SU 1: External Financial Statements & Revenue Recognition Flashcards
The Income Equation
Income (Loss) = Revenues + Gains - Expenses - Losses
How is COGS calculated for a retailer?
Calculated based on changes in inventory:
Beg. Inv. 10000 \+ net purchases 14000 \+ freight-in 1000 = goods avail for sale 25000 - ending inventory 5000 = COGS 20000
How is COGS calculated for a manufacturer
Beg raw materials inv 3000 \+ purchases during the period 3000 - ending raw materials inventory 1000 = direct materials used in production 5000 \+ direct labor costs 5000 \+ manufacturing overhead costs (F&V) 4000 = total manufacturing costs 14000 \+ beg WIP inventory 5000 - ending WIP inventory 4000 = cost of goods manufactured 15000 \+ beg finished goods inventory 6000 - ending finished goods inventory 11000 = COGS 10000
Comprehensive Income includes 2 major categories:
Net Income and Other Comprehensive Income (OCI)
The Statement of Shareholders’ equity shows:
A reconciliation of the beginning and ending balances in shareholders’ equity accounts.
The primary purpose of the statement of cash flows is:
To provide information about cash inflows and outflows from Operating, Investing, and Financing (OIF) activities.
On a Cash Flow Statement where is cash received from interest and dividends reported? What about interest paid on debt?
Operating Activities (counter intuitive)
What are the 2 methods of presentation of cash flows? Which is required knowledge for the CMA exam?
Indirect (CMA) and Direct.
State of Cash Flows: Operating Activities
All transactions and events that are not financing or investing activities. Primarily derived from the principal revenue-producing activities of the entity. In/out-flows from:
- sales of goods and services
- interest on loans
- dividends on equity securities (inflow only)
- cash pymts to suppliers
- employee wages
- to gov’t for taxes, duties, fees, fines
State of Cash Flows: Investing Activities
Typically include the purchase and sale of securities of other entities and the purchase and sale of property, plant, and equipment.
Statement of Cash Flows using the Indirect Method
Begins w/accrual-basis net income or the change in net assets and removes items that did not affect operating cash flow (depreciation is a non-cash item for example).
Statement of Cash Flows: Financing Activities
Generally involve the cash effects of transactions that relate to the issuance, settlement, or reacquisition of the entity’s debt and equity instruments.
Statement of Cash Flows: Noncash Investing and Financing Activities
Information that affects investing and financing activities but not cashflow:
- conversion of debt to equity
- acquisition of assets by assuming liabilities or via a capital lease
- exchange of a noncash asset or liability for another
When should revenue be recognized?
Revenue Recognition Principle - when 1) realized or realizable and 2) earned
When is the Installment Method of Revenue Recognition acceptable to use?
When receivables are collectible over an extended period of time and no reasonable basis exists for estimating the degree of collectibility.
