Module 21.5: Common-Size Income Statements

Question 1

All common size income statements are shown as a % of what?

Answer 1

revenue.

Question 2

What is one income statement line item that is not helpful as a % of revenue? Why?

Answer 2

the tax expense should be compared as a % of pre tax income. the result is the effective tax rate.

Question 3

What are retained earnings?

Answer 3

at the end of the period, net income of the firm is added to stockholders equity through an account called retained earnings.

Question 4

What are the four transactions that are not covered in net income but on OCI?

Answer 4

1) Foreign currency translation gains and losses
2) adjustments for minimum pension liability
3) unrealized gains and losses from cash flow hedging derivatives
4) unrealized gains and losses from available for sale securities

Question 5

According to US GAAP, unrealized gains and losses on trading securities are recognized where? What are trading securities?

Answer 5

securities that a firm holds, but intends to sell are called trading securities. Changes in unrealized gain and loss can be found on the income statement.

Question 6

According to US GAAP, unrealized gains and losses on held to maturity securities are recognized where? What are held to maturity securities?

Answer 6

securities that a firm holds, but does not intend to sell. these are held at amoritized cost, so unrealized gain is not on OCI or income statement.

Question 7

According to US GAAP, unrealized gains and losses on available for sale securities are recognized where? What are available for sale securities?

Answer 7

securities that are not expected to be held to maturity or sold in the near term are classified as available for sale.

changes in unrealized show up on OCI.