远东股份

康泰生物
3 种商业活动
 融资活动 Financing

It Takes
• 借款 borrowing
MONEY • 债权人（ Creditor
s）
to • 发行股票 issuing
stocks
Make
• 股东（ Owners ）
MONEY
!
 投资活动 Investing

获取经营业务所必须的资产
Acquiring the assets for operation

Such as
•Building, equipment, furniture
•Receivables
•Inventory
经营活动 Operating

• 购买 purchase
• 生产 production
• 营销 marketing
• 管理 administration
 Cash Flow Statement
Beginning Balance of BS Cash from Operation 100 Ending Balance of BS
Cash from Investment (200)
Cash from Financing 150
Cash 100 Net Cash Change 50 Cash 150
+Other Asset 1900 +Other Asset 2095
Total Asset 2000 Income Statement Total Asset 2245
- ： Liabilities 1000 Revenue 180 - ： Liabilities 1150
- ： Expenses 85
Owners’ Equity 1000 Net Income 95 Owners’ Equity 1095
Chapter 4 Income Statement and
Related Information
Income Statement

Usefulness of the Income Statement

Evaluate past performance.

Predicting future performance.

9
 Income Statement

Revenues
- Cost of goods sold (COGS)
= Gross Profit
- Expenses
= Earnings Before Tax
- Tax
= Net Income

The purpose of firm is to earn income for investors through selling goods or
providing services to customers. Income statement measures how much income
is earned during a specific period, such as a year, a quarter, or a month.
Elements of the Income Statement

Revenues – Inflows or other enhancements of assets of

an entity or settlements of its liabilities during a period
from delivering or producing goods, rendering services,
or other activities that constitute the entity’s ongoing
major or central operations.

Examples include sales, fees, interest, dividends, and

rents.
Elements of the Income Statement

Expenses –Outflows or other using-up of assets or

incurrences of liabilities during a period from delivering
or producing goods, rendering services, or carrying out
other activities that constitute the entity’s ongoing major
or central operations.

Examples include cost of goods sold, depreciation,

interest, rent, salaries and wages, and taxes
Elements of the Income Statement

Gains – Increases in equity (net assets) from

peripheral or incidental transactions of an entity
except those that result from revenues or
investments by owners.
Losses – Decreases in equity (net assets) from
peripheral or incidental transactions of an entity
except those that result from expenses or
distributions to owners.
Gains and losses result from the sale of investments
or plant assets, settlement of liabilities, and write-offs
of assets due to impairments or casualty.
Multiple-Step Income Statement

Background
Separates operating transactions from
nonoperating transactions.
Matches costs and expenses with related
revenues.
Highlights certain intermediate components of
income that analysts use.
Intermediate Components

Common for companies to present some or all of the following

sections and totals within the income statement.
1. Operating section

2. Nonoperating section

3. Income tax

4. Discontinued operations

5. Noncontrolling interest

6. Earnings per share

Multiple-Step
CABRERA COMPANY
Income Statement
For The Year Ended December 31, 2017

1. Operating Section

2. Nonoperating
Section

3. Income tax
ILLUSTRATION 4-2
格力电器
中国银行
 Supply chain - downstream
Cash or promise to pay

Merchandiser customers
(inventory)
Company
Manufacturer (raw material and supplies)

Production
(direct material
+ direct labor +
overhead)

customers

Cash or promise to pay

 Sales to customers

1. Cash (BS/SCF) or Accounts receivables (BS) $ 100

Revenues (IS) 100

2. Cost of goods sold (IS)

= Beginning inventory (BS) + Purchase (IS) – Ending
inventory (BS)

Cost of goods sold $ 80

Inventory 80
 Sales to customers
3. Other expenses incurred to generate sales, include:
sales commission
depreciation associated with sales
office supply expenses associated with sales
miscellaneous expenses associated with sales

Sales expenses (IS) $100

Cash (BS/SCF) or expenses payable (BS) 100
 Accruals based VS. cash based

Accruals based Cash based

Recognizing revenue and Recognize revenue upon

expenses for the current receipt of cash, and
period is based on the recognize expenses
occurrence of obtaining the upon payment of cash.
right to receive cash or the
obligation to pay cash.
 Expensing （费用化） vs. Capitalization （资产化）
of Expenditures （支出）

• The company pays salaries to its • The company purchases goods, and the
salespeople, and the company expenses the company capitalizes these goods as
salesperson's salaries. inventory assets.
• The expensed expenditure goes into the • The capitalized expenditure goes into the
income statement. balance sheet.
• Expensing the expenditure is used to • Capitalized expenditures are used to
generate revenue for the current period. generate revenue in both the current period
• If a company expenses its expenditures, the and future periods.
current period's profit will decrease by the • If a company capitalizes its expenditures,
same amount. the current period's profit will not decrease
by the same amount as the expenditure.
Expensing （费用化） vs. Capitalization （资产化）
However, reality is not always so simple and straightforward. Sometimes it's challenging to
determine whether expenditures will bring benefits in future periods, and even when they do
bring benefits in future periods, it's often difficult to pinpoint which specific future periods
those benefits pertain to. As a result, companies choose to expense some expenditures that
could have been capitalized. This is a prudence principle embedded in accounting standards
(including those in the United States and internationally) regarding expenditures.

These expenditures include:

•Marketing expenditures: Companies typically allocate funds for marketing and advertising to
promote their products or services. These expenses are often treated as current-period expenses
because it's difficult to ascertain whether they will directly lead to future-period revenue, and
their effectiveness is challenging to precisely measure.
•Research and Development (R&D): This encompasses expenses related to a company's efforts
in research and development of new products, innovations, and technological improvements.
While R&D may eventually lead to future revenue, determining the specific timing and amount
of revenue can be highly complex. Therefore, R&D expenses are typically recognized as
current-period expenses.
Income Statement P. Bride Company
Income Statement ($000 omitted)
Exercise E4.5: Prepare a income For the Year Ended December 31, 2020
statement from the data below using Sales revenue $96,500
the multiple-step form. Cost of goods sold 60,570
Gross profit 35,930
Administrative expense Operating expenses:
Officers’ salaries $4,900 Selling expense 17,250
Depreciation 3,960 Administrative expense 8,860
Cost of goods sold 60,570 Total operating expenses 26,010
Rent revenue 17,230 Income from operations 9,920
Selling expense Other revenue (expense):
Delivery expense 2,690 Rent revenue 17,230
Sales commissions 7,980 Interest expense (1,860)
Depreciation 6.480 Total other 15,370
Sales revenue 96,500 Income before tax 25,290
Income tax 9.070 Income tax 9,070
Interest expense 1,860 Net income $16,220
New Revenue Recognition
Standard
Key Concepts of Revenue Recognition

Five-Step Process for Revenue Recognition

1. Identify the contract with customers.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize revenue when each performance obligation is satisfied.

Revenue Recognition Principle

Recognize revenue in the accounting period when the performance obligation is
satisfied.
Performance Obligation is Satisfied
公司简称 营业收入增长额 净利润增长额 营业收入增长率 净利润增长率

万科 A 33,700,000,000 -21,200,000,000 8.0% -35.8%

国华网安 8,413,173 -571,000,000 3.0% -915.1%

深振业 A 154,000,000 -349,000,000 5.2% -38.7%

神州高铁 297,000,000 -487,000,000 15.5% 54.6%

美丽生态 348,000,000 -37,100,000 24.7% -48.6%

*ST 中华 A 47,400,000 -6,015,263 40.2% -137.5%

深科技 1,520,000,000 -119,000,000 10.2% -12.5%

深圳能源 11,100,000,000 -2,160,000,000 54.2% -50.6%

国药一致 8,710,000,000 -194,000,000 14.6% -11.3%

富奥股份 1,710,000,000 -130,000,000 15.4% -14.3%

大悦城 4,170,000,000 -355,000,000 10.8% -31.6%

神州数码 30,300,000,000 -374,000,000 32.9% -60.0%

深大通 129,000,000 -767,000,000 6.1% -967.2%

泛海控股 866,000,000 -8,370,000,000 6.2% 177.3%

 Sales to customers

1. 现金 Cash collected (BS/SCF) or 应收账款 Receivables (BS) $ 100

销售收入 Sales revenue (IS) 100

2. Cost of goods sold (IS)

= Beginning inventory (BS) + Purchase (IS) – Ending
inventory (BS)

Cost of goods sold $ 80

Inventory 80
Industry Gross profit
Airlines -9.14%
Construction 11.09%
Auto manufacturing 13.13%
Food 15.19%
Agriculture 15.84%
Retail 18.62%
Computer and telecommunication 20.52%
Real estate 22.61%
Internet 24.62%
Capital market services 33.99%
Software and information technology 34.76%
Arts 35.81%
Pharmacy 51.21%
Banking 65.42%
Alchohol and soft drink 69.03%
吉利汽车
宁德时代 2022 年第一季度实现营业总收入 486.78 亿元，同比增长
153.97% ；实现归属于上市公司股东的净利润 14.9 亿元，同比下降 23.62
％；基本每股收益 0.6439 元 / 股。净利润下滑的同时，宁德时代的营业成
本在显著攀升，一季度达 416.27 亿元，同比增长近 2 倍。

对于一季度业绩大跌的原因，宁德时代解释，为维护新能源汽车及动力电
池产业的健康良性发展，公司在 2022 年一季度承担了主要的原材料涨价
压力，是毛利率环比下滑的主要原因。这是短期波动因素影响，随着上游
产能扩产原材料价格将逐渐回归合理水平。
万科
Company A and Company B both achieved a net profit of 100
million RMB in the fiscal year 2022.
Company A's entire net profit comes from product sales.
Company B's net profit is divided into two parts: 80 million
RMB from product sales and 20 million RMB from the proceeds
of disposing of idle fixed assets.

Which company would you choose to invest in?

苏常柴
2007 年 元 2008 年 元
Discuss How to Report Various Income Items
Reporting Various Income Items

Companies are required to report unusual and infrequent

items as part of net income so users can better determine
the long-run earning power of the company.
These income items fall into four general categories:
1.Unusual gains and losses
2.Discontinued operations Modified all inclusive
3.Noncontrolling interest concept

4.Earnings per share

Reporting Various Income Items
Unusual and Infrequent Gains and Losses

a. Unusual. High degree of abnormality and of a type

clearly unrelated to, or only incidentally related to, the
ordinary and typical activities of the company, taking
into account the environment in which it operates.
b. Infrequency of occurrence. Type of transaction that is
not reasonably expected to recur in the foreseeable
future, taking into account the environment in which
the company operates.
 Unusual and Infrequent Gains and Losses (1 of 3)

Common types of unusual or infrequent gains and losses:

•Losses on write-down (impairment) of receivables;
inventories; property, plant, and equipment; goodwill or
other intangible assets
•Restructuring charges
•Gains and losses from sale or abandonment of property,
plant and equipment
•Effects of a strike

LO 3
 Unusual and Infrequent Gains and Losses (2 of 3)

Common types of unusual or infrequent gains and losses:

•Gains and losses on extinguishment (redemption) of
debt obligations.
•Gains and losses related to casualties such as fires,
floods, and earthquakes.
•Gains or losses on sale of investment securities.

LO 3
 Reporting Various Income Items
Discontinued Operations

Occurs when two things happen:

1. A company eliminates the results of operations of a
component of the business.
2. The elimination of a component that represents a
strategic shift, having a major effect on the company’s
operations and financial results.
Amounts are reported “net of tax.”

LO 3
 Discontinued Operations

Illustration: Multiplex Products Inc., a highly diversified company,

decides to discontinue its electronics division. During the current
year, the electronics division lost $300,000 (net of tax). Multiplex
Products sold the division at the end of the year at a loss of
$500,000 (net of tax). Multiplex determines that the electronics
division discontinuation meets the strategic shift criteria because
the division is a major line of business (its assets exceed 20 percent
of Multiplex’s total assets). The following illustration shows how
the discontinued operations would be reported on the income
statement for Multiplex Products.

LO 3
 Discontinued Operations

Illustration: The following illustration shows how the discontinued

operations would be reported on the income statement for
Multiplex Products.

Income from continuing operations $20,000,000

Discontinued operations:
Loss from operation of discontinued electronics
division (net of tax) 300,000
Loss from disposal of electronics division (net of 500,000
tax)
Total loss on discontinued operations 800,000
Net income $19,200,000

LO 3
 Discontinued
Operations

Discontinued
Operations are
reported after
“Income from
continuing
operations.”
Without a
discontinued
operations, “Income
from continuing
operations” would
be “net income.”

LO 3
 Discontinued Operations
Intraperiod Tax Allocation

• Allocation of tax within a period

• Helps users understand impact of income taxes on
various components of net income
• Intraperiod tax allocation is used for:
1. Income from continuing operations
2. discontinued operations

LO 3
 Discontinued Operations (Gain)

Illustration: Schindler Co. has income before income tax of

$250,000. It has a gain of $100,000 from a discontinued
operation. Assuming a 30 percent income tax rate, Schindler
presents the following information on the income statement.

LO 3
 Discontinued Operations (Loss)

Illustration: Schindler Co. has income before income tax of

$250,000. It suffers a loss from discontinued operations of
$100,000. Assuming a 30 percent tax rate, Schindler presents
the income tax on the income statement as shown

LO 3
 Unusual and Infrequent Gains and Losses (3 of 3)

LO 3
 Reporting Various Income Items
Noncontrolling Interest in Income

When a company owns substantial interests (generally

greater than 50%) in another company, GAAP generally
require that the financial statements of both companies
be consolidated together into one set of financials.
Noncontrolling interest is the portion of equity (net
assets) interest in a subsidiary not attributable to the
parent company.

LO 3
 Noncontrolling Interest in Income
Illustration: Assume that Coca-Cola acquires 70 percent of the
outstanding stock of Koch Company. Because Coca-Cola owns
more than 50 percent of Koch, it consolidates Koch’s financial
results with its own. G A A P requires that net income be
allocated to the controlling and noncontrolling interest.

LO 3
 Reporting Various Income Items
Earnings per Share

Net Income - Preferred Dividends

Weighted Average of Common Shares
Outstanding
• A significant business indicator
• Measures the dollars earned by each share of
common stock
• Must be disclosed on the income statement

LO 3
 Earnings per Share Illustration

Illustration: Lancer, Inc. reports net income of $350,000. It

declares and pays preferred dividends of $50,000 for the year.
The weighted-average number of common shares outstanding
during the year is 100,000 shares. Lancer computes earnings
per share as follows:

Net Income - Preferred Dividends

Weighted Average of Common Shares
Outstanding
$350,000 - $50,000
= $3.00 per share
100,000

LO 3
 Earnings per Share

LO 3
苹果 ( 单位 : 万元 , USD )
2006-09-30 2007-09-29 2008-09-27 2009-09-26 2010-09-25 2011-09-24 2012-09-29
营业收入 1,931,500 2,400,600 3,247,900 3,653,700 6,522,500 10,824,900 15,650,800
（变化） 24.3% 35.3% 12.5% 78.5% 66.0% 44.6%
毛利 559,800 815,400 1,114,500 1,314,000 2,568,400 4,381,800 6,866,200
( 占比 ) 29.0% 34.0% 34.3% 36.0% 39.4% 40.5% 43.9%
（变化） 5.0% 0.3% 1.6% 3.4% 1.1% 3.4%
研发费用 -71,200 -78,200 -110,900 -133,300 -178,200 -242,900 -338,100
( 占比 ) 3.7% 3.3% 3.4% 3.6% 2.7% 2.2% 2.2%
（变化） -0.4% 0.2% 0.2% -0.9% -0.5% -0.1%
销售、行政及一般费用 -243,300 -296,300 -376,100 -414,900 -551,700 -759,900 -1,004,000
( 占比 ) 12.6% 12.3% 11.6% 11.4% 8.5% 7.0% 6.4%
（变化） -0.3% -0.8% -0.2% -2.9% -1.4% -0.6%
营业利润 245,300 440,900 627,500 765,800 1,838,500 3,379,000 5,524,100
( 占比 ) 12.7% 18.4% 19.3% 21.0% 28.2% 31.2% 35.3%
（变化） 5.7% 1.0% 1.6% 7.2% 3.0% 4.1%
净利润 198,900 349,600 483,400 570,400 1,401,300 2,592,200 4,173,300
( 占比 ) 10.3% 14.6% 14.9% 15.6% 21.5% 23.9% 26.7%
（变化） 4.3% 0.3% 0.7% 5.9% 2.5% 2.7%

苹果 ( 单位 : 万元 ,
USD )
2013-09-
28 2014-09-27 2015-09-26 2016-09-24 2017-09-30 2018-09-29 2019-09-28 2020-09-26 2021-09-25 2022-09-24
17,091,00
营业收入 0 18,279,500 23,371,500 21,563,900 22,923,400 26,559,500 26,017,400 27,451,500 36,581,700 39,432,800
（变化） 9.2% 7.0% 27.9% -7.7% 6.3% 15.9% -2.0% 5.5% 33.3% 7.8%
毛利 6,430,400 7,053,700 9,362,600 8,426,300 8,818,600 10,183,900 9,839,200 10,495,600 15,283,600 17,078,200
( 占比 ) 37.6% 38.6% 40.1% 39.1% 38.5% 38.3% 37.8% 38.2% 41.8% 43.3%
（变化） -6.2% 1.0% 1.5% -1.0% -0.6% -0.1% -0.5% 0.4% 3.5% 1.5%
研发费用 -447,500 -604,100 -806,700 -1,004,500 -1,158,100 -1,423,600 -1,621,700 -1,875,200 -2,191,400 -2,625,100
( 占比 ) 2.6% 3.3% 3.5% 4.7% 5.1% 5.4% 6.2% 6.8% 6.0% 6.7%
（变化） 0.5% 0.7% 0.1% 1.2% 0.4% 0.3% 0.9% 0.6% -0.8% 0.7%
销售、行政及一般
费用 -1,083,000 -1,199,300 -1,432,900 -1,419,400 -1,526,100 -1,670,500 -1,824,500 -1,991,600 -2,197,300 -2,509,400
( 占比 ) 6.3% 6.6% 6.1% 6.6% 6.7% 6.3% 7.0% 7.3% 6.0% 6.4%
（变化） -0.1% 0.2% -0.4% 0.5% 0.1% -0.4% 0.7% 0.2% -1.2% 0.4%
营业利润 4,899,900 5,250,300 7,123,000 6,002,400 6,134,400 7,089,800 6,393,000 6,628,800 10,894,900 11,943,700
( 占比 ) 28.7% 28.7% 30.5% 27.8% 26.8% 26.7% 24.6% 24.1% 29.8% 30.3%
（变化） -6.6% 0.1% 1.8% -2.6% -1.1% -0.1% -2.1% -0.4% 5.6% 0.5%
净利润 3,703,700 3,951,000 5,339,400 4,568,700 4,835,100 5,953,100 5,525,600 5,741,100 9,468,000 9,980,300
( 占比 ) 21.7% 21.6% 22.8% 21.2% 21.1% 22.4% 21.2% 20.9% 25.9% 25.3%
（变化） -5.0% -0.1% 1.2% -1.7% -0.1% 1.3% -1.2% -0.3% 5.0% -0.6%
苹果 ( 单位 : 万元 , USD ) 2018-09-29 2019-09-28 2020-09-26 2021-09-25 2022-09-24

营业收入 26,559,500 26,017,400 27,451,500 36,581,700 39,432,800

15.9% -2.0% 5.5% 33.3% 7.8%
毛利 10,183,900 9,839,200 10,495,600 15,283,600 17,078,200
38.3% 37.8% 38.2% 41.8% 43.3%
-0.1% -0.5% 0.4% 3.5% 1.5%
研发费用 -1,423,600 -1,621,700 -1,875,200 -2,191,400 -2,625,100
5.4% 6.2% 6.8% 6.0% 6.7%
0.3% 0.9% 0.6% -0.8% 0.7%
销售、行政及一般费用 -1,670,500 -1,824,500 -1,991,600 -2,197,300 -2,509,400
6.3% 7.0% 7.3% 6.0% 6.4%
-0.4% 0.7% 0.2% -1.2% 0.4%
营业利润 7,089,800 6,393,000 6,628,800 10,894,900 11,943,700
26.7% 24.6% 24.1% 29.8% 30.3%
-0.1% -2.1% -0.4% 5.6% 0.5%
净利润 5,953,100 5,525,600 5,741,100 9,468,000 9,980,300
22.4% 21.2% 20.9% 25.9% 25.3%
1.3% -1.2% -0.3% 5.0% -0.6%
小米集团 ( 单位 : 万元 , CNY ) 2018-12-31 2019-12-31 2020-12-31 2021-12-31 2022-12-31
营业收入 17,491,543 20,583,868 24,586,563 32,830,915 28,004,402
52.6% 17.7% 19.4% 33.5% -14.7%
毛利 2,219,194 2,855,403 3,675,186 5,826,094 4,757,719
12.7% 13.9% 14.9% 17.7% 17.0%
-0.5% 1.2% 1.1% 2.8% -0.8%
研发费用 -577,683 -749,255 -925,614 -1,316,709 -1,602,813
3.3% 3.6% 3.8% 4.0% 5.7%
0.6% 0.3% 0.1% 0.2% 1.7%
销售、管理费用 -2009215 -1348197 -1828585 -2571969 -2643720
11.5% 6.5% 7.4% 7.8% 9.4%
5.9% -4.9% 0.9% 0.4% 1.6%
营业利润 119,647 1,176,022 2,403,473 2,602,866 281,650
0.7% 5.7% 9.8% 7.9% 1.0%
-10.0% 5.0% 4.1% -1.8% -6.9%
净利润 1,347,775 1,010,295 2,031,271 1,928,324 250,257
7.7% 4.9% 8.3% 5.9% 0.9%
46.0% -2.8% 3.4% -2.4% -5.0%
Worldcom 单位：百万 USD AT&T 单位：百万 USD
2001 2000 1999 2001 2000 1999
Revenue 35179 39090 35908 Revenue 52550 55533 54973
变化 -10.0% 8.9% 变化 -5.4% 1.0%
Operating expenses 31665 30937 28020 Operating expenses 48796 51305 43515
占比 92.9% 92.4% 79.2%
占比 90.0% 79.1% 78.0%
变化 0.5% 13.2%
变化 88.9% 1.1%
Cost of services and
Line cost 14739 15462 14739 13960 12795 11013
products
占比 41.9% 39.6% 41.0% Access and other
12136 13140 14439
变化 43.4% -1.5% connection
SGA 11046 10597 8935 Total (product cost) 26096 25935 25452
占比 49.7% 46.7% 46.3%
占比 31.4% 27.1% 24.9%
变化 3.0% 0.4%
变化 29.2% 2.2%
SGA 10832 9752 10894
Depreciation and
5880 4878 4354 占比 20.6% 17.6% 19.8%
amortization
占比 16.7% 12.5% 12.1% 变化 22.9% -2.3%
Depreciation and
变化 16.4% 0.4% 6865 5924 5137
amortization
Operating income 3514 8153 7888 占比 13.1% 10.7% 9.3%
占比 10.0% 20.9% 22.0% 变化 2.4% 1.3%
变化 11.1% -1.1% Operating income 3754 4228 11458
Net income 1501 4153 4013 占比 7.1% 7.6% 20.8%
占比 4.3% 10.6% 11.2% 变化 -0.5% -13.2%
变化 4.8% -0.6% Net income 7715 4669 3428
占比 14.7% 8.4% 6.2%
变化 6.3% 2.2%
 Learning Objective 4
Explain the Reporting of Accounting Changes
and Errors

LO 4
 Accounting Changes and Errors
Changes in Accounting Principle

• Retrospective adjustment
• Cumulative effect adjustment to beginning retained
earnings
• Approach preserves comparability across years
• Examples include:
 change from F I F O to average cost
 change from percentage-of-completion to completed-
contract method
LO 4
 Changes in Accounting Principle Illustration 1

Illustration: Gaubert Inc. decided in March 2020 to change from

FIFO to weighted-average inventory pricing. Gaubert’s income
before taxes, using the new weighted-average method in 2020, is
$30,000. This illustration presents the pretax income data for
2018 and 2019 for this example.

LO 4
 Changes in Accounting Principle Illustration 2

Illustration: Gaubert Inc. decided in March 2020 to change from

FIFO to weighted-average inventory pricing. Gaubert’s income
before taxes, using the new weighted-average method in 2020, is
$30,000. This illustration shows the information Gaubert
presented in its comparative income statements, based on a 30
percent tax rate.

LO 4
Accounting Changes and Errors
Change in Accounting Estimates

• Accounted for in period of change or period of

change and future periods if change affects both
• Not handled retrospectively, not considered an error
• Examples include:
 Useful lives and salvage values of depreciable assets
 Allowance for uncollectible receivables
 Inventory obsolescence

LO 4
 Change in Accounting Estimate (1 of 3)

Illustration: Arcadia HS, purchased equipment for $510,000

which was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time. Depreciation
has been recorded for 7 years on a straight-line basis. In 2020
(year 8), it is determined that the total estimated life should
be 15 years with a salvage value of $5,000 at the end of that
time.
Questions:
• What is the entry to correct prior years’ depreciation?
• Calculate the depreciation expense for 2020.

LO 4
 Change in Accounting Estimate (2 of 3)
Calculation of depreciation for first 7 years.
Equipment cost $510,000
Salvage value − 10,000
Depreciable base 500,000
Useful life (original) ÷ 10 years
Annual depreciation $ 50,000 × 7 years = $350,000

After 7 Balance Sheet (December 31, 2019)

years Fixed Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000
LO 4
Change in Accounting Estimate (3 of 3)
Calculate depreciation expense for 2020 and remaining years.
Net book value $160,000
Salvage value (revised) − 5,000
Depreciable base 155,000
Useful life ÷ 8 years
Annual expense $ 19,375

Journal entry for 2020 and remaining years.

Depreciation Expense 19,375
Accumulated Depreciation 19,375

LO 4
 Accounting Errors
Corrections of Errors

• Result from:
 mathematical mistakes
 mistakes in application of accounting principles
 oversight or misuse of facts
• Corrections treated as prior period adjustments
• Adjustment to the beginning balance of retained
earnings

LO 4
 Accounting Errors

Illustration: In 2021, Hillsboro Co. determined that it

incorrectly overstated its accounts receivable and sales
revenue by $100,000 in 2020. In 2021, Hillboro makes the
following entry to correct for this error (ignore income taxes).

Retained Earnings 100,000

Accounts Receivable 100,000

LO 4
 Accounting Changes and Errors
Summary: Changes in Accounting Principle

Placement on
Type of Situation Criteria Examples Income Statement
Changes in Change from Change in the basis of Recast prior years'
accounting one generally inventory pricing from income statement
principle accepted FIFO to average-cost. on the same basis
accounting as the newly
principle to adopted principle.
another. (Shown net of tax.)

LO 4
 Accounting Changes and Errors
Summary: Changes in Estimates

Placement on
Type of Situation Criteria Examples Income Statement
Changes in Normal, Changes in the Show change only
estimates recurring readability of in the affected
corrections receivables and accounts in current
and inventories; changes in and future periods.
adjustments. estimated lives of (Not shown net of
equipment, intangible tax.)
assets; changes in
estimated liability for
warranty costs, income
taxes, and salary
payments.
LO 4
 Accounting Changes and Errors
Summary: Corrections of Errors

Placement on
Type of Situation Criteria Examples Income Statement
Corrections of Mistake, Error in reporting Treat as prior
errors misuse of income and expenses. period adjustment;
facts. restate prior years'
income statements
to correct for error.
(Shown net of tax.)

LO 4
 Retained Earnings Statement (1 of 3)
Increase
•Net income
•Change in accounting principle
•Prior period adjustments
Decrease
•Net loss
•Dividends
•Change in accounting principles
•Prior period adjustments
LO 5
 Retained Earnings Statement (2 of 3)
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2020

Balance, January 1 $ 1,050,000

Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000

Before issuing the report for the year ended December 31, 2020, you
discover a $50,000 error (net of tax) that caused 2019 inventory to be
overstated (overstated inventory caused COGS to be lower and thus net
income to be higher in 2019). Would this discovery have any impact on the
reporting of the Statement of Retained Earnings for 2020?

LO 5
Retained Earnings Statement

Restrictions on Retained Earnings

Disclosed
 In notes to the financial statements.
 As Appropriated Retained Earnings.
 All changes in equity during a period except
those resulting from investments by owners and
distributions to owners.

Includes:
•all revenues and gains, expenses and losses reported in
net income, and
•all gains and losses that bypass net income but affect
stockholders’ equity

LO 5
 Comprehensive Income
Net Income Other Comprehensive
+ Income
Income Statement (in thousands)
Sales $285,000
Cost of goods sold 149,000 • Unrealized gains and
Gross profit 136,000 losses on available-for-
Operating expenses: sale securities
Selling expenses 10,000
Administrative expenses 43,000 • Translation gains and
Total operating expense 53,000 losses on foreign
Income from operations 83,000 currency
Other revenue (expense):
Interest revenue 17,000
• Plus others
Interest expense (21,000)
Total other (4,000) Reported in Stockholders’
Income before taxes 79,000
Income tax expense 24,000
Equity
Net income $ 55,000

LO 5
Comprehensive Income

Review
Gains and losses that bypass net income but affect
stockholders' equity are referred to as
a. comprehensive income.
b. other comprehensive income.
c. prior period income.
d. unusual gains and losses.