FSA- Income Statement- Reading 24

Question 1

Revenue Recognition:

under IFRS:

Answer 1

i. Risk & Rewards associated with ownership are transferred from buyer to seller
ii. Amount of revenue can be measured reliably.
iii. Economic benefits associated with the transaction will flow to entity in all probability.
iv. Cost incurred or to be incurred can be reliably measured.

Question 2

Revenue Recognition:

under GAAP

Answer 2

i. There is evidence of arrangement b/w buyer & seller.
ii. The product has been delivered or service has been rendered.
iii. The price is determined or determinable.
iv. The seller is reasonably sure of collecting money.

Question 3

Revenue Recognition:

Long Term Contracts:

Answer 3

• If Outcome can be reasonably measured:
  both IFRS & GAAP
• if Outcome cannot be reasonably measured:

Question 4

• If Outcome can be reasonably measured:

both IFRS & GAAP

Answer 4

i. % of Completion Method: IFRS & GAAP
a) Revenue, Cost & Net Income from the contract are recognised in proportion of the total contract completed.
b) proportion to be recognised is calculated by dividing the total cost incurred for the period by total cost of project.

Question 5

• if Outcome cannot be reasonably measured:

Answer 5

under GAAP:

i) Completed Contract Method is followed:
a) no revenues or costs are recognized on the income statement until project completion.
b) large revenue recognition during project completion period, and none in prior periods.

Under IFRS:

 a) Revenue is recognized on the income statement to the extent of costs incurred during the period. 
 b) No profits are recognized until all costs have been recovered.

Question 6

Loss Recognition

Answer 6

under Both IFRS & GAAP:

Any loss incurred needs to be recognised immediately, regardless of the revenue recognition methods followed

Question 7

Revenue Recognition:

Installment Sales:

Answer 7

Installment Method: when revenue collection cannot be reasonably estimated
Cost Recovery Method: This method is used when collectability of revenues is highly uncertain.

Question 8

Installment Method

Answer 8

Profits are recognised in proportion of total cash received in that period
Profit for the period=(Cash collected in the period/Selling price)×Total profit

Question 9

Cost Recovery Method

Answer 9

Profits are recognized only once total cash collections exceed total costs.

Question 10

Barter Transaction

Answer 10

Under IFRS, revenue from barter transactions must be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties (parties other than the barter partner).

US GAAP state that revenue can be recognized at fair value only if a company has historically received cash payments for such services and can thus use this historical experience as a basis for determining fair value; otherwise, the revenue from the barter transaction is recorded at the carrying amount of the asset surrendered.

Question 11

Gross Vs Net Reporting

Answer 11

Under Gross Reporting
i) sales & cost of sales are shown separately.
Under Net Reporting
i) Difference b/w sales & cost of sales is reported in Income statement.

Question 12

Conditions for Gross Reporting

Answer 12

For a company to recognise revenue based on Gross reporting, it must be :

i) Primary obligor under the contract.
ii) bearing the inventory and credit risk.
iii) able to choose its suppliers.
iv) having reasonable latitude to establish price.

Question 13

Expense Recognition

Answer 13

A company recognizes expenses in the period that it consumes (i.e., uses up) the economic benefits associated with the expenditure, or loses some previously recognized economic benefit.

Question 14

Inventory Costing Methods

Answer 14

i) FIFO
ii) LIFO- Not permitted by IFRS
iii) Specific Identification Method
iv) Weighted Average Cost

• LIFO- Not permitted under IFRS

Question 15

Impact of Costing Methods in scenario of Rising Prices

Answer 15

Method COGS Ending Inventory
FIFO Lowest Highest
LIFO Highest Lowest
Weighted Avg Middle Middle

Question 16

Expense Recognition- Applications

Answer 16

Doubtful Accounts
Warranties
Depreciation & Amortization

Question 17

Doubtful Accounts

Answer 17

under Matching Principal co. is supposed to

i) record an estimate of how much of the revenue will ultimately be uncollectible based on prior history with such a/c’s.
ii) such estimated uncollectible are shown as an expense on the income statement.

Question 18

Warranties

Answer 18

Similar to Doubtful a/c, an estimate future expense resulting from warranty expense based on prior experience is created.

Question 19

Depreciation & Amortisation

Answer 19

Depreciation:
Process of systematically allocating costs of Physical long-lived assets over the period during which the assets are expected to provide economic benefits.
Amortisation:
Term commonly applied to intangible long lived assets.

Question 20

Depreciation Methods

Answer 20

i) Straight Line Method

ii) Accelerated/ Double Declining Method

Question 21

Amortisation Methods

Answer 21

Intangible Assets with finite life use Straight Line method.
e.g- Patents, copyrights etc.
Intangible Assets with infinite life are not depreciated but tested for impairment.

Question 22

Non-Recurring/ Non-Operating Items

Answer 22

Discontinued Operations
Extraordinary Items
Unusual or Infrequent items

• Extraordinary Items not permitted under IFRS

Question 23

Earnings Per Share [EPS]

Answer 23

Basic EPS- Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.

Diluted EPS- The EPS that would result if all dilutive securities were converted into common shares.

Question 24

Basic EPS

Answer 24

(Net Income- Pref Dividend) / Weighted Avg No. of Shares Outstanding

If the number of shares of common stock increases as a result of a stock dividend or a stock split, the EPS calculation reflects the change retroactively to the beginning of the period.

Question 25

Factors effecting Avg No.of outstanding shares

Answer 25

Stock Repurchase
Stock Split
Stock Dividend

Question 26

Stock Repurchase

Answer 26

i) Stock repurchases result in a decrease in the number of shares outstanding.
ii) The reacquired shares are excluded from the computation of weighted average number of shares from the date of repurchase.

Question 27

Stock Split/Dividend

Answer 27

i) Stock repurchases result in a increase in the number of shares outstanding.
ii) If a company declares a stock split or a stock dividend, the weighted average number of shares outstanding should be calculated based on the assumption that the additional (newly granted) shares have been outstanding since the date that the original shares were outstanding.
iii) stock split & dividend are applied to all the o/s shares prior to split/dividend announcement. not applied to issuance/repurchase after the announcement.

Question 28

Diluted EPS

Answer 28

When co. has potentially diluting instruments in its capital structure, then Diluted EPS needs to be calculated. 
Diluting Instruments include:
i)  Convertible Preferred Stocks
ii) Convertible Debt outstanding
iii) ESOP's, Warrants etc.

By definition, Diluted EPS< Basic EPS.

Question 29

Diluted EPS Calculation: Convertible Preferred Stocks

Answer 29

If Co. has convertible preferred stock in capital structure we use “If Converted Method”.
If Converted Method: Specifies what EPS would be if the potentially convertible Preferred shares are converted to common shares at the beginning of the period, its effect on Net Income & Weighted Average No. of Shares.

EPS= Net Income / (Weighted Avg No. of Shares Outstanding + New common shares issued at conversion)

Question 30

Diluted EPS Calculation: Convertible Debt Outstanding

Answer 30

uses If Converted Method

EPS= (Net Income+After tax Interest on Convertible debt- Preferred Dividend)/ (Weighted Avg No. of Shares Outstanding + New common shares issued at conversion)

Question 31

Diluted EPS Calculation: ESOP, Warrants

Answer 31

uses “ Treasury Stock Method”
Specifies what EPS would be if the effect of ESOP, warrants on EPS, if warrants, ESOP had been exercised and the proceeds had been used to repurchase common stock.

Question 32

Treasury Stock Method

Answer 32

EPS= (Net Income- Preferred Dividend) / [Weighted average number of shares outstanding + (New shares that would have been issued at option exercise − Shares that could have been purchased with cash received upon exercise) × (Proportion of the year during which the financial instruments were outstanding)]