(R21) Understanding Income Statements Flashcards
Expenses grouped by nature vs. function (What goes in each category?)
Nature: depreciation
Function: COGS and SG&A
Multi-step vs. Single-step IS
A multi-step income statement provides a subtotal for gross profit and a single step income statement does not.
Product vs. period costs
Product costs: directly related to revenue (COGS)
Period costs: related to operations (administration, depreciation)
Two methods of depreciation/amortization under IFRS
- Cost model - each component depreciated separately (straight line and accelerated methods)
- Revaluation model (not allowed under GAAP)
How are intangible assets with limited/indefinite lives expensed?
Intangible assets with limited lives should be amortized using a method that reflects the flow over time of their economic benefits. Intangible assets with indefinite lives (e.g., goodwill) are not amortized.
Describe treatment of discontinued operations and where they are included on IS?
Results of discontinued operations are reported below income from continuing operations, net of tax, from the date the decision to dispose of the operations is made. These results are segregated because they likely are non-recurring and do not affect future net income. (Shown as separate line item)
Describe treatment of unusual/infrequent items and where they are included on IS?
Show as part of continuing operations but presented on a separate line item; If material and/or relevant to understanding, should be disclosed separately
Distinguish between the operating and non-operating components of the income statement.
Operating income is generated from the firm’s normal business operations. Non-operating income (gains/losses) is typically earned through investing or financing activities
Basic EPS formula
Net income - preferred dividends / Weight average # of shares outstanding
Basic EPS and dilutive EPS does not factor in what?
Discontinued operations (continuing operations only)
Dilutive EPS formula with convertible preferred shares
Net income / (Weighted average # of shares outstanding plus new shares from conversion)
Dilutive EPS formula with convertible debt
(Net income + after tax interest - preferred dividends) / (Weighted average # of shares outstanding plus new shares from conversion)
Dilutive vs. Anti-dilutive securities
Dilutive security: one that, if converted to its common stock equivalent, would decrease EPS
Anti-dilutive: Conversion would result in an EPS higher than basic EPS
Common size income statements
Each line item of the IS is expressed as a percentage of revenue. Eliminates size effect
Total comprehensive income =
Net income + OCI
