome,thespecialitemsfromcontinuingoperationsappearattheiractualimpactonthecompany—thatis,netoftheirtaxeffect. EPSisreportedbothbefore($5.550)andafter($4.078)thediscontinuedoperations,extraordinaryitem,andthecumulativeeffectofachangeinaccountingprinciple.   AnsonCompany StatementofRetainedEarnings FortheYearEnded December31 Retainedearnings, January1 $5,000,000 Priorperiodadjustment:  Correctionoferrorofexpensingland(netoftaxeffectof$80,000)  -120,000 Retainedearnings, January1,asadjusted $5,120,000 Add:Netincome 4,077,600 $9,197,600 Less:Dividends  –500,000 Retainedearnings,December31 $8,687,600 Thecorrectionofthe $200,000erroraddsonly $120,000toretainedearnings.Thisresultoccursbecausethemistakewasincludedinthelastyear’staxreturnandtaxeswereunderpaidby $80,000.Inthe thisyear’s return,the $80,000oftaxeswouldhavetobepaid. 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