 Hello, and welcome to the session in which we would look at a multiple step income statement. In this example, we are giving a regular income statement or a single step income statement. We are giving additional information, including discontinued operation. This topic, whether the income statement or discontinued operation, it's covered in your intermediate accounting courses as well as your CPA exam. So whether you are an accounting students or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. You keep that course. I am a useful addition. I'm a supplemental tool. I can explain the material differently than your CPA review course, which will supplement your CPA review course. As a result, you will add 10 to 15 points to your CPA exam, which in turn will help you pass the exam. 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So let's take a look at this example where we have to prepare a multiple step income statement. So we are giving a single step income statement where we are giving revenues, interests, revenue and other income all at once. We are giving expenses, cost of goods sold, selling income taxes all at once, income tax expense all at once. We are giving that income. Then we are giving earnings per share. So we need to prepare a proper income statement, which will be a multiple step income statement, giving the additional information first. Selling and administrative expenses include 36 million and restructuring cost. So we're saying this number here include 36 million and restructuring cost. The first thing you need to know that restructuring cost has to be reported separately. So what we have to do is we have to take this number and deduct from it 36 million and report the 36 million separately. Restructuring cost, there's a specific line for the restructuring cost. Restructuring cost is when the company go through a reorganization or through a layoff or sometime it called employee engineering. They redistribute the positions. They have new positions. They have new departments. So what they do, it's called restructuring cost. They lay off employees. They have to pay maybe some people to leave or whatever the issue is. This is restructuring cost. It has to be reported separately. Included in other income, 130 million in income from a discontinued operation. Okay. So another income here, we have 130, this 136, 130 is discontinued operation. Again, what do we need to know about discontinued operation? They are also reported separately. Therefore, we have to report them separately. And remember, they have to be reported net of tax, which we'll see that in a moment. This consists of 90 million in operating income and 40 million gain on disposal. So this amount is broken down into two components. Remember, discontinued operation, we have to report the operating for that year. And if we sell the asset, whether we have a gain or a loss and whether we operate the business, whether we have a gain or a loss and they have to be reported net of tax, which we'll see this. The remaining 6 million is from the gain on sale of investments. That's fine. Sale on investment is will be reported under other revenue. We'll see that. So what we have to do, we have to take those numbers and fix them up. And usually this happens in the real world. In the real world, maybe a company, they prepared their income statement really quick. They don't really know how to prepare a proper income statement. They send it to you. You as the accountant working in a CPA firm, you'll have to prepare a proper income statement. And this is what we're going to be doing. But this income statement is multiple step. It's a little bit more involved than your mom and pop store. But this is what you do in the real world. You prepare income statement. Cost of goods sold in 2023 was increased by 10 million to correct an error in the calculation of 2020 ending inventory. The amount is material. Well, if it's prior period error in inventory, it doesn't go on the income statement. So therefore, we have to take out out of the cost of goods sold 10 million. So cost of goods sold will have to deduct 10 million from it. Because there is a 10 million in there that should not be there. This adjustment should go into retained earnings, not into the cost of goods sold. So prepare a revised income statement reflecting the fact. Assume the income tax is 25% applied to all income statement and a 10 million shares of common stock were outstanding. So let's go ahead and start to prepare the income statement. We have the company name, the name of the statement, and four year ended. Remember, the income statement are for a period of time, not a point in time. December 31st, 2023. Now, what do we start with? We start with sales revenue. Let's start. Sales revenue, 490 million. And from sales revenue, we are going to deduct cost of goods sold. Cost of goods sold is 270 million, not 280. Remember, we had to deduct 10 million because of the inventory adjustment that should not go into cost of goods sold. This is a prior period adjustment. If we take sales minus cost of goods sold, it gives us gross profit, gross profit of 220 million. Okay, gross profit. Then what we're going to do, we're going to deducting our operating expenses. Our operating expenses consist of selling an administrative and restructuring cost. Remember, we had to report the restructuring cost separately. It's a separate item on the income statement. It's important. If it's an important, it has its own line, separate item. Now we add up all our operating expenses. They will add up to 164, which is they came back to 164, right? But although they are 164, we have to report them separately according to gap. Now we take gross profit minus operating expenses will give us operating income. This number is very important for investors, for the users. Because what matters when you are investing in a company, when you are trying to start a company or invest or trying to buy a stock in a company, what matters to you is their operating income. What is operating income? It's the income that the company is making from operating the business. When you buy a business, you buy a business to make money from what they are doing. So it's very important to see, are they making money from operating the business? And in this example, clearly they are making 56 million in operating the business. So this number is very important. So this is basically, this part here is the heart of the business. This is what they do. They sell, they have constant of goods sold. They operate the business and they have a profit. Now are they going to have other items other than those? Sure they will. We're going to report them separately, but this is the business. Now they're going to have other income. What are the other income? They're going to have interest revenue. Well, they have interest revenue. They have maybe bonds, investment and bonds, money in the bank, interest revenue of 14 million. That's fine. They also have gain on the sale of the investment. We are told there's a gain on the sale of the investment of 6 million right here, right here. The 6 million. So this is gain on the sale of the investment is reported here. Then we have the total other income. Now we might have other expenses. We could have other income and expenses. What could be other expenses? Could be interest expense. Could be loss on investment. Here we only have gains and revenues, which is good. So we have total other income of 20 million. Now notice, interest revenue and the gain of the sale on the investment are reported separately, separately from this section, separately from what the business do. Any company could have interest income, whether they are doing good as a company or not good. Any company could have a gain on the sale of their investments, whether they are doing good or not good. That's why we have to report those separately from what they do. Because when you invest in a business, you don't invest for this section for other income. You invest for this section. You invest to find out how well the company is doing. Then you invest, okay? Now we're going to take other income and we're going to add it to income operating income. And that's going to give us 76 million income from continuing operation before income taxes, 76 million. Now we're going to take this amount multiplied by 25%. And we're going to have a tax bill, well, taxes of 19 million. Now we're going to get, after that, we're going to deduct the taxes and we're going to get to income from continuing operation. Now, why are we saying, usually this should be net income, but why are we saying this is income from continuing operation? Because in this example, we are told we have a discontinued operation. We discontinued one of our divisions. We sold it. We sold it. And this 130 million here, okay? That was another income. That was part of it, I'm sorry, part of the 136. You remember we had 136. We said 6 million of it was gain on the sale of the investments. And 130 million was discontinued operation, of which 90 is from operating the business and 40 from the gain of the disposal. Now we're going to start a separate section and that's discontinued operation. Not all companies will have this. Small companies don't have discontinued operation. Even large companies, unless they discontinue an operation. And if you don't know what discontinued operation is, don't sit for the CPA exam as of yet, because that's a major topic on the exam. Okay, from the discontinued operation, we have income from operation of 130 of discontinued component. Now we could also report the 90. Some companies, they would report the 90 and the 40 separately. Here I reported them together. 90 from operating the business, 40 from the gain of the disposal. Now what do we have to do? We have to take this amount because we have this gain multiplied by 25%. And that's going to give us a tax bill of 32 million 50. So we're going to compute the tax bill separately for the discontinued operation. And I don't mean the tax bill. We're going to compute the taxes because with the tax bill, it implies this is what we're going to be paying. Not necessarily true. Okay, so the tax amount applied to discontinued operation is 32 million. Then we would report discontinued operation net of tax. And the amount net of tax also a profit 97 million, 97.5 million, which is good. That's what they're selling it again. They operated the business throughout the year and they had the gain. Therefore the total is 97.5 net of tax. That's good. Now we're going to have from continuing operation, they have 57 million from income from this continued operation 97.5. Together, now we came up to net income. Net income is 154.5 million. Now, if you are evaluating this company, really they did not really make 154.5 or this is not what you look at. You don't, if you want to invest in this company, you don't say, well, this company make 154.5 million. You would say this company made 56 million. This is the number that you would look at in evaluating the performance of the company because this number, it's not sustainable. Actually, it's not only that sustainable, this number is they're telling you this is going to be gone. Whoops, sorry. We are told this discontinued operation will be gone. So this 97.5 million don't count on it because we sold that division. I don't know why would we sell this division? We were making money on it, but that's beside the point. So what we focus on is this 56 million, this 56 million. So this is how we would prepare an income statement, a multiple step income statement, including discontinued operation. It's very important for the CPA exam. It's critical that you know how to do this. It's critical, the various components of the income statement because the financial statement by itself is a topic and discontinued operation by itself is a topic. Now we need to compute earnings per share. And when we have intermediate component like this continued operation, we have to report for both. For the income from operation, we're going to take 57 million, 57 million divided by 10 million and earnings per share is $5.75 per share income from continuing operation, which is going to take 97.5 divided by 10. It's going to give us 9.75. We really don't care about 9.75. What we care about if we are going to value this company, actually we would look only at this 56 million, not even the 57 million. So really if I'm evaluating this company, I would say your earnings per share is $5.60 and I will start my analysis based on this number, not on the 57 million and definitely not on the 97.5 because those are not relevant to the business. They're not relevant to the business. It's important to know this. On my website, farhatlectures.com, I explained the income statement, this continued operation separately for each topic, for each topic, I don't replace your CPA review course. My courses are aligned to parallel your CPA review course. To tell you, I'm there to support you. I'm there to help you with your CPA review course. Check it out, give me a try. One month, that's it. If you don't like it, cancel. That's your risk. Are you willing to take that risk to pass your CPA exam? Remember, you're gonna pass your CPA exam only once. Don't shortchange yourself. Use all the resources, the tools that you have at your disposal, especially something like my website. Good luck, study hard and of course, stay safe.