Chap 4 Flashcards
Revenues - X = Net Income
Expenses
X - Expenses = Net Income
Revenue
Net Income =
Revenue - Expenses
Income Statement is called
Statement of Earnings
Statement of ? = Income Statement
Earnings
R.O.G.E.L = Net Income
Revenue + Other Income + Gains -Expenses -Losses = Net Income
X + Other Income + Gains - Expenses - Losses = Y
X=Revenue
Y=Net Income
Revenue + Other Income + Gains - X-Y= Net Income
X = Expenses Y = Losses
Revenue defined
Amounts charged/expected to receive for delivery of goods/services thru ordinary business activities
Amounts charged/expected to receive for delivery of goods/services thru ordinary business activities
Revenue
Net Revenue
Revenue after adjustments; cash / volume discounts or estimated returns
Revenue after adjustments; cash / volume discounts or estimated returns
Net Revenue
Revenue
Sales or turnover
Sales vs. Revenue
Sale of goods vs. included in Sale of goods but used interchangeably
Expenses
Outflows, depletions of assets, incurrences of liabilities
Outflows, depletions of assets, incurrences of liabilities
Expenses
Gains and losses are included in
Net Income
Gains and losses are
economic benefits indirectly related to the core business; sale of land, sale of investment
Gains/Losses calculated by
Carrying Value - Price Sold
Income includes both
Revenue and gains
Net Income includes
Gains and losses
Net Income (Profit or loss) defined
(a) income - expenses (b) revenue + other income + gains - expenses - losses
Non-Controlling Interests
entities owned by less than 100%
Minority Interest
portion of income that belongs to minority shareholders
portion of income that belongs to minority shareholders
Minority Interest
entities owned by less than 100%
Non-Controlling Interests
Gross Profit
Revenue - Cost of Sales (COGS)
MultiStep income statement
Income statement with gross profit subtotals
Single Step
Income statement excludes gross profit subtotal
IS with no GP subtotal
Single Step
IS with GP subtotal
Multi Step
Revenue (Sales) - Cost of Sales (COGS)
Gross Profit
Operating Profit (Margin)
Revenue - ALL operating expenses
Revenue - COGS - SG&A
Operating Profit (Margin)
Operating Profit (Margin)
Profits before deducting taxes, interest expense & non-operating expenses
Operating Profit = EBIT
NO
Gross Profit = Gross Margin
YES
Operating Income =
Operating Profit
Operating Expense - SGA - RD - Gross Profit =
Operating Profit
Operating Profit defined
Reflects company profits on usual business activities before taxes & interest expense
EBIT
Earnings before Interest Expense and Taxes
Operating Profit = EBIT
YES
Revenue Recognition
Idendent of cash receipt/movements
Accrual Accounting
Revenue is recognized (reported on income statement) in the period in which it is earned
Revenue is recognized (reported on income statement) in the period in which it is earned
Accrual Accounting; Matching Concept
Cash received in advance of delivery or service performed =
Unearned Revenue
Unearned Revenue
Cash received in advance of delivery or service performed
IFRS Revenue Recognition Rule
- Transfer of significant risks/rewards have been passed to buyer
- Management involvement, effective control over goods no longer applies
- Revenue can be measured
- Economic benefit is likely to occur
- Costs incurred can be measured
IFRS transfer of risks / rewards of ownership occur when
goods are delivered to buyer or legal title is transferred
Sales
-Cost of Sales =
Gross Profit
Gross Profit
-Operating Expenses =
Operating Profit / Margin
US GAAP Revenue Recognition
When revenue is realized or realizable and earned
When revenue is realized or realizable and earned
US GAAP Revenue Recognition
GAAP Revenue Recognition/Realized
- Evidence of contract
- Product has been delivered or service performed
- Price is determined or determinable
- Payment is reasonably assurred or collectible
Long - Term Contract
Spans a number of accounting periods
Percentage of completion method used for
Long Term Contract Revenue Recognition
Percentage of completion method
- Can be measured reliably
- Est of % complete is reported on income statement
- Contract costs are expensed revenue
- Net Income or profit is reported annual as work is performed
% of Completion for LT contract
- When the outcome can be reliably measured
2. More certainty vs completed contract
Completed Contract measure for LT contract
1 When outcome cannot be reliably measured
2. Less certainty vs. % of completion
% Complete Example
$5MM BID; Est Cost $4MM
YR 1 $3MM Cost incurred
Revenue? Cost of Revenue? GP?
Year 1: 75% cost incurred;
Revenue =.75 x $5MM = $3.75MM
Cost = .75 x $4MM = $3MM
Gross Profit = $3.75MM -$3MM = $.75M
% Complete Example $5MM BID; Est Cost $4MM YR 1: Revenue $3.75MM Cost $3MM Gross Profit $.75M YR 2: $1MM cost incurred Revenue? Cost? GP?
Year 2:
Revenue = $5MM - $3.75MM = $1.25MM
Cost = $1MM
Gross Profit = $.25M
Error in % complete estimates
If final year:
% completion is the preferred method under IFRS, GAAP or Both
Both
Completed Contract is allowed under IFRS, GAAP or both
GAAP only
Depreciation Methods
- Straight Line
- Accelerated
- Units of Production
Straight Line Depreciation
Allocates costs of long lived assets less salvage value evenly across useful life
Accelerated Depreciation
Allocates greater portion of expense in first years of asset life
Diminishing balance is an example
Units of Production Depreciation
Allocation of cost corresponds to actual use of asset in a specific period
Judgments needed for Depreciation
- Salvage Value
2. Useful Life (IRS determined)
Accelerated Depreciation Calculation
- Determine straight line
- Determine acceleration factor
- Dep Rate = Straight line x accel factor
- Dep Expense = Net Book Value x Dep Rate
- Discontinue when NBV = Salvage Value
Diminshing Balane Dep =
Accelerated Method
Depreciation Expense offset
Accumulated Depreciation
Depreciation is a cash neg, pos or non cash item
Non Cash Item
Nonrecurring items =
- Discontinued Operations
2 Extraordinary Items - Unusual or Infrequent Items .
Dicontinued Ops defined
Disposal or stoppage of business line
Extraordinary Items defined
- Not permitted by IFRS
- Must be reported separately on Income State under GAAP
- Must be both unusual and infrequent
- Force Majour “ Acts of God”
Unusual or Infrequent Items defined
- IFRS allowed
- GAAP allowed but can not also be extraordinary
- Under GAAP must be reported as a part of continuing operations
