Reading 23- Understanding Income Statements Flashcards
Describe the components of the income statement and alternative presentation formats of that statement.
- Components of an income statement:
- revenues + expenses
- interest expenses
- noncontrolling interest expenses
Categorization of Types:
-Single Income Statement (Groups Revenues + Expenses as one category without breaking anything down)
-Multi-Step Income Statement (broken down into revenues and expenses)
EX: Pro forma income statements, Common-size income statements, etc.
Describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis.
A.) General Principles of Revenue Recognition
+So, when we are talking about Revenue Recognition, we are talking about when to recognize it based on the services we provide.
**2 ITEMS: PERCENTAGE OF COMPLETION/ COMPLETED CONTRACT METHOD
- ) One principle says that it is based on when the work/service is completed, not when CASH IS RECEIVED. (Revenue- service completed IS; BS accounts receivable setup immediately)
- So when we get the money, we will DECREASE AR & INCREASE cash on BS.
B.) General Principles of Accrual Accounting
- Revenue Accrual and Expense Accrual
1. ) Expense Accrual occurs when a service is exchanged or product is exchanged. - Utilities Expense (water, electricity, building expenses)
EX: you are build every 3 months, but you don’t pay for that 3 months till the end of the 3 months. So what happens is you have recognize the expense because you are receiving a service for that first 3 months. (increase in utilities expense account and a change in balance sheet as a liability and an accounts payable increase).
- ) Revenue-Accrual goods or services that we have NOT yet billed the COSTUMER FOR.
- Installment Method & Cost-Recovery Method*
c. ) General Principles of Specific Revenue Recognition Applications
Calculate revenue given information that might influence the choice of revenue recognition method.
LOOK AT PRACTICE QUESTIONS FOR MORE HELP!
Describe key aspects of the converged accounting standards for revenue recognition issued by the International Accounting Standards Board in May 2014.
Accounting Board for Revenue Recognition has issued certain guide lines (IFRS & GAAP):
- Identify the contract with a customer
- Identify the separate or distinct performance obligations in the contract.
- Determine the transaction price
- Allocate the transaction price to costs/revenues
- recognize revenue when the entity satisfies a performance obligation.
Describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis.
Expense Recognition: FIFO, LIFO, Weighted Average Cost, SL Depreciation Expense, DDB Depreciation Expense
Describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting principles.
Non-Recurring Items-
a.) Discontinued Operations- the business must be physically and operationally distinct from the rest of the firm.
b.) Unusual or Infrequent Items- these include accounts that were not recognized in the time period that was incurred. They are written off as bad-debt expenses/ write off expenses.
Distinguish between the operating and non-operating components of the income statement.
Operating Transactions- related to normal business transactions
Non-Operating Transactions- financial expenses and revenue from investments (items related to financing and investing)
Describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures.
Basic Earnings per Share= NI- preferred dividend payouts/ total number of shares outstanding
(Simple capital structures because they have fixed amounts of shares)
Diluted Earnings per Share= (NI- PREFERRED DIVIDENDS + AND CONVERTIBLE BONDS)/ weighted average number of shares
(complex capital structures include dilutive securities including convertible bonds)
Distinguish between dilutive and anti-dilutive securities and describe the implications of each for the earnings per share calculation.
Dilutive Securities- any type of common stock that would DECREASE EPS upon addition to the company
(ex: stock splits)
Anti-Dilutive Securities- any type of common stock that would INCREASE EPS upon addition to the company.
(convertible preferred stocks, convertible debt type stuff)
Convert income statements to common-size income statements.
Common-Size Income Statements= (any line on the income statement divided by revenue)
Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement.
- Gross Profit Margin, Net profit margin
- you will look and compare for multiple statements.
Describe, calculate, and interpret comprehensive income.
Comprehensive Income= Sum [(net income) + (other comprehensive income)]
***Other comprehensive income= forex market + stock profits; any additional incomes
Describe other comprehensive income and identify major types of items included in it.
Other comprehensive Income= forex market, stock profits, etc.
