Chapter 4 Flashcards
In simple terms, what are the basic activities in Financing?
Obtaining cash funding, often by borrowing, issuing shares, or (in established companies) retaining profits. Financing activities also involve the repayment of debt and/or repurchase of shares.
In simple terms, what are the basic activities in Investing?
Using the funding to buy assets and invest in people. Investing activities also include divestitures.
In simple terms, what are the basic activities in Operating?
Using the assets to earn profits.
What is risk/return tradeoff?
An economic concept that notes that the higher the risk, the greater the return or compensation that is required to take that risk.
What is Net Income?
It is revenues less expenses (including gains and losses) other than those defined under IFRS as other comprehensive income.
Net income represents revenues and gains less expenses and losses both from continuing and discontinued operations.
What is Comprehensive Income?
Comprehensive income is net income plus/minus other comprehensive income/loss.
What is Operating Income?
Income from ongoing revenues after deducting expenses.
It represents a measure of regular income before any irregular items3 such as gains/losses, discontinued operations, and other comprehensive income.
3 The term “irregular” is used for transactions and other events that come from developments that are outside the normal business operations.
Earnings per share is calculated based on?
Earnings per share are calculated based on net income. ASPE currently uses this view of income.
What is an all-inclusive approach?
An income measurement approach that indicates that most items, including irregular ones, are recorded in income.
What is a current operating performance approach?
An income measurement approach that argues that the most useful income measure will reflect only regular and recurring revenue and expense elements; that is, normalized, sustainable earnings.
What makes up OCI (Other Comprehensive Income)? Which account is OCI closed out to?
OCI is made of certain specific gains or losses including unrealized gains and losses on certain securities, certain foreign exchange gains or losses, and other gains and losses as defined by IFRS. Some items are “recycled” meaning that they are recognized first in OCI and then reclassified later to net income. For instance, under IAS 39 gains and losses on investments classified as fair value through other comprehensive income (FV-OCI) are first booked to OCI and then booked to net income later, when the investment is impaired or sold. Some items such as gains on revaluing property, plant, and equipment under the revaluation method, are not recycled but are recognized once in OCI.
OCI is closed out to a balance sheet account that is often referred to as Accumulated Other Comprehensive Income, which acts as a type of retained earnings account. Accumulated other comprehensive income is an equity account on the balance sheet.
What is a business component? What are the components under ASPE? Under IFRS?
A component of an entity being disposed of where the operations, cash flows, and financial elements are clearly distinguishable from the rest of the enterprise.
Considered a Component under ASPE:
An operating segment, a reporting unit, a subsidiary, an asset group and operations without long-lived or other assets.
Considered a Component under IFRS:
A separate major line of business or geographical area of operations. And a business that meets the criteria to be accounted for as held for sale upon acquisition.
In terms of discontinued operations, when does the disposal of an asset constitute a disposal of a component?
The key elements are that the asset or group of assets generates its own net cash flows (is a cash-generating unit) and is operationally distinct (that is, it operates as a separate unit).
What 6 criteria are met for assets to be considered to be held for sale?
- There is an authorized plan to sell
- The asset is available for immediate sale in its current state
- There is an active program to find a buyer
- Sale is probable within one year
- The asset is reasonably priced and actively marketed
- Changes to the plan are unlikley
For accounting purposes, assets may be considered as held for sale when there is a formal plan to dispose of the component. This ensures that only assets or asset groups for which management has a detailed, approved plan for disposal get measured and presented as held for sale.
Note that assets that are held for sale might not (and do not need to) meet the definition of discontinued operations. Where this is the case, these assets, would be measured and presented the same way (similar to discontinued operations) on the balance sheet, but any related gains or losses on remeasurement would be recorded as part of income from continuing operations.
Why is the distinction between revenues, expenses, gains and losses important? ~
The distinction between revenues and gains (and expenses and losses) depends to a great extent on how the enterprise’s ordinary or typical business activities are defined. It is therefore critical to understand an enterprise’s typical business activities. For example, when McDonald’s sells a hamburger, the selling price is recorded as revenue. However, when McDonald’s sells a deep fryer machine, any excess of the selling price over the book value would be recorded as a gain. This difference in treatment results because the hamburger sale is part of the company’s regular operations while the deep fryer sale is not. Only when a manufacturer of deep fryers sells a fryer, therefore, would the sale proceeds be recorded as revenue.
