F1 - M2 - Income Statement and Balance Sheet Flashcards
Income Statement
Statement of Earnings
- Determining Profitability
- Value for Investment Purposes
- Creditworthiness
- Predicts info about Future Cash Flows (Trend Analysis)
Cost
Amount actually paid for something such as capital assets, services, merchandise, etc.
Costs vs. Unexpired Costs
Costs - Period Costs, expensed immediately
Unexpired Costs - Capitalized (Asset), expire in future periods and charged against revenue from future periods
Match the Unexpired Costs with Expired Costs:
Inventory
Prepaid Insurance
NBV of Fixed Assets
Patents (Intangible)
- Inventory (Asset) = COGS (Expense)
- Prepaid Insurance (Asset) = Insurance Expense
- NBV of Fixed Assets = Depreciation Expense
- Patents (Intangible) = Patents Expense Amortized
What does Gross Concept mean?
Revenues and Expenses are reported as gross as separate line items on the income statement. These are normal operating costs.
*Revenues are reported at gross less allowance for returns and discounts given
Ex: Sales, COGS, SG&A
What does Net Concept mean?
Gains and Losses are reported at net amount. These are non-operating costs since they are not related to every day normal business.
Proceeds are greater than or less than NBV.
Ex: Sale of non-inventory items, write downs, write offs, etc.
Unusual or Infrequent Transactions
Items of income or loss that are unusual or infrequent (or both) should be reported separately as part of income from continuing operations
Nature of the item and financial statement effects should be disclosed on face of the income statement or in the footnotes.
Multi-Step Income Statement
Reports operating revenues and expenses separately from non-operating revenues and expenses. and other gains and losses.
Sum of Operating R/E and Non-Operating G/L
Benefit - Enhanced user information that provides readily available data to calculate analytical ratios
Single-Step Income Statement
Subtracts total expenses (including tax expense) from total revenues. Does not break out operating from non-operating.
Benefit - Simple design. Classification of revenues and expenses do not appear as more important than others.
Balance Sheet
Statement of Financial Position
Helps to assess Financial Risk (“Capital Structure”)
Classified Balance Sheet
Separates current and non-current assets and liabilities.
Allowed by US GAAP but not required.
What is the benefit of a classified balance sheet?
Easier to calculate current ratio - bigger the spread, the higher the current ratio, the higher working capital, less financial risk
Current Assets - Current Liabilities = Working Capital
Current Ratio - Current Assets/Current Liabilities
List of Current Assets
Cash and Cash Equivalents Trading Securities, at Fair Value Accounts Receivable, net of allowance Notes Receivable Inventory Prepaid Expenses
List of Non-Current Assets
Investments
Property, Plant, Equipment
Intangible Assets
Other (Pension, Deferred Income Tax Asset, etc.)
List of Current Liabilities
Current portion of Long Term Debt Accounts Payable Notes Payable Interest Payable Salaries Payable Unearned Revenue
List of Long Term Liabilities
Bonds Payable
Deferred Income Tax Liability
Pension/Post Retirement Benefit Liabilities
Less Long Term Liability, less risk
Stockholders Equity
Residual Interest - What is leftover after Assets and Liabilities
Contributed Capital:
- Preferred Stock
- Common Stock
- Paid in Capital
Internally Generated:
- Retained Earnings
- Accumulated Other Comprehensive Income
Contra Equity - When you buy back your own stock
What are the elements of the Income Statement?
REGL
Revenues
Expenses
Gains
Losses
How are purchase discounts presented in a single step income statement?
They are included as a part of COGS; therefore, they are not presented in revenue.
Treatment for abandonment
Abandonment is treated like a sale - included in income from continuing operations
What is the minimum operating cycle for reporting a prepaid current asset?
12 months (one year)
Is cash an asset or liability?
Asset.. UNLESS there is an overdraft. In that case, it would be a liability.
How are potentially refundable payments categorized?
Current or Non-Current Assets. (NOT Liability)
Tax Effect on Income (Loss) from Operations
Gross (before tax expense)
Tax Effect on Income (Loss) from Continuing Operations
Net of tax
When to use Income (Loss) from Continuing Operations on the Income Statement?
Only when discontinued operations are being reported. Otherwise, use Net Income.
