Income Statement Flashcards
use of income statement
understand performance for period of time
determine profitability, value for investment purposes, and credit worthiness
unexpired costs
costs that be charged against revenues from future periods inventory (to COGS) prepaid expenses (to insurance/rent expense) fixed assets (to depreciation expense)
gross concept
revenues and expenses
net concept
gains and losses
presentation order of I/S and statement of RE
“IDEA”
income from continuing operations (before tax, then after tax) income from discontinued operations (after tax) extraordinary items (after tax) accounting principle changes > statement of RE (after tax)
multi-step I/S
reports operating activities separately from non-operating activities
gross profit/margin
net sales - cost of sales
income (loss) from operations
requires separate disclosure
gross profit/margin - SG&A and depreciation (separate disclosure)
operating activities
net sales, cost of sales, SG&A, depreciation
other revenues and gains
non-operating activities
- interest income
- gain on sale of fixed assets
- other income
other expenses and losses
non-operating activities
- interest expense (separate disclosure)
- loss on sale of fixed assets
income before unusual items and income tax
income (loss) from operations + other revenues/gains - other expenses/losses
unusual or infrequent items
loss on sale of available-for-sale securities
income from continuing operations
“net income” (if no extraordinary items or discontinued operations)
includes operating and non-operating activities
inventory cost
purchase price + freight-in
selling expenses
freight-out, salaries and commissions, advertising
general & administrative expenses
officers salaries, accounting and legal, insurance
non-operating expenses
auxiliary activities, interest expense
single-step I/S
total revenues - total expenses (including income tax expense)
no need for additional classification
discontinued operations
reported net of tax, 3 calculations:
- impairment loss
- gain/loss from actual operations
- gain/loss on disposal
calculated in the period they occur
component of entity
(lowest level) or which operation and cash flows can be clearly distinguished
i.e. operating/reportable segment, reporting unit, subsidiary, asset group
component of an entity
GAAP vs IFRS
GAAP - part of an entity that is clearly distinguishable (operations and for financial reporting)
IFRS - separate major line of business or geographical area of opearations, or subsidiary acquired for resale
business
conducted and managed for purpose of providing a return to investors, owners, etc. (profit)
non-profit
conducted and managed for purpose of providing benefits OTHER THAN goods or services at a profit
held for sale criteria
there’s a PLAN to sell component
available for IMMEDIATE sale
active program to LOCATE buyer
sale is PROBABLE, expected to be sold within 1 year
actively MARKETED
unlikely to have significant changes to plan will be made or withdrawn
held for sale
GAAP vs IFRS
GAAP - component of business (see criteria)
- does not require re-measurement of INDIVIDUAL assets/liabilities before classified as held for sale but entire component is subject to impairment analysis
IFRS (disposal group)
- INDIVIDUAL assets/liabilities must be measured in accordance with applicable standards and any gains/losses must be recognized
- reported at lower of carrying value or fair value less costs to sell
discontinued operations criteria
- has been disposed of
- classified as held for sale
"GEL" disposal represents strategic shift and/or MAJOR effect on entity's operation - geographic - equity method investment - line of business
discontinued operations calculation
loss from operations
gain/loss on sale
impairment loss (and subsequent increases in FV)
(remember after tax calculation)
subsequent increases in FV
recognize gain less costs to sell
limited to amount of previously recognized loss
impairment loss
recognized if FV/NRV < BV
recognized on year classified as held for sale
depreciation and amortization for held or sale component
not recognized since tested for impairment as a whole
measurement and valuation (held for sale component)
measured at lower of CV or FV less costs to sell
net realizable value
FV less costs to sell
exit or disposal activities
“downsizing or closing a hub”
NOT a discontinued operation
recognize liability of PV of future payments for costs associated with exit or disposal activity
exit and disposal costs
involuntary employee termination benefits
costs to terminate contract (NOT a capital lease)
other costs, including costs to consolidate facilities or relocate employees
liability measurement (exit/disposal activity)
measure at FV, may be adjusted for changes in estimate
changes accounted for prospectively
liability recognition criteria (exit/disposal activity)
exit or disposal plan
ALL MUST BE MET:
obligating event has occurred (profits < budget)
event results in a present obligation (transfer assets/provide service)
entity has little or no discretion to avoid future obligation
future operating losses expected to be incurred as part of exit/disposal activity are recognized in period incurred
I/S presentation of exit/disposal activities
reported in discontinued operations OR income from continuing operations depending on costs associated with exit/disposal activity
disclosed in the notes
disclosure for exit/disposal activity
disclosed in notes
- description of activity
- major costs associated with activity (expected and actual)
- line items in I/S where costs are aggregated
- liability not recognized because FV cannot be estimated (and reason why)
extraordinary items
“after tax”
material
unusual AND infrequent
(natural disasters, expropriation (theft by government), prohibition, certain gains/losses from early retirement of LT debt specifying unusual and infrequent)
examples of non-extraordinary items
gain/loss from sale/abandoned PPE used in business
write-downs or write-offs (AR, inventory, intangibles, LT securities)
gain/loss from foreign currency transactions/translations
losses from major employee strikes
early retirement of LT debt (not unusual and infrequent)
material unusual OR infrequent items
reported in income from continuing operations (non-operating section) before tax
extraordinary items
GAAP vs IFRS
IFRS has no such thing as extraordinary items in statement of comprehensive income, I/S, or notes to F/S
accounting changes and error corrections
recognized on statement of RE, net of tax
change in accounting estimate
not an error, PROSPECTIVE (do not restate prior periods)
affects current and future income from continuing operations
disclosed if it affects several future periods, income before extraordinary, net income and EPS
change in ordinary acctg estimate do not have to be disclosed unless they are material
change in accounting principle
general rule, RETROSPECTIVE
record changes to statement of RE in beg RE of earliest period presented
change must be like to like (GAAP to GAAP, IFRS to IFRS)
changes allowed if it’s justified (GAAP/IFRS requirement, etc.)
not allowed for transactions/event that has been terminated/non-recurring
change in useful life
change in estimate
change in accounting entity
RETROSPECTIVE (restate to earliest period presented if comparative F/S)
full disclosure of cause and nature of change (including income before extraordinary items, net income and RE)
adjustments of year-end accrual of officers salaries and/or bonuses
change in estimate
write downs of obsolete inventory
change in estimate
change of accounting principle inseparable from change in estimate (depreciation method)
change in estimate
change of accounting principle inseparable from change in estimate
change in estimate
settlement of litigation
change in estimate
direct effects
adjustments necessary to restate F/S of prior periods
adjust beginning RE
indirect effects
differences in items based on earnings that would have occurred if new principle had been used in prior periods
cumulative effect
non-comparative F/S presented
difference b/w amount of beginning RE
VS. amount of what RE would have been if change applied to prior periods
adjust RE by the difference
cumulative effect
comparative F/S presented
difference b/w beginning RE in first period presented
VS. what RE would have been if principle was applied to all prior periods
adjust RE by the difference
change to LIFO
PROSPECTIVE
change in accounting principle inseparable from estimate
change in accounting entity
GAAP vs IFRS
IFRS does not have concept of change in accounting entity
change in depreciation method
change in aPROSPECTIVE
change in accounting principle inseparable from estimateccounting principle, PROSPECTIVE
change in accounting principle
non-GAAP/IFRS to GAAP/IFRS
considered an error (restate)
error corrections
comparative F/S, if year presented
correct error in those prior F/S
error corrections
prior period adjustment/RESTATE
error corrections
non-comparative F/S
adjust beg RE (after tax)
error corrections
comparative F/S, year is NOT presented
adjust (after tax) beg RE of earliest year presented
error corrections
GAAP vs IFRS
IFRS - if impractical to determine period-specific or cumulative effect of an error, restate information prospectively from earliest date that’s practical
GAAP - no impracticality exemption for error corrections
change in AR collection method
PROSPECTIVE
change in accounting principle inseparable from estimate
