Financial Reporting & Analysis - Income Statement Flashcards
Definition: revenue
Amounts charged and expected to be received for goods & delivery of goods in the normal course of business.
Definition: expenses
Outflows, depletion of assets and incurrence of liabilities.
Definition: minority interest / non-controlling interest
Shows the portion of income that comes from subsidiaries that the company has a minority interest in (<50%).
Gains/losses included in net income?
Yes, gains and losses are included in net income.
Formula: net income
- Income - expenses, or further
- Revenue + other income + gains - expenses, or further
- Revenue + other income + gains - business expenses - other expenses - losses, or further
- Revenue - business expenses + other income - other expenses + gains - losses
Definition: grouping by nature
Refers to primary activities the company is engaged in, such as selling a product or providing a service
Definition: grouping by function
Nature refers to the inputs to accomplish those functional activities such as costs related to people (labor and benefits) materials (depreciation), etc.
Formula: gross profits
Revenue - cost of goods sold
Formula: operating income
Gross profit - operating expenses (before taxes)
Revenue recognition, general principles (5)
Revenue should be recognized when:
- Entity has transferred risk/reward of owning good to buyer.
- Entity does not control or manage the good.
- The amount of revenue can be measured reliably.
- It is probable that economic benefits of transaction will flow to entity.
- Cost of transaction can be measured reliably.
Revenue recognition: long-term contracts
- If outcome can be reliably measured, the percentage of completion method is used.
- Need example
Revenue recognition: completed contract
- Results cannot be measured reliably. Do not report income until project is substantially finished.
- Costs = revenue until costs have been recouped. Therefore net income = $0.
Installment sales: IFRS standard
Report revenue on the sale price at the point of sale & revenue from interest over time.
Installment sales exceptions (2), GAAP
- Installment method: % recognized each period = % profit / sale price.
- Cost recovery method: seller does not report profit until they have received enough $ from interest/payments to cover costs.
Revenue recognition: Barter (IFRS)
Fair value of revenue from similar non-barter transactions
Revenue recognition: Barter (GAAP)
- Fair value if company has historically received cash fro same services.
- If not, recognized at carrying costs.
Revenue: gross vs. net (i.e. commission)
Gross if:
- Company is primary obligor under contract,
- Bears inventory and credit risk,
- Can choose supplier,
- Has reasonable latitude to establish price.
Expense recognition: general principle
Generally recognize expenses in the period that economic benefit is consumed
Expense recognition: matching principle
Match expenses with revenues i.e. cost of goods sold, in same period as revenue.
Expense recognition: period costs
Expenditures that less directly match revenues are incurred in period when company incurs liability to pay.
GAAP: account methods allowed
- FIFO,
- LIFO, and
- Weighted average cost
IFRS: accounting methods allowed
- FIFO, and
2. Weighted average cost
Doubtful accounts
- 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.
Warranties
Estimate expected warranty expenses at the time of sale & update over the life of the warranty
Depreciation
- Incur costs of physical long lived assets over useful life
- Land and intangible assets w/ unlimited lives are not depreciated
Amortization
Same as depreciation, but for long-lived intangible assets w/ a useful finite life.
Depreciation: cost model
- Cost - residual value is depreciated over the remaining life of the asset.
- Asset is reported at cost less accumulated deprecation
Depreciation: straight line method
Allocates evenly the cost less residual value over the life of the asset
Accelerated depreciation steps
- Figure out straight line yearly %
- Apply some factor to first half (usually), call it 2x the %
- Return to straight line to second half
Expense: discontinued operations
Reported separately under both IFRS and GAAP
Expense: extraordinary items
- GAAP allows, IFRS does not
2. GAAP: unusual in nature and infrequent, reported net of tax
Expense: unusual or infrequent
IFRS requires these expenses to be reported separately
Changes in accounting policies
- Reported retrospectively unless impractical to do so
2. Changes to estimates and forecasts are shown prospectively
Capital structure: simple
No instruments that are convertible to common stocks
Capital structure: complex
Company has issued instruments that are convertible into common stock, including convertible bonds, convertible preferred stock, employee stock options and warrants.
Formula: EPS - basic
= (net income - preferred dividends) / weighted average # of shares outstanding
Formula: diluted EPS (convertible preferred)
= (net income) / (wtd. avg. # of shares + new common shares from conversion)
Formula: diluted EPS (convertible debt)
= (net income + after tax income on convertible debt - preferred dividends) / (wtd. avg. # of shares + addtl shares)
Formula: diluted EPS (options/warrants)
= (net income - preferred dividends) / (wtd. avg. # of shares + (new shares issued at exercise price - shares repurchased w/ cash)*portion of year instrument outstanding)
Antilutive Insruments
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)
Common Size Analysis - Income Statement
- Each line-item as a % of revenue, and
2. Taxes as a % of pre-tax income
Ratio: Net profit margin
= net income / revenue
Ratio: Gross profit margin
= gross profit / revenue
Ratio: Operating profit margin
= operating income / revenue
Ratio: Pre-tax margin
= earnings before taxes / revenue
Comprehensive Income
- Net income = revenue - expenses
- Certain revenue and expenses aren’t included and show up in “other comprehensive income”
- These show up in owner’s equity, not net income
Comprehensive Income examples (4)
- Foreign currency translation when consolidating foreign subsidiaries
- Unrealized g/l on derivatives accounted for as hedges
- Unrealized holdings g/l on available for sale securities
- Certain costs of DB post-retirement plans not recognized in current period
Definition: available for sale securities
Security intended to be sold before reaching maturity. Gain/loss recorded in other comprehensive income, NOT net income.
