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Chapter 4 - Reporting Financial Performance

This document outlines the key objectives and concepts for reporting financial performance in Chapter 4. It discusses (1) measuring income, (2) reporting results of discontinued operations, (3) preparing income statements and statements of comprehensive income, retained earnings, and changes in equity. It also covers the differences between cash basis and accrual basis accounting and between IFRS and ASPE standards.

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Cait Post
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96 views

Chapter 4 - Reporting Financial Performance

This document outlines the key objectives and concepts for reporting financial performance in Chapter 4. It discusses (1) measuring income, (2) reporting results of discontinued operations, (3) preparing income statements and statements of comprehensive income, retained earnings, and changes in equity. It also covers the differences between cash basis and accrual basis accounting and between IFRS and ASPE standards.

Uploaded by

Cait Post
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 4: Reporting Financial Performance

Objectives:
1. How to measure income
2. Measure/report results of discountied operations
3. Measure income/prepare income statement/statement of comprehensive income
4. Prepare statement of retained earning and statement of changes in equity
5. How disckouses/analysis helps fininacals statement users
6. Differences between IFRS and ASPE
7. Differences between cash basis of accounting and accerial basis (Appendix 4A self-study)

Statement of Financial Performance:


- Statement of income/earnings various names:
o ASPE: income statement
o IFRS: income can be reported
 In two separate statements:
 Statement of profit or loss
 Statement of comprehsnive income
 In a combined statement:
 Statement of financial performance (SFP)
- Report that measures the success of compays operations over specific time period

Measurement of Income:
- Net income: revenues and gains less expenses and loss from continuing/discoutnied
operations
o Supported by ASPE
- Comprehensive Income: net income plus/minus other comprehensive income/loss
o All inclusive approach: includes all changes in equity except shareholders
ttranscations
o Supported by IFRS
- Operating Income – ongoing revenues less expenses
o Current operating performance aaproach
o Supports ideads that regular and recurring items provife best predictive stability

Other Comprehensive Income (OCI):


- OCI: made up of unrealized gains and loses on certain secrutiies, foreign exchange gain
or losses, and oter gains/losses
- OCI = comprensieve income less net income (comprehensive income – net income)
- OCI is closed to an equity account on the SFP
o Called accumulated other comprehsnive income (AOCI)
- OCI not recongized under ASPE
Discountinued Operations:
- Discountied operations include separate components of an enterprise
o That have been disposed
o That are classified as held for sale
- Discounited operations are presented seperatkey, net of tax
o On statement of income/comrpehsnive income
o On statement of cash flows

Single-step Income Statement:


- Two main groups of items:
o Revenus (including gains) less expenses (including losses)
- Single step: single subtraction needed to arrive at net income before discountied
operations
- Income tax reported separately before net income before discountied operations

Single-Step Statement – Partial Statements of Operations

- Shows only profit/loss portion of statement


Multiple-Step Income Statements:
- Separating operating from non-operating transactions
- Matches costs/expenses with related revenues
- Highlight intermediate componets to facilitate analysis
o Gross profit margin; operating earnings
o Income/loss from discointiued operations
 Non-reccuring so little predictive value; provided feedback value
- Net income from only continuing operaions is viewed as higher quality
- Separate disclours help users recongize that incidenital/irregual activities are unlikely to
continue at same level

Multiple-Step Income Statements Presentation – Operating Section:


1. Contiuning Operations
a. Operating section: report of the revenues/expenses of the companys main
operations
i. Sales or Revenue
 Subsection presenting sales, discounts, allowances, returns, other
related info
 Purpose is to arrive at the net amount of sales revenue
ii. Cost of Goods Sold
 Subsection that shows the cosr of godds that were sold to
produce the sales
iii. Selling Expenses
 Subsection that lists expenses resulting from the companys efforts
to make sales
iv. Administatrtibe or Genral Expenses
 Subsection reporting expenses for general administration

b. Non-Operating Section:
 Report of revenues/expenses resulting from companys secondary
or supporting activities
 Special gains/losses that are freqwueny and/or unusual are
normally reported in this section
i. Other Revenues and Gains
 List of revenues earned or gains incurred from non-operatinf
transctions
 Generally net of related expenses
ii. Other Expenses and Losses
 List of expenses or losses incurred from non-operating
trnasactions
 generally net of related income
c. Income Tax:
 Short section reporting income taxes on imcome from continuing
operations

Multiple-Step Income Statement Presentaion – Other Sections:


2. Disconuitned Operations
o Material gains or losses resulting from disposition of a part of the business (net
of taxes)

3. Other Comprehnesive Income (IFRS)


o Other gains/losses that are not required by primary sources of GAAP to be
included in net income
o Includes all other changes in equity that do no relate to shareholder transactions
(net of taxes)

- Financial statements provided to external useers have less details that internal reports

Statement of Financial Perfroamnce example:

Name of Company
Statement of Financial Performane
For the year ended

Sales Revenue
Less: Sales Discount
Less: Sales Return and Allowance
= Net Sales revenue
Less: Cost of Goods Sold
Beg. Inventory
Add: Purchases
Less: purchase discount, return and allowance
Plus: Freight in
= Cost of goods available for sale
Less; Ending Inventory
= Cost of Goods Sold
= Gross Profit
Less Operating Exepsnes
Salareies and wages expenses
Sales commission expense
Entertainment expense
Advertising expense
Freight out
Depreciation expense
Telephone and internet expense
Utilities expense
= Income from Operation

Other expenses.Losses, Revnues/Gains


-interest expense
-Loss from fire
+Rent Revenue
+Interest Revnue
+Gaons from sale of Assets
+Unrealized gain from FV-NI-Investment
= Income Before Tax
Less: Income Tax Expense
= Income from Continuing Operation

Discountied Operarion
Gain or loss from operation, net of tax
(revenue – expenses) x 1 – tax rate
Gain or loss from disposal of operation, net of tax
= Net income (Continued and discountied)
+ OCI
Unrelaized Gain or Loss, net of tax
= Comprehensive Income

Earnings Per Share (EPS):


EPS-Inceme from Continuing Operation
(Net income from continuing operation – prefereed dividends / weighted average common
shares)
EPS-Discontuied Operation
(discontuined income or Loss/Weighted averaged common shares)
Basic EPS = sum of the above 2 EPS

Earnings Per Share (EPS):


- Key indicator of company’s performance
- Measures # of dollards earned per common sahre
o Does not report the dollars paid (or to be paid) to shareholders as dividends

- Some companies EPS are subject to reducutiin before existing contingences allow future
issue of comman shares
o Stock option
shareholders∗¿
EPS = Income available ¿ common
Weighted average number of common share outstanding

*Income available to common shareholders = Net Income – Preferred Dividends

Presentation of the Statement of Retained Earnings (ASPE)


- Statement of Reatin earnings shpws accumulated income (or deficit) as well as how
much has been paid out as dividends
- Other varibales that affect retained earnings:
o Retrospectibe apple changes ina ccouting polciolices
o Retrospective corrections of errors
o Changes in accoutnign esitmates are account for prospectivitly
 In income statement, not statement of retained earnings
- Statement can be prepared separated or combined ith statement of income

Presentation of the ZStatement of Changes in Equity (IFRS):


- IFRS required statement showu=ing changes in each equity component and for total
shareholders’ equity
- Items that muct be presented in the statement
o Total comprehensive income
 Attributable to owners and noncontrolling interests
o For each component of equity
 Effects of retrospective application
 Reconciliation of beginning and ending carrying amounts
 Profits or loss, OCI, owner transactions
- Must disclose an analsys of OCI by item
o In the statement or the notes

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