Study Unit 3: Income Statement Flashcards
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cashOnly used when cash collection is uncertain
What is deferred gross profit?
Gross Profit that can’t be recognized until cash is receivedD.GP : Gross Profit % x Accounts Receivable Pay attention to the year if GP% varies
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the assetMost conservative method of revenue recognition when collection of sale price is uncertain
Describe fair value with respect to an asset
The price you would receive if you sold the assetAssumes asset is at its highest and best valueAssumes asset is sold at its most advantageous market to get the best price possible
What market assumptions are made in a fair value assessment?
Buyer and Seller are not RelatedBuyer and Seller are KnowledgeableBuyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10MBuyer and Seller are both motivated to buy/sell
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market pricesFor example NYSE or NASDAQ
What items are included in a Level 2 valuation input?
Interest ratesPrime rate
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecastsLowest priority for valuation
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the assetIncome approach - uses present value discounts earningsCost approach - uses replacement cost to value the asset
What is a deferred revenue?
A type of current liability Payments that have been received but cannot be recorded as revenue yetExample: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
When are revenues recognized?
When they have been earned; i.e. company has performed
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the businessCan be operating or non-operating
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the businessCan be operating or non-operating
How is an event that is unusual and/or infrequent reported on the Income Statement?
As part of the calcuation for continuing operations and before discontinued items.
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
How are changes in accounting principle applied?
Retrospective Application:Prior Periods adjustedRetained Earnings adjustedCompleted Contract to % CompletionEx: LIFO to FIFO
Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?How would it be applied?
A change of principle.Applied retrospectively.
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?
A change in accounting principle.Applied retrospectively.
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).No backwards adjustment is made.
Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?How would this change be applied?
Change in depreciation method would be a change in accounting estimate. It is applied prospectively.
How is a correction of an accounting error made?
Restating the Prior-Period Statements (Retrospective). The beginning balances of (1) assets, (2) liabilities, (3) Retained Earnings are adjusted in the earliest period presented in the comparative statements.The correction of the error must be included in the footnotes.
What are the requirements for a prior period adjustment?
Effect is MaterialIs identifiable in Prior PeriodCouldn’t be estimated in Prior Periods
How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error.Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statementsCorrection of the error must be included in the footnotes
How does an inventory error effect the financial statements?
Effect on Ending Inventory : Effect on Net IncomeIf one is overstated- both overstated. If one is understated- both understated.Misstating inventory corrects itself after TWO periods.
How is a change in entity recorded?
Applied retrospectively.All prior periods presented for comparative purposes must reflect the changeFootnote disclosures must be madeChanging to Consolidated Statements
Error analysis addresses…
1) Whether an error affects prior-periods2) The timing of error detection 3) Whether comparative statements are presented, and 4) Whether the error is counterbalancing
What is the purpose of Fair Value Option?
The FVO allows entities to measure most recognized financial assets and liabilities at Fair Value. - Unrealized gains and losses are reported in EARNINGS(Income statement) at each subsequent reporting date.
How are financial instruments elected for FV?
The decision whether to elect the FVO is made IRREVOCABLY at an election date (unless a new election date occurs).With certain exceptions, the decision is made Instrument by Instrument and only for an Entire Instrument.
How is FVO applied to multiple instruments in a single transaction?
The FVO generally need NOT be applied to ALL instruments in a single transaction.-But an instrument that constitutes one legal contract is indivisible for FVO purposes.
The election for the FVO may be made only on the date of?
1) Initial recognition of an eligible item2) Making an eligible firm commitment3) A change in accounting for an investment in another entity b/c it becomes subject to the equity method4) Deconsolidation of a subsidiary or a variable interest entity (w/ retentino of an interest)5) An event requiring measurement of an eligible item at F.V on that date but NOT subsequently (exclude LCM impairment)
What are some examples of events that require either Remeasurement at FV or initial recognition (or both) of eligible items
1) Business Combination2) Consolidation or deconsolidation, or3) Significant modification of debt
How are items with Fair Values reported on the Balance sheet?
Assets and Liabilities measured using FVO are reported by separating their reported FV from the carrying amounts of similar items
How are items with Fair Values reported on the Income Statement?
Unrealized gains and losses on items measured using the FVO are recognized in EARNINGS at each subsequent reporting date.- Upfront costs and fees related to those items are recognized as incurred
How are items with Fair Values reported on the Cash Flow Statement?
Classified according to their nature and purpose.
Define Earnings Per Share
EPS is the amount of current-period earnings that can be associated w/ a single share of common stock
In relation to BEPS, how is Preferred Stock Treated.
Preferred stock holders have superior claim and the amounts related to P/S must be removed from the calculation of BEPS.
What is used to determine the value of the BEPS numerator?
Income Statement Amount minusDividends on P/S (cumulative or declared non cumulative)
How are Stock Dividend and Stock Splits accounted for in the calculation for the BEPS Denominator?
Adjusted retroactively to reflect change as if it occurred at the BEGINNING of the FIRST period presented. Even if occur after the end of the current reporting period but before issuance of the statements.
Dilution reduces BEPS due to the following assumptions…
1) Convertible securities2) Options, Warrants exercised3) Contingently C/S were issued
Potential Common Shares (PCS) are included in the calculation of DEPS only if
The PCS are dilutive, reducing BEPS
