21: Understanding Income Statements

Question 1

generally refers to the amount charged for the delivery of goods or services in the ordinary activities of the business

Answer 1

revenue

Question 2

sometimes used to specifically indicate that the revenue has been adjusted

Answer 2

net revenue

Question 3

reflect outflows, depletions of assets, and incurrences of liabilities in the course of the activities of the business

Answer 3

expenses

Question 4

net income often referred to as:

Answer 4

the bottom line

Question 5

increases or decreases in economic benefits, which mat or may not arise in the ordinary activities of the business

Answer 5

gains and losses

Question 6

can be defined as: income minus expenses or revenue plus other income plus gains minus expenses or revenue plus other income plus gains minus expenses in the ordinary activities of the business minus other expenses and other losses

Answer 6

net income

Question 7

expenses can be grouped together either by:

Answer 7

nature or function

Question 8

revenue less cost of sale

Answer 8

gross profit or gross margin

Question 9

results from deducting operating expenses such as selling, general, and administrative and research and development expenses from gross profit

Answer 9

operating profit

Question 10

increases in economic benefits during the accounting period in which the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants

Answer 10

income

Question 11

revenue is recognized when it is earned, so the company’s financial records reflect revenue from the sale when the risk and reward of ownership is transferred; this is often when the company delivers the goods or services

Answer 11

accrual accounting

Question 12

record a liability when the cash is initially received and revenue would be recognized ad being earned over time as products and services are delivered

Answer 12

unearned revenue

Question 13

revenue should be recognized to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods and services

Answer 13

revenue recognition

Question 14

5 steps of recognizing revenue:

Answer 14

• identify the contracts with the customer
• identify the separate or distinct performance obligations in the contract
• determine the transaction price
• allocate the transaction price to the performance obligations in the contract
• recognize revenue when (or as) the entity satisfies a performance or obligation

Question 15

an agreement and commitment, with commercial substance between the contracting parties, establishes each party’s obligations and rights

Answer 15

contract

Question 16

decreases in economic benefits during the accounting period in the form of outflows and depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Answer 16

expenses

Question 17

matching of costs with revenues

Answer 17

matching principle

Question 18

expenditures that less directly match revenues, are reflected in the period when a company makes the expenditure or incurs the liability to pay

Answer 18

period costs

Question 19

specifically identify which inventory items were sold and which remained in inventory to be carried over to later periods

Answer 19

specific identification method

Question 20

the oldest goods purchases ( or manufactured) are assumed to be the first sold and the newest goods purchased (or manufactured) are assumed to remain in inventory

Answer 20

FIFO method (first in, first out)

Question 21

assigns the average cost of goods available for sale to the units sold and units remaining in inventory

Answer 21

weighted average cost method

Question 22

newest goods purchased (or manufactured) are assumed to be the first sold and the oldest goods purchased (or manufactured) are assumed to remain in inventory

Answer 22

LIFO method (last in, first out)

Question 23

an estimate of how much of the revenue will ultimately be uncollectible

Answer 23

allowance for doubtful accounts

Question 24

recognize credit losses on customer receivables would be for the company to wait until such time as a customer defaulted

Answer 24

direct write-off method

Question 25

if the product proves deficient in some respect and is covered; recognized as an estimate in the period of sale

Answer 25

warranty expense

Question 26

assets expected to provide economic benefits over a future period of time greater than one year ex. land, plant, equipment

Answer 26

long-lived assets

Question 27

assets lacking physical substance

Answer 27

intangible assets

Question 28

the process of systematically allocating costs of long-lived assets over the period during which the assets are expected to provide economic benefits

Answer 28

depreciation

Question 29

the process of systematically allocating costs for intangible long-lived assets

Answer 29

amortization

Question 30

the depreciable amount of the asset (cost less residual value) is allocated on a systematic basis over the remaining useful life of the asset; asset is reported at its cost less any accumulated depreciation

Answer 30

cost model

Question 31

asset is reported at its fair value

Answer 31

revaluation model

Question 32

allocates evenly the cost of long-lived assets less estimated residual value over the estimated useful life of an asset

Answer 32

straight-line method

Question 33

allocate a greater proportion of the cost o the early years of an asset’s useful life

Answer 33

accelerated methods

Question 34

depreciates the asset at double the straight-line rate

Answer 34

double declining balance depreciation

Question 35

the remaining undepreciated balance of the asset each period

Answer 35

net book value

Question 36

the financial statements for all fiscal years shown in a company’s financial reports are presented as if the newly adopted accounting principle had been used throughout the entire period

Answer 36

retrospective application

Question 37

companies are not required to revise previously reported financial statements but adjusted opening balances of retained earnings for the cumulative impact of the new standard

Answer 37

modified retrospective

Question 38

those equity shares that are subordinate to all other types of equity

Answer 38

ordinary shares

Question 39

the EPS that would result if all dilutive financial instruments were converted; financial instruments that are potentially converted to common stock could decrease EPS

Answer 39

dilutive EPS

Question 40

calculated using the reported earnings available to common shareholders of the parent company and the weighted average number of shares outstanding

Answer 40

basic EPS

Question 41

basic EPS equation

Answer 41

net income - preferred dividends
_____________________________________
weighted average number of shares outstanding

Question 42

what EPS would have been if the convertible preferred securities had been converted at the beginning of the period,

Answer 42

if-converted method

Question 43

diluted EPS equation

Answer 43

net income
____________
weighted avg # of shares OS + new common shares

Question 44

diluted EPS equation with convertible debt

Answer 44

NI +after-tax int. -preferred dividends
_______________________________
weighted avg # of shares OS + new common shares

Question 45

common size analysis of the income statement- stating each line on the income statement as a percentage of –

Answer 45

revenue

Question 46

net profit margin equation

Answer 46

net income/revenue

Question 47

gross profit margin equation

Answer 47

gross profit/revenue

Question 48

operating profit margin

Answer 48

profit from operations/revenue

Question 49

pretax margin equation

Answer 49

profit before tax/revenue

Question 50

items of income and expense that are not recognized in profit or loss as required or permitted by other IFRS

Answer 50

other comprehensive income

Question 51

the change in equity during a period resulting from transaction and other events, other than those changes resulting from transaction with owners in their capacity as owners

Answer 51

total comprehensive income

Question 52

under US GAAP, the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources

Answer 52

comprehensive income