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INCOME AND CHANGES IN RETAINED EARNINGS Lecture # 15

Chapter 12. INCOME AND CHANGES IN RETAINED EARNINGS Lecture # 15. Normal, recurring revenue and expense transactions. Unusual, nonrecurring events that affect net income. 1. Results of discontinued operations. 2. Impact of extraordinary items.

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INCOME AND CHANGES IN RETAINED EARNINGS Lecture # 15

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  1. Chapter12 INCOME AND CHANGES IN RETAINED EARNINGS Lecture # 15

  2. Normal, recurring revenue and expense transactions. Unusual, nonrecurring events that affect net income. 1. Results of discontinued operations. 2. Impact of extraordinary items. 3. Effects of changes in accounting principles. Reporting the Results of Operations Information about net income can be divided into two major categories Income from continuing operations.

  3. This tax expense does not include effects of unusual, nonrecurring items. These unusual, nonrecurring items are each reported net of taxes.

  4. Income/Loss from operating the segment prior to disposal. Income/Loss on disposal of the segment. Discontinued Operations When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. Discontinued Operations

  5. Discontinued Operations When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. A segment must be a separate line of business activity or an operation that services a distinct category of customers.

  6. Discontinued Operations During 2005, Matrix, Inc. sold an unprofitable segment of the company. The segment had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Matrix reported income from continuing operations of $350,000. All items are taxed at 30%. How will this appear on the income statement?

  7. Discontinued Operations

  8. Discontinued Operations Income Statement Presentation:

  9. Extraordinary Items • Material in amount. • Gains or losses that are both unusual in nature and not expected to recur in the foreseeable future. • Reported net of related taxes.

  10. Extraordinary Items During 2005, Matrix, Inc. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $175,000. All gains and losses are subject to a 30% tax rate. How would this item appear on the 2005 income statement?

  11. Extraordinary Items - Example Income Statement Presentation:

  12. Accounting Changes

  13. Change in Accounting Principle • Occurs when changing from one GAAP method to another GAAP method. • Make a catch-up adjustment known as the cumulative effect of a change in accounting principle. • The cumulative effect is reported net of taxes and after extraordinary items.

  14. Change in Accounting Principle Also in 2005, Matrix, Inc. decided to change from the double-declining balance to the straight-line method for depreciation. The effect of this change is an increase in net income of $65,000. Matrix reported income before cumulative effect of an accounting change of $122,500 during the year. All items of income are subject to a 30% tax rate. How would this item appear on the income statement?

  15. Change in Accounting Principle Computation: Income Statement Presentation:

  16. Change in Estimates • Revision of a previous accounting estimate. • The new estimate should be used in the current and future periods. • The prior accounting results should not be disturbed.

  17. Change in Estimates On January 1, 2002, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2005, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation. Compute the revised depreciation expense for 2005.

  18. Change in Estimates Record depreciation expense of $4,200 for 2005 and subsequent years.

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