Understanding Income Statements

Question 1

net income equals (i) revenue minus expenses in the ordinary activities of the business, plus (ii) other income minus other expenses, plus _______

Answer 1

(iii) gains minus losses.

Question 2

Grouping together expenses such as depreciation on manufacturing
equipment and depreciation on administrative facilities into a single line item called
“depreciation” is an example of a _________ of the expense. An example of __________ would be grouping together expenses into a category such as cost of goods sold, which may include labour and material costs, depreciation, some salaries (e.g., salespeople’s), and other direct sales related expenses.

Answer 2

grouping by nature, grouping by function

Question 3

When an income statement shows a gross profit

subtotal, it is said to use a _______ format rather than a ______ format.

Answer 3

multi-step, single-step

Question 4

Operating profit results from _________.

Answer 4

deducting operating expenses such as selling, general, administrative, and research and development expenses from gross profit

Question 5

In IFRS, the term “income” includes ______ and _______.

Answer 5

revenue, gains

Question 6

There are situations when a company receives cash in advance and actually delivers the product or service later, perhaps over a period of time. In this case, the company would record a _______ for ________ when the cash is initially received, and revenue would be recognized as being earned over time as
products and services are delivered.

Answer 6

liability, unearned revenue

Question 7

According to the standard, a contract is an agreement and commitment, with ___________ between the contacting parties. In addition, a contract exists only if ________ is probable.

Answer 7

commercial substance, collectability

Question 8

Under IFRS, probable means more likely than not, and

under US GAAP it means _______.

Answer 8

likely to occur

Question 9

______, expenditures that less directly match revenues, are reflected in
the period when a company makes the expenditure or incurs the liability to pay.

Answer 9

Period costs

Question 10

Under the ______ method, a company waits until a customer defaults and only then recognizes the loss.

Answer 10

direct write-off

Question 11

IFRS allow two alternative models for valuing property, plant, and equipment:
the _______ and the _______.

Answer 11

cost model, revaluation model

Question 12

________ is the term commonly applied to this process for physical long- lived assets such as plant and equipment (land is not depreciated), and _______ is the term commonly applied to this process for intangible long- lived assets with a
finite useful life

Answer 12

depreciation, amortization

Question 13

The revaluation model is not permitted under ________.

Answer 13

US GAAP

Question 14

There are two other differences

between IFRS and US GAAP to note with regards to the cost model: (2)

Answer 14

(1) IFRS require each component of an asset to be
depreciated separately and US GAAP do not require component depreciation

(2) IFRS require an annual review of residual value and useful life, and US GAAP do not
explicitly require such a review

Question 15

Goodwill and intangible assets with indefinite life are not amortised. Instead, they are ______.

Answer 15

tested at least annually for impairment

Question 16

Under US GAAP, ordinary equity is referred

to as _________.

Answer 16

common stock or common shares

Question 17

Basis EPS =

Answer 17

(Net income - preferred dividends)/ weighted average number of shares outstanding

Question 18

Diluted EPS =

Answer 18

Net income / (Weighted average number of shares outstanding + New common shares that would have been issued at conversion)

Question 19

Diluted EPS When a Company Has Convertible Debt Outstanding

Answer 19

(Net income + After-tax interest on convertible debt - Preferred dividends) / (Weighted average number of shares outstanding + Additional common shares that would have been
issued at conversion)

Question 20

Under IFRS and US GAAP, antidilutive securities are _____.

Answer 20

not included in the

calculation of diluted EPS

Question 21

What’s AERG in English?

Answer 21

Other comprehensive income

Question 22

Four types of items are treated as other comprehensive income under both IFRS
and US GAAP:

Answer 22

• Foreign currency translation adjustments
• Unrealized gains or losses on derivatives contracts accounted for as hedges

-Unrealized holding gains and losses on a certain category of investment securities, namely, available- for- sale debt securities under US GAAP and securities
designated as “fair value through other comprehensive income” under IFRS

-Certain costs of a company’s defined benefit post- retirement plans that are not recognized in the current period.

Question 23

The US GAAP _______ category pertains to a debt security that is acquired with the intent of selling it rather than holding it to collect the interest and principal payments.

Answer 23

trading securities

Question 24

________ debt securities are those not designated as either held-to-maturity or trading.

Answer 24

Available-for-sale

Question 25

The residual value is not subtracted from the initial book value to calculate ______.

Answer 25

Double- declining balance depreciation

Question 26

Under IFRS, a loss from the destruction of property in a fire would most likely
be classified as:
A continuing operations.
B discontinued operations.
C other comprehensive income.

Answer 26

A is correct. A fire may be infrequent, but it would still be part of continuing
operations and reported in the profit and loss statement. Discontinued operations relate to a decision to dispose of an operating division.

Question 27

Comprehensive income =

Answer 27

(Ending shareholders equity – Beginning shareholders equity) + Dividends

Question 28

Which statement is most accurate? A common size income statement:

A restates each line item of the income statement as a percentage of net
income.
B allows an analyst to conduct cross- sectional analysis by removing the effect
of company size.
C standardizes each line item of the income statement but fails to help an
analyst identify differences in companies’ strategies.

Answer 28

B

Question 29

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all
of 2009. During 2009, CSI also had 10,000 options outstanding with exercise
prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used
in the denominator?

A 1,003,333.
B 1,006,667.
C 1,010,000.

Answer 29

A - Treasury method