Financial Accounting
Income Statement Structure
Dr. Charles W. Mulford
Scheller College of Business
Georgia Institute of Technology
Atlanta, GA 30332-0520
(404) 894-4395
Financial Accounting C.Mulford: Income Statement Structure:
1
Income Statement Structure
BGS Technologies
Income Statement
Year Ended March 31, 2018
Sales $ 1,000,000
Cost of goods sold 550,000
Gross profit 450,000
Research and development expense 100,000
Selling, general and admin. expenses 150,000
Operating income 200,000
Other income (expense):
Special item - Lawsuit settlement (125,000)
Special item – Loss from flood (25,000)
Interest income 50,000
Interest expense (25,000)
Income from continuing operations before taxes 75,000
Income tax provision 18,750
Income from continuing operations 56,250
Gain from discontinued operations (net of tax) 110,250
Net Income $ 166,500
Financial Accounting C.Mulford: Income Statement Structure:
2
Definitions:
Special Items – An item that is nonrecurring in nature for the
company given its industry, location or environment.
Nonetheless, the item isn’t expected to recur. Reported as
component of other income within Income from Continuing
Operations. Not reported net of income tax.
Example: Lawsuit settlement.
Example: Writedown of slow-moving inventory.
Extraordinary Items - unusual and nonrecurring gain or loss.
No longer a separate line item on the income statement. Such
items, including gains and losses that historically would have
been considered to be extraordinary, are now reported as a
separate line of other income within income from continuing
operations.
Example: Loss from fire.
Example: Earthquake damage - likely not extraordinary
for a company based in Los Angeles.
Discontinued Operations - income or loss from discontinued
business segment, including gain or loss on disposal. Involves
exiting a line-of-business entirely or disposal of a separate
reporting unit. Reported separately, net of income tax.
Example: Philip Morris disposes of Kraft Foods.
Financial Accounting C.Mulford: Income Statement Structure:
3
Income Statement Structure Illustrated
Nonrecurring Items
ABEC Telecommunications, Inc.
(In thousands) 2018 2017
Net sales $ 586,222 $ 448,735
Cost of products sold 302,094 221,448
Gross Profit 284,128 227,287
Expenses:
Development and product engineering 66,460 48,974
Selling and administration 130,297 110,799
Goodwill amortization 3,133 3,135
Personnel reduction 3,914 --
Total expenses 203,804 162,908
Operating Income 80,324 64,379
Other income (expense), net 5,905 (58)
Income before taxes 86,229 64,321
Provision for income taxes 31,043 23,800
Net income 55,186 40,521
Financial Accounting C.Mulford: Income Statement Structure:
4
ABEC Telecommunications, Inc. (cont’d)
Personnel Reduction: During the quarter ended April 30, 2018, the Company
initiated a realignment of its Kentrox and Fibermux subsidiaries into one business
unit. The Company recorded a charge of $3,914,000 in conjunction with the
realignment, related primarily to a personnel reduction. As a result of the
realignment, approximately 100 Fibermux employees, primarily in sales,
administration and engineering, were separated from the Company.
The charge for personnel reduction is a nonrecurring item.
Typically, such items are reported as a separate line item outside
of operating income. In this case, the nonrecurring item is
reported as part of operating income.
Financial Accounting C.Mulford: Income Statement Structure:
5
Income Statement Structure Illustrated
Discontinued Operations
Computer Dynamics Corp.
2017 2016
Net sales $ 10,308 $ 9,699
Cost of goods sold 8,792 8,113
Gross margin 1,516 1,586
Selling, general and administrative expenses 1,214 1,095
Research and development 359 66
Operating income (loss) (57) 425
Other (income) expense
Interest expense 31 21
Interest income (9) (28)
Other (income)expenses 186 (1,662)
Total other (income) expense 208 (1,669)
Income (loss) from continuing operations
before income taxes (265) 2,094
Income tax provision (benefit) (55) 29
Income (loss) from continuing operations (210) 2,065
Discontinued Operations:
Loss from discontinued operations (352) (860)
Loss on disposal of discontinued operations (101) -
Loss from discontinued operations (453) (860)
Net Income (loss) $ (663) $ 1,205
Financial Accounting C.Mulford: Income Statement Structure:
6
Divestiture of Suntec Division
On August 21, 2017, Quanta Systems transferred all of the assets and liabilities of
Quanta Systems's Suntec division to Suntec Service Corporation, a newly-formed
corporation ("Suntec"), in return for (i) all of Suntec's issued and outstanding
common stock and (ii) Suntec's agreement to pay to Quanta Systems a royalty of
2% of Suntec's net sales and other revenues for thirty (30) years from the date of
the closing.
As a result of the disposal of Suntec in 2017, the consolidated statements of
operations for the year ended December 31, 2016 has been restated to reflect
Suntec as a discontinued operation. Loss from Discontinued Operations includes
a provision of $101 thousand in 2017 for the loss on disposal. Revenues included
in loss from discontinued operations, were $656 thousand, and $2.588 million in
2017 and 2016, respectively.
Discontinued operations include income from operations of the
discontinued segment plus a gain or loss on disposal. Note the
restatement of prior-year results to conform with current year
presentation.
Financial Accounting C.Mulford: Income Statement Structure:
7
Other Comprehensive Income
Comprehensive income includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners.
In particular, comprehensive income includes net income, as
traditionally defined, plus four items:
● Adjustments for underfunded and overfunded pension plans
● Unrealized gains and losses on available-for-sale debt securities
● Cumulative foreign currency translation gains and losses
● Certain derivatives-related gains and losses
Accumulated amounts for these items are reported directly in
shareholders' equity, in a section termed Accumulated Other
Comprehensive Income.
Separate disclosure of comprehensive income (net income plus other
comprehensive income) is required in either single continuous
statement or in two separate, but consecutive statements.
Financial Accounting C.Mulford: Income Statement Structure:
8
Comprehensive income disclosed in a Separate Statement
(most companies employ this approach)
Enterprise
Statement of Comprehensive Income
Year Ended December 31, 2016
Net income $ 63,250
Other comprehensive income:
Foreign currency translation $ 8,000
Available-for-sale securities ($13,000 unrealized
holding gains less $1,500 in gains included in
net income) 11,500
Pension plan adjustment (2,500)
Other comprehensive income 17,000
Comprehensive income $ 80,250
Financial Accounting C.Mulford: Income Statement Structure:
9
Where on the Income Statement?
Several special income statement and other comprehensive
income items are provided below. For each item, decide if it
should be reported:
“O” - as a nonrecurring item on the income statement within
income from continuing operations.
“D” - as a discontinued segment on the income statement.
“OCI” – as a component of other comprehensive income.
1. A foreign currency transaction loss of $14.3 million.
(Dekalb Genetics).
Where is it reported? _____.
2. Litigation charge of $10.9 million. (U.S. Home).
Where is it reported? _____.
3. Loss of $4.9 million on an FTC ordered divestiture of
seven previously acquired bakery companies. (Flowers
Industries, a bakery company).
Where on the Income Statement? _____.
4. A foreign currency translation gain of $587,951. (Profire
Energy, Inc).
Where is it reported? _____.
Financial Accounting C.Mulford: Income Statement Structure:
10
5. Gain of $1.7 million on the early retirement of debentures.
(Kulicke and Soffa Industries).
Where is it reported? _____.
6. Unrealized gain of $1 million on available-for-sale debt
securities (Intuit, Inc.).
Where is it reported? _____.
7. Loss of $4.4 million from the impact of a state wide freeze
in Florida on some of its non-fruit bearing and mature trees.
(Orange-Co, Inc.).
Where on the Income Statement? _____.
8. Gain of $127 million from the sale of its consumer paint,
industrial coatings, surfactants, and emulsifiers businesses.
After these sales, the company operates in a single segment
-- the manufacture of detergents. (DeSoto, Inc.).
Where on the Income Statement? _____.
9. A estimated loss of $41 billion arising from the cost of
cleaning up a multi-million gallon oil spill in the Gulf of
Mexico (BP, Inc.)
Where on the Income Statement? _____.
Financial Accounting C.Mulford: Income Statement Structure:
11
Changes in Accounting Principle
All Reported as a Restatement with
Retroactive Adjustment to Retained Earnings
Basic Industries
(000s)
Income Statement and Statement of Retained earnings,
As originally reported, December 31, 2016 financial statements
Y/E December, 31, 2016
Sales $ 82,914
Cost of sales 49,748
Gross profit 33,166
Operating expenses 20,729
Operating income 12,437
Other income 819
Income before income taxes 13,256
Income tax provision 4,807
Net income $ 8,449
Retained earnings Dec. 31, 2015 $ 71,770
Net income for year ended Dec. 31, 2016 8,449
Dividends for year ended Dec. 31, 2016 (3,500)
Retained earnings Dec. 31, 2016 $ 76,719
Financial Accounting C.Mulford: Income Statement Structure:
12
Basic Industries (cont’d)
(000s)
Income Statement as Restated
December 31, 2017 financial statements . . .
Y/E Dec. 31, 2017 Y/E Dec. 31, 2016
(As Restated, See note 2)
Sales $ 91,205 $ 82,914
Cost of sales 54,722 49,748
Gross profit 36,483 33,166
Operating expenses 21,307 19,458
Operating income 15,176 13,708
Other income 910 819
Income before income taxes 16,086 14,527
Income tax provision 5,759 5,268
Net income $ 10,327 $ 9,259
===========================================================
Statement of Retained Earnings as Restated
Dec. 31, 2017 financial statements . . .
Retained earnings, Dec. 31, 2015, as originally reported $ 71,770
Adjust beg. bal. for prior-years effect of accounting change 15,552
Adjusted balance, Dec. 31, 2015 87,332
Net income for year ended Dec. 31, 2016, as restated 9,259
Dividends for year ended Dec. 31, 2016 (3,500)
Retained earnings, Dec. 31, 2016 as restated $ 93,081
Net income for year ended Dec. 31, 2017 10,327
Dividends for year ended Dec. 31, 2017 (3,500)
Retained earnings, Dec. 31, 2017 $ 99,908
Note 2.
Effective January 1, 2017, the Company adopted the prevailing industry practice which is to
capitalize spare parts when purchased and, upon their later use, to charge them to expense.
Previously spare parts were expensed when purchased. Financial statements for the year ended
Dec. 31, 2016 were restated to reflect this change in accounting. The cumulative effect of the
change on net income of years prior to the year ended Dec. 31, 2016 in the amount of $15,552 is
reflected as a retroactive adjustment to the balance in retained earnings as of Dec. 31, 2015. The
effect of this change on 2017 and 2016 operations was to increase net income by $1,555 and
$810, respectively.
Financial Accounting C.Mulford: Income Statement Structure:
13
Accounting Change (T/F)
Basic Industries
1. Income from continuing operations in 2017 was $15,176.
2. The change in accounting for spare parts inventories
increased net income reported in the 2016 income statement, as
restated, by a total of $ 810.
3. The change in accounting for spare parts inventories
increased net income reported in the 2017 income statement by
a total of $1,555.
4. The 2017 change in the accounting for spare parts reduced
Ideal Basic’s 2017 ratio of debt to equity.
Financial Accounting C.Mulford: Income Statement Structure:
14
