Understanding Income Statements Flashcards
net income equals (i) revenue minus expenses in the ordinary activities of the business, plus (ii) other income minus other expenses, plus _______
(iii) gains minus losses.
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.
grouping by nature, grouping by function
When an income statement shows a gross profit
subtotal, it is said to use a _______ format rather than a ______ format.
multi-step, single-step
Operating profit results from _________.
deducting operating expenses such as selling, general, administrative, and research and development expenses from gross profit
In IFRS, the term “income” includes ______ and _______.
revenue, gains
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.
liability, unearned revenue
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.
commercial substance, collectability
Under IFRS, probable means more likely than not, and
under US GAAP it means _______.
likely to occur
______, expenditures that less directly match revenues, are reflected in
the period when a company makes the expenditure or incurs the liability to pay.
Period costs
Under the ______ method, a company waits until a customer defaults and only then recognizes the loss.
direct write-off
IFRS allow two alternative models for valuing property, plant, and equipment:
the _______ and the _______.
cost model, revaluation model
________ 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
depreciation, amortization
The revaluation model is not permitted under ________.
US GAAP
There are two other differences
between IFRS and US GAAP to note with regards to the cost model: (2)
(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
Goodwill and intangible assets with indefinite life are not amortised. Instead, they are ______.
tested at least annually for impairment
Under US GAAP, ordinary equity is referred
to as _________.
common stock or common shares
Basis EPS =
(Net income - preferred dividends)/ weighted average number of shares outstanding
Diluted EPS =
Net income / (Weighted average number of shares outstanding + New common shares that would have been issued at conversion)
Diluted EPS When a Company Has Convertible Debt Outstanding
(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)
Under IFRS and US GAAP, antidilutive securities are _____.
not included in the
calculation of diluted EPS
What’s AERG in English?
Other comprehensive income
Four types of items are treated as other comprehensive income under both IFRS
and US GAAP:
- 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.
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.
trading securities
________ debt securities are those not designated as either held-to-maturity or trading.
Available-for-sale
The residual value is not subtracted from the initial book value to calculate ______.
Double- declining balance depreciation
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.
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.
Comprehensive income =
(Ending shareholders equity – Beginning shareholders equity) + Dividends
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.
B
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.
A - Treasury method
