Chapter 4 study cards

Question 1

Statement of Financial Performance (SFP)

Answer 1

Measures a company’s operational success over a period of time.
ASPE: Income Statement.
IFRS:
Two separate statements:
Statement of Profit or Loss.
Statement of Comprehensive Income.
Combined statement: Statement of Financial Performance.

Question 2

Business Models & Activities

Answer 2

3 Main Activities:
Financing: Obtaining cash funding.
Investing: Using funding to buy assets and invest in people.
Operating: Using assets to generate profits.
Business Models:
Can vary by industry or company within an industry.
Impact income statement and cost structures.
Representational Faithfulness: Reflects economic reality in financial statements (FS).

Question 3

Communicating Performance Information

Answer 3

Investors & Creditors use income statement information to:
Evaluate past performance.
Predict future performance.
Assess the risk of not achieving future cash inflows.
Key qualities of useful information:
Feedback value.
Predictive value.
Decision-making value

Question 4

Quality of Earnings/Information
Shortcomings of Income Statements:

Answer 4

Items not reliably measured.
Methods and estimates affect income numbers.
Bias in GAAP and presentation.

Question 5

Quality of Earnings:

Answer 5

Content: Integrity, sustainability of earnings.
Presentation: Clear, concise, understandable.

Question 6

Quality of Earnings/Information: Characteristics of High-Quality Earnings:

Answer 6

Unbiased, reflect economic reality.
Correlate with cash flows.
Based on strategy or business model.
Transparent and understandable.

Question 7

Measurement of Income: ASPE

Answer 7

Net Income (ASPE): Includes income from continued and discontinued operations.

Question 8

Measurement of Income: IFRS

Answer 8

Includes net income + other comprehensive income (OCI).
All-inclusive, excludes shareholder transactions.
Operating Income: Revenues from regular operations minus expenses.

Other Comprehensive Income (OCI):

Unrealized gains/losses on certain securities and foreign exchange, among others.
Should be recycled to net income when necessary.
Reported as a part of equity (AOCI).

Question 9

Discontinued Operations:
Definition

Answer 9

A component of an enterprise that has been disposed of or is held for sale.

Question 10

Discontinued Operations: Held for sale

Answer 10

Held for Sale: Part of a plan to dispose of a major line of business or geographical area.
Criteria for “Held for Sale”:

Plan to sell, asset available for immediate sale.
Actively marketed and reasonably priced.
Presentation:

Discontinued operations are shown separately on income/comprehensive income statements and the balance sheet.
Reported NET OF TAX.

Question 11

Presentation of Income/Comprehensive Income
Basic Representation Requirements (ASPE & IFRS):

Answer 11

Revenue, expenses, income tax, results of discontinued operations.
For IFRS, includes OCI and comprehensive income.

Question 12

Presentation of Income/Comprehensive Income: Income Statement Formats

Answer 12

Single-Step: Revenues minus expenses in one step, simple format.
Multi-Step: Separates operating and non-operating items, helps analyze components (e.g., gross profit, operating earnings).
Discontinued Operations: Separate section showing losses/gains from discontinued parts of the business.

Question 13

Other Comprehensive Income (OCI)

Answer 13

Unrealized gains/losses on certain securities, foreign exchange changes, etc.
Recycling of OCI:
OCI items should be recycled to net income when relevant (to reflect economic reality).
Presentation in Income Statements:
Group OCI items based on whether they will be recycled or not.

Question 14

Measuring & Reporting Discontinued Operations:

Answer 14

Must be a separate unit with distinct operations and financial data.
Must represent a major line of business or geographical area.
Reported separately as discontinued on income statements, balance sheets, and cash flows.

Question 15

Measuring & Reporting Discontinued Operations- Assets held for Sale

Answer 15

Remeasured at lower carrying value or fair value minus costs to sell.
Not depreciated.
Presented separately as current on the balance sheet (IFRS).

Question 16

Statement of Retained Earnings:

Answer 16

Aspe
Shows changes in retained earnings over a period (net income, dividends).

Question 17

Statement of Changes in Equity:

Answer 17

Details all changes in equity accounts, including share capital, retained earnings, and OCI.

Question 18

Disclosures and Analysis for Users

Answer 18

Helps users assess performance by providing insights into the financial health of the company.
Key areas of focus: Significant transactions, accounting policies, risks, and uncertainties.
Full Disclosure:

Provides relevant and material information that is necessary for understanding the financial statements.

Question 19

IFRS vs. ASPE Differences (Disclosures)

Answer 19

IFRS: More detailed and includes concepts like OCI and two separate statements for income and comprehensive income.
ASPE: Less detailed, simpler approach.
Key Potential Changes:
Differences in how financial positions and performance are measured and presented between IFRS and ASPE may evolve with global accounting standards.

Question 20

Expenses: Nature vs. Function

Answer 20

Nature of Expenses (IFRS):
Purchases of materials, transportation costs, employee benefits, depreciation.
Function of Expenses (IFRS):
Cost of sales, admin costs (requires judgment to allocate some expenses).
When expenses are presented by function, nature must also be disclosed.
ASPE:
No specific guidance on expense classification by nature or function.

Question 21

Intraperiod Tax Allocation

Answer 21

Allocation of tax balances within a period.
Items on the income statement reported net of tax.
Income Tax Expense (under IFRS):
Separate tax expense calculation for:
Income from Continuing Operations.
Discontinued Operations.
Other Comprehensive Income (OCI).
Relates tax expense directly to the taxed items.
OCI Presentation (IFRS):
Can present OCI either net of tax or before tax, with one tax amount for all OCI items.

Question 22

EPS

Answer 22

Performance measure showing the amount earned per common share.

Basic EPS Calculation:

EPS = Income available to common shareholders ÷ Weighted Average Common Shares (WACS) outstanding.
Income available to common shareholders = Net Income - Preferred Dividends.
Diluted EPS:

Some companies may experience dilution due to contingencies (e.g., future issues of common shares).
EPS Presentation:

Public companies: Required to disclose basic EPS.
EPS reported for both income before discontinued operations and per-share amounts for discontinued operations.
Both basic and diluted EPS are presented in the income statement.
ASPE:

EPS is not relevant for private companies and is therefore not included.

Question 23

Statement of Retained Earnings (ASPE)

Answer 23

Shows accumulated income (or deficit) and dividends paid out.

Other Variables Affecting Retained Earnings:

Retrospective application of accounting policies.
Retrospective corrections of errors.
Changes in accounting estimates (accounted for prospectively in the income statement, not retained earnings).
Presentation:

Can be prepared separately or combined with the statement of income.

Question 24

Statement of Changes in Equity (IFRS)

Answer 24

Displays changes in each component of equity and total shareholder equity.

Items Included:

Total comprehensive income.
Reconciliation of equity components (profit/loss, OCI, owner transactions).
Analysis of OCI by item: Must be included either in the statement or the notes.
Presentation:

Shows comprehensive income and changes to equity over a period.
Requires detailed breakdown of changes, including retrospective applications and adjustments.

Question 25

Disclosures (IFRS)

Answer 25

Purpose: Provides additional background and explanatory information to supplement financial statements.

Key Disclosures:

Accounting policies.
Sources of estimation uncertainty.
Information about capital and its management.
Details on dividends, legal form, country of incorporation, parent company, and business description.
Full Disclosure Principle: All material and relevant information must be disclosed.

Question 26

Other Key Financial Measures

Answer 26

Price-Earnings (P/E) Ratio:
Formula: Market price per share ÷ EPS.
Also known as the earnings multiple.
Used to compare earnings multiples between companies and industries.
Importance: Highlights the relevance of EPS in valuing companies.

Question 27

IFRS vs. ASPE Comparison
Income Statement Presentation:

Answer 27

IFRS: Requires a list of items to be presented.
ASPE: Different requirements with less detail

Question 28

IFRS vs. ASPE Comparison
Expense Classification:

Answer 28

IFRS: Can present expenses by nature or function (with disclosures required if function is used).
ASPE: No specific guidance, just required disclosures.

Question 29

Comparison: Aspe/ifrs
Discontinued Operations:

Answer 29

IFRS: Held-for-sale assets and liabilities are reclassified as current.
ASPE: Held-for-sale assets may be classified as current or non-current

Question 30

Comparison Aspe vs Ifrs: OCI

Answer 30

IFRS: Requires classification as part of comprehensive income and a separate statement of OCI.
ASPE: Does not recognize OCI.

Question 31

Comparison IFRS vs. ASPE: EPS

Answer 31

IFRS: Requires both basic and diluted EPS and disclosure of EPS for both continuing and discontinued operations.
ASPE: EPS is not relevant for private companies.

Question 32

Comparison ASPE VS. IFRS- Changes in Equity

Answer 32

IFRS: Requires a Statement of Changes in Equity.
ASPE: Uses a Statement of Retained Earnings instead.

Question 33

Comparison IFRS vs. ASPE
Accounting Changes:

Answer 33

IFRS: New policies must be reliable and more relevant.
ASPE: Does not have to meet the same relevance and reliability standards.