Chapter 17 Flashcards
net income =
revenues − ordinary expenses + other income − other expense + gains − losses
controlling interest vs. noncontrolling interest
When a firm has a controlling interest in a subsidiary, the statements of the two firms are consolidated; the earnings of both firms are included on the income statement. Noncontrolling interest is subtracted from the consolidated total income to get the net income of the parent company.
Single-Step vs. Multi-Step Income Statement
single-step: all revenues are grouped together and all expenses are grouped together.
multi-step: includes gross profit, revenues minus cost of goods sold.
Gross profit
is the amount that remains after the direct costs of producing a product or service are subtracted from revenue
operating profit or operating income
subtracting operating expenses, such as selling, general, and administrative expenses, from gross profit
The converged standards identify 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.
contract
an agreement between two or more parties that specifies their obligations and rights. Collectability must be probable for a contract to exist
performance obligation
is a promise to deliver a distinct good or service.
A “distinct” good or service is one that meets the following criteria:
- The customer can benefit from the good or service on its own or combined with other resources that are readily available.
- The promise to transfer the good or service can be identified separately from any other promises.
transaction price
the amount a firm expects to receive from a customer in exchange for transferring a good or service to the customer.
period costs
expenses that cannot be directly tied to revenue generation and are expensed in the period incurred: administrative costs
specific identification
a firm can identify exactly which items were sold and which items remain in inventory: an auto dealer records each vehicle sold or in inventory by its identification number.
first-in, first-out (FIFO)
the first item purchased is assumed to be the first item sold: Permited under GAAP and IFRS
Last-in, first-out (LIFO)
the last item purchased is assumed to be the first item sold: Only permitted under GAAP
straight-line depreciation
Straight-line depreciation (SL) allocates an equal amount of depreciation each year over the asset’s useful life as follows:
Accelerated depreciation
speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation expense in the early years of the asset’s life and less depreciation expense in the later years of its life. Total depreciation expense over the life of the asset will be the same as it would be if straight-line depreciation were used.
double-declining balance (DDB):
Amortization
is the allocation of the cost of an intangible asset (such as a franchise agreement) over its useful life.
retrospective vs prospective application
With retrospective application, 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. Retrospective application enhances the comparability of the financial statements over time: change in accounting policy, prior-period adjustment for an error
With prospective application, prior statements are not restated, and the new policies are applied only to future financial statements: chnage in accounting estimate
simple capital structure
one that contains no potentially dilutive securities. A simple capital structure contains only common stock, nonconvertible debt, and nonconvertible preferred stock.
complex capital structure
contains potentially dilutive securities such as options, warrants, or convertible securities.
Basic EPS
weighted average number of common shares
is the number of shares outstanding during the year, weighted by the portion of the year they were outstanding.
stock dividend
is the distribution of additional shares to each shareholder in an amount proportional to their current number of shares. If a 10% stock dividend is paid, the holder of 100 shares of stock would receive 10 additional shares.
stock split
refers to the division of each “old” share into a specific number of “new” (post-split) shares. The holder of 100 shares will have 200 shares after a 2-for-1 split or 150 shares after a 3-for-2 split.
