Financial Reporting & Analysis - Income Statement

Question 1

Definition: revenue

Answer 1

Amounts charged and expected to be received for goods & delivery of goods in the normal course of business.

Question 2

Definition: expenses

Answer 2

Outflows, depletion of assets and incurrence of liabilities.

Question 3

Definition: minority interest / non-controlling interest

Answer 3

Shows the portion of income that comes from subsidiaries that the company has a minority interest in (<50%).

Question 4

Gains/losses included in net income?

Answer 4

Yes, gains and losses are included in net income.

Question 5

Formula: net income

Answer 5

1. Income - expenses, or further
2. Revenue + other income + gains - expenses, or further
3. Revenue + other income + gains - business expenses - other expenses - losses, or further
4. Revenue - business expenses + other income - other expenses + gains - losses

Question 6

Definition: grouping by nature

Answer 6

Refers to primary activities the company is engaged in, such as selling a product or providing a service

Question 7

Definition: grouping by function

Answer 7

Nature refers to the inputs to accomplish those functional activities such as costs related to people (labor and benefits) materials (depreciation), etc.

Question 8

Formula: gross profits

Answer 8

Revenue - cost of goods sold

Question 9

Formula: operating income

Answer 9

Gross profit - operating expenses (before taxes)

Question 10

Revenue recognition, general principles (5)

Answer 10

Revenue should be recognized when:

1. Entity has transferred risk/reward of owning good to buyer.
2. Entity does not control or manage the good.
3. The amount of revenue can be measured reliably.
4. It is probable that economic benefits of transaction will flow to entity.
5. Cost of transaction can be measured reliably.

Question 11

Revenue recognition: long-term contracts

Answer 11

1. If outcome can be reliably measured, the percentage of completion method is used.
2. Need example

Question 12

Revenue recognition: completed contract

Answer 12

1. Results cannot be measured reliably. Do not report income until project is substantially finished.
2. Costs = revenue until costs have been recouped. Therefore net income = $0.

Question 13

Installment sales: IFRS standard

Answer 13

Report revenue on the sale price at the point of sale & revenue from interest over time.

Question 14

Installment sales exceptions (2), GAAP

Answer 14

1. Installment method: % recognized each period = % profit / sale price.
2. Cost recovery method: seller does not report profit until they have received enough $ from interest/payments to cover costs.

Question 15

Revenue recognition: Barter (IFRS)

Answer 15

Fair value of revenue from similar non-barter transactions

Question 16

Revenue recognition: Barter (GAAP)

Answer 16

1. Fair value if company has historically received cash fro same services.
2. If not, recognized at carrying costs.

Question 17

Revenue: gross vs. net (i.e. commission)

Answer 17

Gross if:

1. Company is primary obligor under contract,
2. Bears inventory and credit risk,
3. Can choose supplier,
4. Has reasonable latitude to establish price.

Question 18

Expense recognition: general principle

Answer 18

Generally recognize expenses in the period that economic benefit is consumed

Question 19

Expense recognition: matching principle

Answer 19

Match expenses with revenues i.e. cost of goods sold, in same period as revenue.

Question 20

Expense recognition: period costs

Answer 20

Expenditures that less directly match revenues are incurred in period when company incurs liability to pay.

Question 21

GAAP: account methods allowed

Answer 21

1. FIFO,
2. LIFO, and
3. Weighted average cost

Question 22

IFRS: accounting methods allowed

Answer 22

1. FIFO, and

2. Weighted average cost

Question 23

Doubtful accounts

Answer 23

1. Recorded as an expense.

2. When revenues are recognized company’s are required to estimate a % that will not be paid by buyers on credit.

Question 24

Warranties

Answer 24

Estimate expected warranty expenses at the time of sale & update over the life of the warranty

Question 25

Depreciation

Answer 25

• Incur costs of physical long lived assets over useful life

- Land and intangible assets w/ unlimited lives are not depreciated

Question 26

Amortization

Answer 26

Same as depreciation, but for long-lived intangible assets w/ a useful finite life.

Question 27

Depreciation: cost model

Answer 27

1. Cost - residual value is depreciated over the remaining life of the asset.
2. Asset is reported at cost less accumulated deprecation

Question 28

Depreciation: straight line method

Answer 28

Allocates evenly the cost less residual value over the life of the asset

Question 29

Accelerated depreciation steps

Answer 29

1. Figure out straight line yearly %
2. Apply some factor to first half (usually), call it 2x the %
3. Return to straight line to second half

Question 30

Expense: discontinued operations

Answer 30

Reported separately under both IFRS and GAAP

Question 31

Expense: extraordinary items

Answer 31

1. GAAP allows, IFRS does not

2. GAAP: unusual in nature and infrequent, reported net of tax

Question 32

Expense: unusual or infrequent

Answer 32

IFRS requires these expenses to be reported separately

Question 33

Changes in accounting policies

Answer 33

1. Reported retrospectively unless impractical to do so

2. Changes to estimates and forecasts are shown prospectively

Question 34

Capital structure: simple

Answer 34

No instruments that are convertible to common stocks

Question 35

Capital structure: complex

Answer 35

Company has issued instruments that are convertible into common stock, including convertible bonds, convertible preferred stock, employee stock options and warrants.

Question 36

Formula: EPS - basic

Answer 36

= (net income - preferred dividends) / weighted average # of shares outstanding

Question 37

Formula: diluted EPS (convertible preferred)

Answer 37

= (net income) / (wtd. avg. # of shares + new common shares from conversion)

Question 38

Formula: diluted EPS (convertible debt)

Answer 38

= (net income + after tax income on convertible debt - preferred dividends) / (wtd. avg. # of shares + addtl shares)

Question 39

Formula: diluted EPS (options/warrants)

Answer 39

= (net income - preferred dividends) / (wtd. avg. # of shares + (new shares issued at exercise price - shares repurchased w/ cash)*portion of year instrument outstanding)

Question 40

Antilutive Insruments

Answer 40

If issuance of convertible instruments causes the diluted EPS to be higher than basic EPS, you would use the basic EPS as the dilluted EPS (more conservative)

Question 41

Common Size Analysis - Income Statement

Answer 41

1. Each line-item as a % of revenue, and

2. Taxes as a % of pre-tax income

Question 42

Ratio: Net profit margin

Answer 42

= net income / revenue

Question 43

Ratio: Gross profit margin

Answer 43

= gross profit / revenue

Question 44

Ratio: Operating profit margin

Answer 44

= operating income / revenue

Question 45

Ratio: Pre-tax margin

Answer 45

= earnings before taxes / revenue

Question 46

Comprehensive Income

Answer 46

1. Net income = revenue - expenses
2. Certain revenue and expenses aren’t included and show up in “other comprehensive income”
3. These show up in owner’s equity, not net income

Question 47

Comprehensive Income examples (4)

Answer 47

1. Foreign currency translation when consolidating foreign subsidiaries
2. Unrealized g/l on derivatives accounted for as hedges
3. Unrealized holdings g/l on available for sale securities
4. Certain costs of DB post-retirement plans not recognized in current period

Question 48

Definition: available for sale securities

Answer 48

Security intended to be sold before reaching maturity. Gain/loss recorded in other comprehensive income, NOT net income.