Professional Documents
Culture Documents
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY
CHAPTER 6
Financial Statements I:
The Income Statement
Introduction
Various groups are affected by, and have a stake in, the financial
reporting requirements of the FASB and the SEC
Introduction
Investors in equity securities are the central focus of
the financial reporting environment
Introduction
Investing involves
Giving up current resources
3 Financial information
Can affect the rate of capital formation in the economy
And result in a reallocation of wealth between consumption and investment within the
economy.
The Economic Consequences of
Financial Reporting
1. Determining Earnings
2. Defining Earnings
1 All inclusive
2 Current operating performance
Current Income Statement Format
= Net income
Income From Continuing Operations
Basic calculation
Net income - Preferred dividends
Average # of common shares outstanding
Comprehensive income
The change in equity (net assets) of a business
enterprise during a period from transactions and other
events and circumstances from nonowner sources.
Other comprehensive income
Revenues, expenses, gains, and losses included in
comprehensive income but excluded from net income.
SFAS No 130 - Reporting
Comprehensive Income
Original issues:
1. Should comprehensive income be reported?
2. Should cumulative accounting adjustments be included in
comprehensive income?
3. How should the components of comprehensive income be classified for
disclosure?
4. How should comprehensive income be disclosed
in the financial statements?
5. Should the components of other comprehensive
income be disclosed before or after their related
tax effects?
Should Comprehensive Income Be
Reported?
SFAS No 130
Requires the disclosure of comprehensive
income and
Discusses how to report and disclose
comprehensive income and its components,
including net income.
Does not specify when to recognize or how to
measure components
Should Cumulative Accounting
Adjustments Be Included?
Include As Part Of
Cumulative Accounting Comprehensive Income
Adjustments
Cumulative
Accounting
Adjustments
How Should the Components of
Comprehensive Income Be Classified
for Disclosure?
Requirement:
Companies must disclose an
amount for net income
That amount must be accorded equal
prominence with the amount disclosed for
comprehensive income
Items of other comprehensive income are
classified based on their nature
How Should Comprehensive Income be
Disclosed in the Financial Statements?
140.0% 122.9%
100.0% 107.1% 114.6%
103.8% 107.0%
120.0% 104.8%
100.0% 100.0% 100.3%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
2007 2008 2009 2010 2011
20.0%
10.0%
0.0%
2007 2008 2009 2010 2011
20.0%
15.0% 10.3%
10.4% 10.6% 10.2%
10.0% 8.2% 9.0% 8.3%
6.1% 7.8%
4.3%
5.0%
0.0%
2007 2008 2009 2010 2011
Hershey Tootsie Roll
Operating Profit Percentage
Operating Profit Percentage = Operating profit Net Sales
10.00
5.00
-
2007 2008 2009 2010 2011
Hershey Tootsie Roll
The Value of Corporate
Earnings
The relationship between corporate earnings
and stock prices
Measured by price earnings ratio
P/E Ratio = Current market price per share EPS
Hershey = 21.68
Tootsie Roll = 31.14
Price-Earnings Ratios
Operating Profit Percentage = Operating profit Net Sales
50.00 45.39
37.66
40.00 31.14
30.80 32.19
30.76
30.00 25.35
18.17 20.59 21.68
20.00
10.00
-
2007 2008 2009 2010 2011
Hershey Tootsie Roll
International Accounting Standards
Profit is used
To measure performance
Or as the basis for other measures
Measurement of income is
dependent on
The concept of capital maintenance used by the
enterprise
Physical capital maintenance
Financial capital maintenance
IASB Definitions of Performance and Income
Interpretations
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