17: Income Statements Flashcards
Income statement equation
revenues- expense = net income
Expenses are grouped together by their ____ or ____ function
nature
function
Example of expense group by function
COGS
Example of expense group by nature
depreciation expenses
the amount that remains once the cost of a product or service is subtracted from revenue
Gross profit
Revenue - COGS=
Gross profit
Gross profit- operating expenses (SG&A)=
operating profit
For nonfinancial firms, operating profit is the amount that remains before _____ and _____ are considered
financing costs and income taxes
Operating income
+- other revenue/expense
+- unusual or infrequent items
-Taxes
Net income
For financial firms _____ expense is considered an operating expense
interest
When a firm has ______ in a subsidiary, the statements of the two firms are consolidated
controlling interest
The share of a subsidiary’s income that a firm does not own is reported in the firms income statement as ________.
Non-controlling interest/minority owner’s interest
Revenue is recognized when _____
goods are transferred to the buyer
The central principle of the converged standards for revenue recognition for IASB and FASB is?
revenue is recognized when the firm has transferred a good or service to the customer
How is revenue recognized for long term projects?
based on the firm’s progress towards completion of performance obligation (contract)
All revenues are grouped together and all expenses are grouped together in this presentation format
single step
presentation includes subtotals like gross profit and operating profit
multi-step
Under _______________, expense recognition is based on the matching principle
accrual basis of accounting
Matching principle: expenses for producing goods and services are recognized ______
in the period in which the revenue is recognized (when the goods have been transferred)
expenses that are not directly tied to generating revenue, like administrative costs,
period costs
period costs are expensed when?
the period they occur
If a firms sells good on credit or provides warranty to the customer, the matching principle requires the firm to ______________
establish a BDE or warranty expense
Assets generate more benefit in the early year of their lives, make the _____ depreciation method more appropriate for matching revenues and expenses
accelerated
Straight line method results in _____ depreciation expense and _____ net income, than accelerated methods
lower, higher
DDB depreciation stops once the _____ has been reached
residual value
LIFO is popular because it results in ____ COGS, in an ______ environment, creating ______ benefits
higher
inflationary
income tax
which inventory method is not permitted under IFRS?
LIFO
If an intangible asset is impaired…. income statement?
expense is recognized equal to the impairement
Investing income and financing expenses (interest) for a nonfinancial firm are considered _____ transactions
nonoperating
Interest, dividends, gains/losses for financial firms are considered _____ transactions
operating
Discontinued operating must be _____ and _____ distinct from the rest of the firm
physically
operationally
Discontinued operations is reported ____ in the income statement after ________
separately
net income from continuing operations
Unusual or infrequent items are included in _________
income from continuing operations
Gains or losses from the sale of assets or part of the business is an example of?
unusual/infrequent items
Impairements, write-offs/downs, restructuring costs are examples of?
unusual/infrequent items
with _____ application, any prior period financial statements presented in a firm’s current financial statements must be restated
retrospective
Changes in accounting policies require _____ application
retrospective of all shown in a financial report
does not require prior period restatement, However, beginning values of affected accounts are adjusted for the cumulative effects of the change
modified retrospective application
Changes in accounting estimates are applied:
Prospective
Prior period adjustments are applied:
retrospective
EPS is only reported for ______
shares of common stock
EPS measures ______ performance
profitability
Simple capital structure contains:
no dilutive securities
Complex capital structure contains:
dilutive securities
stock options, warrants, convertible securities are examples of?
dilutive securities
Dilutive securities ____ EPS, resulting in:
Diluted EPS ___ Basic EPS,and we report:
Decrease;
Diluted < Basic;
Report Diluted
Anti- Dilutive securities ____ EPS; resulting in
Diluted EPS ___ Basic EPS, and we report:
Increase EPS;
Diluted > Basic;
Report Basic EPS
Ending value of an asset; salvage value
residual value
treasury stock method assumes: that the funds received by the company from the exercise of the options would be used to ______ shares of the company’s ______ in the market at the average market price
purchase CS
Vertical common sized income statements: express each category of the income statement as a percentage of _____
revenue
common size IS allows for comparison over time in ______
(time-series analysis)
common size IS allows for comparison amongst firms in ____
cross-sectional
Gross profit margin can increase by _____ price or ______ production costs
raising price
reducing production costs
Used to measure a firm’s profitability quickly
gross profit margin
measures the profit generated after considering all expenses
net profit margin
High profit margins can be achieved by?
product differentiation
Retained Earnings =
Beg RE + NI - Dividends
Comprehensive income: the sum of _____ and ________, excluding _____
net income
OCI
transactions with shareholders
Other comprehensive income: change in equity from transactions from _______
non-ownership sources
OCI includes:
________ gains and losses
Adjustments for ______
Unrealized gains and losses from cash flow _______
Unrealized gains and losses from _______
Unrealized gains and losses on ________
-Foreign currency translation
-minimum pension liability
-hedging derivatives
-available-for-sale securities
-held to maturity securities
Transactions with shareholders, not included on the IS are ?
dividends paid
shares issued or repurchased
IFRS equivalent for trading securities
measured at fair value through P/L
IFRS equivalent for available for sale securities
Measured at fair value through OCI
IFRS equivalent for held to maturity securities
measured at amortized cost
Price to earnings ratio=
Stock price/ EPS
Net revenue =
Revenue - returns/allowances
how do you handle stock splits when calculating the weighted average shares outstanding in EPS?
no matter when it was issued, you restate the beginning of the year shares with this split
(for stock dividends too)
What is the relationship between contracts & performance obligations?
The contract outlines what the performance obligation will be, which is the promise to transfer a distinct good or service
According to the Standards of Revenue Recognition
