I'm always looking for context in which people tell stories. In "Fight Club" it's these support groups for dying people, and then in "Choke" it's 12-step recovery groups. In one novel it's artists' colonies, in another novel it's a diary form that submariners' wives typically keep so that when their husband comes back from serving on a submarine they have an accounting of their spouse's time. So I'm always looking for, number one, a non-fiction context - because you can tell a more outrageous story if you use a non-fiction form.
Statements of Net Income and Comprehensive Income (Part A)
by
Charles Lamson
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Introduction Net income, revenues, and gains less all expenses and losses, is one of the most important numbers companies report in the financial statements. It represents the return to the shareholders over a given time period---and, everything else being equal, shareholders prefer net income to a net loss. That is, investors prefer increased net income to no growth or decreased net income. In a survey of over 400 executives, 52% indicated that net income was the most important performance measure for a company (John Graham, Campbell Harvey, and Shiva Rajgopal, "The Economic Implications of Corporate Financial Reporting," Journal of Accounting & Economics, 2005, pp. 3-73). In analyzing a company, net income is an important measure of financial performance---but it represents only one view of a company's performance. Consider Kimberly-Clark Corporation, the U.S.-based global manufacturer of personal care products, consumer tissues, and healthcare items with brands such as Kleenex, Scott, and Huggies, its bottom line net income increase to $2,166 million in 2016, representing a $1,153 million, or 114%, increase from the prior year (see Kimberly-Clark's annual report at https://www.kimberly-clark.com/-/media/kimberly/pdf/annual-report/kmb-2016-10k_umbracofile.pdf). Why would net income increase by over 100% in one year? To obtain a complete picture of a company's financial performance, a company will often present steps, or subtotals, to get to net income. Let's consider Kimberly-Clark's gross profit and operating profit, steps to get to net income. During 2016, Kimberly-Clark's gross profit, less revenues less cost of goods sold, of $6,651 million increased only 0.4%, suggesting that Kimberly-Clark's manufacturing performance was relatively steady. However, Kimberly-Clark's operating income increased by $1,704 million, or 106%. Examining Kimberly-Clark's 2016 financial statements further we find Kimberly-Clark reported a one-time expense in the prior year of $1,568 million dollars primarily related to employee pension costs. This one time expense depressed Kimberly-Clark's 2015 net income. In other words, Kimberly-Clark's 2016 net income figures looked much higher because its 2015 net income was unusually low due to a one-time expense. we will examine numerous measures of income---including net income, operating income, and gross profit---that include different aspects of performance and return to the shareholders.  In the next several parts of this analysis, we will discuss the reporting of income on the income statement and statement of comprehensive income. We begin with an overview and then cover specific presentation and format requirements, including the single-step and multiple-step income statements. Here, we will also discuss discontinued operations. Next, we will present important differences between Generally Accepted Accounting Principles (GAAP or U.S. GAAP) and International Financial Reporting Standards (IFRS) income statements. We then discuss the presentation of other comprehensive income and the statement of comprehensive income. We conclude by providing a discussion of the statement of stockholders equity. Overview of the Income Statements The first step in our discussion of the income statements is outlining important terminology, the requirements for reporting the two components of comprehensive income, and the key advantages and limitations of the income statements. We first present U.S. GAAP requirements, and then discuss similarities and differences between U.S. GAAP and IFRS.
Income Statement Terminology Comprehensive income is the change in a company's equity during a period of time resulting from transactions, events, and circumstances other than transactions with owners. For example, comprehensive income does not include new issues of shares or dividend distributions. Comprehensive income is composed of two parts: net income and other comprehensive income. Comprehensive income = Net income + Other Comprehensive Income
 Reporting Income Income statements are designed to reflect all components of comprehensive income by presenting an entity's financial performance and results of operations over a period of time. Entities may report comprehensive income in two ways:
The computation of net income and comprehensive income are the same under either alternative---only the format of the presentation differs. We will discuss both formats in a later post. For consistency, we will refer to the financial statement(s) related to comprehensive income as the income statements throughout the next several posts.  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 171-173* end |
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