Understanding Income Statements Flashcards
What does the Income Statement show?
An entity’s revenues, expenses, gains and losses during a reporting period.
What is the difference between a multi-step and single step income statement?
A multi-step income statement provides a subtotal for gross profit and a single step income statement does not.
When is revenue recognized?
When earned.
When are expenses recognized?
Expenses are recognized when incurred.
What are the two methods for accounting for long-term contracts?
- Percentage-of-completion
- Completed-contract
What is the percentage of completion method?
- Method of accounting for long-term contracts.
- Recognizes revenue in proportion to costs incurred.
What is the completed contract method?
- Method of accounting for long-term contracts.
- Recognizes revenue only when the contract is complete.
What are the three types of revenue recognition methods for installment sales?
- Normal revenue recognition at time of sale
- Installment sales method
- Cost recovery method
Installment sales: under what circumstances is normal revenue recognition acceptable?
If collectability is reasonably assured.
Installment sales: under what circumstances is installment sales method acceptable?
When collectability cannot be reasonably estimated.
Installment sales: under what circumstances is the cost recovery method acceptable?
When collectability is highly uncertain.
Revenue from barter transactions can only be recognized if?
Its fair value can be estimated from historical data on similar non-barter transactions.
Which is more aggressive: percentage-of-completion or completed-contact method?
Because of the estimates involved, the percentage-of-completion method is more aggressive than the completed-contact method.
Which is more aggressive: Installment or the cost recovery method.
The installment method is more aggressive than the cost recovery method.
What is straight-line depreciation?
Equal amount of depreciation expense in each year of the asset’s useful life.
What is double declining balance depreciation?
Apply a constant rate of depreciation to the declining book value until book value equals residual value.
What are the four types of inventory valuation methods?
- FIFO
- LIFO
- Average cost
- Specific identification
What is FIFO?
When inventory reflects cost of most recent purchases, COGS reflects cost of oldest purchases.
What is LIFO?
COGS reflects cost of most recent purchases, inventory reflects cost of oldest purchases.
What is the average cost method of inventory valuation?
Unit cost equals cost of goods available for sale divided by total units available and is used for both COGS and inventory.
Describe the specific identification method for inventory valuation:
- Each item in inventory is identified and its historical cost is used for calculating COGS when the item is sold.
- Ideal for easily identifiable inventory(car dealership)
How are results of discontinued operations are reported?
Below income from continuing operations, net of tax, from the date the decision to dispose of the operations is made.
These results are segregated because they likely are non-recurring and do not affect future net income.
How are unusual or infrequent items reported?
Before tax and above income from continuing operations.
How are extraordinary items (both unusual and infrequent) reported?
Below income from continuing operations, net of tax under U.S. GAAP, but this treatment is not allowed under IFRS.
What three changes require a retrospective restatement of all prior-period financial statements?
- Changes in accounting standards,
- Changes in accounting methods applied
- Corrections of accounting errors
What change is applied prospectively, with no prior-period restatement?
A change in an accounting estimate.
What is the basic EPS equation?
What is the equation for diluted EPS?
What is a dilutive security?
One that, if converted to its common stock equivalent, would decrease EPS.
What is an anti dilutive security?
A security that would not reduce EPS if converted to its common stock equivalent.
What is a vertical common size income statement?
- An income statement in which each account is expressed as a percentage of the value of sales
What is the equation for gross profit margin?
- Profitability ratio
- gross profit / revenue
What is the equation for net profit margin?
- Profitability ratio
- net income / revenue
What is comprehensive income?
- The sum of net income and other comprehensive income.
- Measures all changes to equity other than those from transactions with shareholders.
Are transactions with shareholders reported on the income statement?
NO!!! Transactions with shareholders, such as dividends paid and shares issued or repurchased, are not reported on the income statement.
Does other comprehensive income affect net income?
NO!!! Other comprehensive income includes other transactions that affect equity but do not affect net income.
What are four categories of transactions that would be clasified as other comprehensive income?
- Gains and losses from foreign currency translation.
- Pension obligation adjustments.
- Unrealized gains and losses from cash flow hedging derivatives.
- Unrealized gains and losses on available-for-sale securities.
