Income Statement Flashcards
What is accrual accounting versus cash accounting?
Accrual accounting recognizes revenue when it is earned = when risk and ownership is transferred, often with the delivery of goods and services.
When a company sells something on credit, what happens to the revenue and balance sheet?
Revenue is recognized directly and accounts receivable (asset side) increases on balance sheet. It decreases again when the money has been paid.
When a company sells something with payment in advance, when is revenue recognized and which post on the balance sheet is created?
Revenue is recognized over time and a liability post called unearned or deferred revenue is created.
What is revenue recognition?
When revenue is stated on the income statement
What happens when certain revenue is likely to be reversed?
The seller will record a minimal amount of revenue upon sale and recognize a refund liability and a “right to returned goods” on asset side of balance sheet.
What happens when revenues are recognized but the payment by the customer is conditional on some other future performance?
Contract asset is created until performance obligations are met,
When should a company recognize expenses in general?
It should recognize expenses in the period that it consumes the economic benefits associated with the expenditure, or loses some previously recognized benefit.
What are the three expense recognition methods?
Matching principle
Expensing as incurred
Capitalization with subsequent depreciation or amortization
What is the matching principle of expense recognition?
A company recognizes expenses when associated revenues are recognized
What happens with period costs recognition?
Recognized as incurred. Mostly overhead costs like administrative etc.
What is the capitalization of expenditures?
Certain expenditures are capitalized as assets on the balance sheet, and depreciation/amortization appears on income statement, and typically appears as an investing cash outflow on the Statement of Cash Flows.
When do we capitalize and when do we expense?
We capitalize for assets with a useful life of multiple years and we expense for things we used within one year
Depreciation and amortization have no impact on the cash flow statement because they are non-cash expenses
How does the capitalization of interest costs work?
Companies generally must capitalize interest costs associated with acquiring or constructing an asset that requires a long period of time to get ready for its intended use. They are capitalized until the asset is ready for use!
What is the difference between IFRS and US GAAP in handling temporary income made from the borrowed funds?
Under IFRS, you may reduce the interest costs with the income made on the balance sheet.
Under US GAAP, that income goes directly to P&L.
What is the interest coverage ratio and how to calculate it?
EBIT / Interest expense
It measures how easily a company can pay its interest on outstanding debt.
How to calculate the interest coverage ratio for capitalized interest?
Add amortization to EBIT and add capitalized interest to the interest expense.
EBIT + Amortization / Interest expense + Capitalized interest
How do IFRS and US GAAP classify expensed interest on the cash flow statement?
IFRS says operating or financing cash flows
US GAAP says operating cash flows
Accounting standards require companies to capitalize development/R&D costs after a product’s feasibility is established.
Both IFRS and US GAAP specify that the results of discontinued operations should be reported separately.
How do IFRS and US GAAP specify the reporting of unusual/infrequent items?
IFRS - items of income or expense that are relevant to the understanding of financial performance should be disclosed separately.
US GAAP - shown as part of continuing operations but presented separately
How do IFRS and US GAAP specify the reporting of discontinued operations?
Both specify to report discontinued operations separately on the income statement and show the associated assets for sale on balance sheet
How should companies incorporate changes in accounting policy?
Changes in accounting policies are reported through retrospective application unless it is impractical to do so.
What are modified and fully retrospective views of accounting policy?
Fully retrospective shows the statements of previous years with the new policy and modified only adjusts the begin balance of the current year.
