Book 3_FinAn_Reading 30_ANALYZING INCOME STATEMENTS Flashcards
a five-step process for recognizing revenue
- Identify the contract(s) with a 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 obligation
Type of revenue
- Performance obligation and progress toward completion (long-term contracts)
- Acting as an agent
- Franchising and licensing
- Service versus license
- Bill-and-hold agreements: a type of sales agreement that involves the customer paying for goods ahead of shipping
The matching principle
- Match revenues recognized in a period with the expenses required to generate them (cost of good sold)
- Construction revenue: 35% cost, so record 35% revenue of total contract
Capitalization
- an expenditure that is expected to provide a future economic benefit over multiple accounting periods is capitalized
- Transportation, Installation, rebuild capitalized
- Training, repair and matenance expensed
Capitalization affect
- Lower expense and higher net income in the first period and reverse in the subsequences
- Higher assets and equity
- Lower CFI and higher CFO
- Higher ROE and ROA at first and lower at the subsequences
- Lower debt-to-assets and debt-to-equity ratios
Capitalized Interest
the interest that accrues during the construction period is capitalized as a part of the asset’s cost
Research and Development Costs
- Research costs, the discovery of new scientific or technical knowledge are expensed
- Development costs: translate research findings into a plan or design of a new product or process is capitalized
Bad Debt Expense and Warranty Expense Recognition
the matching principle requires the firm to estimate bad debt expense or warranty expense
Results of discontinued operations
- Are reported below income from continuing operations, net of tax, from the date the decision to dispose of the operations is made
- They likely are nonrecurring and do not affect future net income.
Unusual or infrequent items
- Are reported before tax and above income from continuing operations.
- An analyst should determine how “unusual” or “infrequent” these items really are for the company when estimating future earnings or firm value
Changes in accounting standards, changes in accounting methods applied, and corrections of accounting errors
require retrospective restatement
A change in an accounting estimate from new information
is applied prospectively (to subsequent periods) with no restatement of prior-period results.
Basis EPS
= (Net income - preferred dividends)/(weight average number of common shares outstanding)
dilutive securities and antidilutive securities
- Dilutive: Decrease EPS, Need to be calculated in diluted EPS
- Antidilutive: Increase EPS, Don’t calculate in diluted EPS
Diluted EPS
= (net income - preferred dividends) + convertible preferred dividends + convertible debt interestx(1-t))/ (weighted average + share from convertible + share options)
