Analyzing Income Statements

Question 1

Unread revenue

Answer 1

A liability. Payment for goods is received before the transfer of the goods. Revenue can be recognized when goods are transferred.

Question 2

Accounts receivable

Answer 2

An asset. Sale of goods is made with credit and revenue can be recognized at time of sal.

Question 3

Five-step process for recognizing revenue

Answer 3

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the separate or distinct performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when/as performance obligations are satisfied.

Question 4

How can progress toward ocmpletion of a performance obligation be measured?

Answer 4

• Input percentage (% of total estimated costs incurred)
• Output percentage (units produced or milestones achieved)

Question 5

Matching principle

Accrual method of accounting

Answer 5

Expenses for producing goods and services are recognized in the period in which the revenue for the goods and services is recognized.

Question 6

Period costs

Accrual method of accounting

Answer 6

Expenditures that less directly match the timing of revenues (e.g. admin costs). Expense when you incur the costs

Question 7

Capitalizing

Answer 7

Spreading an asset’s cost over multiple periods, creating a balance sheet asset. CApitlaize if benefits extend over multiple periods

Question 8

Expensing

Answer 8

Taking an asset’s cost as an expense on the income statement in the current period. Expense if benefits beyond one period are highly uncertain

Question 9

Research costs

(capitalized or expensed?)

Answer 9

Expensed under US GAAP and IFRS

Question 10

Development costs

(capitalized or expensed?)

Answer 10

IFRS: may be cap, US GAAP: exp

Question 11

Retrospective application

Answer 11

Any prior-period financial statements presented in a firm’s current financial statements must be restated, applying the new policy to those statements as well as future statements.

Question 12

Prospective applicaiton

Answer 12

Prior statements are not restated, and the new policies are applied only to future financial statements.

Question 13

Modified retrospective application

Answer 13

Does not require restatement of prior-period statements; however, beginning values of affected accounts are adjusted for the cumulative effects of the change.

Question 14

Potentially dilutive securities

Answer 14

These include stock options, warrants, convertible debt, and convertible preferred stock.

Question 15

Dilutive securities

Answer 15

These are securities that would decrease EPS if exercised or converted to common stock.

Question 16

Antidilutive securities

Answer 16

These are securities that would increase EPS if exercised or converted to common stock.

Question 17

Simple capital structure

Answer 17

This is a capital structure that contains no potentially dilutive securities

Question 19

Complex capital structure

Answer 19

Complex structures contain potentially dilutive securities

Question 20

Weighted average shares outstanding

Answer 20

Used to determine the average number of shares of a company’s stock that were outstanding over a specific period, adjusted for any changes in the number of shares outstanding during that period.

Question 21

basic EPS

Answer 21

(net income - preferred dividednds) / weighted number of common stock

net income - pre divs = earnings available to common stockholders

Question 22

diluted EPS

Answer 22

Question 23

Vertical Common-size income statement

Answer 23

Expresses each category of income statement as a pecentage of revenue

Question 24

Gross profit margin

Answer 24

gross profit / revenue

Question 25

Net profit margin

Answer 25

net income/revenue