Understanding Income Statements

Question 1

How is net income reported for Firms with controlling interest in subsidiary

Answer 1

The proportion of subsidiary income not owned by the parent company is reported in parent’s income statement as the non-controlling interest. Then the non-controlling interest is subtracted from the parent’s company net income because the parent is reporting all of the subsidiary’s revenue and expenses

Question 2

How do you calculate Net Income

Answer 2

Net income = revenues - ordinary expenses + other income - other expenses + gains - losses

Question 3

Under IASB, Revenue is recognized in five ways:

Answer 3

1. when the risk and reward of ownership is transferred
2. There is no continuing control or mgmt over goods sold
3. When revenue can be reliably measured.
4. When there is a probable flow of economic benefits
5. When the cost can be reliably measured.

Question 4

Under IASB, for services rendered, revenue is recognized when:

Answer 4

1. The amount of revenue can be reliably measured.
2. There is a probable flow of economic benefits
3. The stage of completion can be measured.
4. The cost incurred and cost of completion can be reliably measured.

Question 5

Under FASB, revenue is recognized when:

Answer 5

1. it is realized or realizable

2. it is earned

Question 6

Under SEC, revenue is recognized when:

Answer 6

1. There is evidence of an arrangement between the buyer and seller.
2. The product has been delivered or the service has been rendered.
3. The price is determined or determinable.
4. The seller is reasonably sure of collecting money.

Question 7

Unearned Revenue

Answer 7

firm receives cash before revenue recognition. ex: magazine subscriptions
It is reported on the Balance Sheet as a liability

Question 8

Percentage of Completion Method

Answer 8

is measured by the total cost incurred to date divided by the total expected cost of the project. It is used under IFRS and U.S. GAAP.

Question 9

Completed-Contract Method

Answer 9

Used when outcome of project cannot be reliably measured. If a loss is expected, the loss must be recognized immediately under IFRS and U.S. GAAP

Question 10

Installment Sale

Answer 10

occurs when a firm finances a sale and payments are expected to be received over an extended period of time.

Question 11

Installment Method

Answer 11

profit is recognized as cash is collected. Profit is equal to the cash collected during the period multiplied by the total expected profit as a percentage of sales.

Question 12

Cost Recovery Method

Answer 12

profit is recognized only when cash collected exceeds costs incurred.

Question 13

barter transaction

Answer 13

two parties exchange goods or services without cash payment. Under U.S. GAAP revenue can be recognized at fair value only if the firm has historically received cash payments for such goods and services and can use this historical experience to determine fair value. Under IFRS, revenue must be based on the fair value of revenue from similar nonbarter transactions with unrelated parties.

Question 14

Round-trip transaction

Answer 14

involves the sale of goods to one party with the simultaneous purchase of almost identical goods from the same party.

Question 15

Financial analysts must consider what two points in analyzing firms revenue:

Answer 15

1. how conservative are the firm’s revenue recognition policies (recognizing revenue sooner rather than later)
2. the extent to which the firm’s policies rely on judgement and estimates

Question 16

Expenses are:

Answer 16

outflows or depletions of assets or incurrence of liab

Question 17

FIFO

Answer 17

first item purchased is the first item sold. Example: perishable food products will be sold as oldest products first.

Question 18

LIFO

Answer 18

Last item purchased is the first item sold. Example: Coal will be sold off the top of the pile. It is the most popular because of its tax benefits. It results in a higher cost of goods sold. Prohibited under IFRS.

Question 19

Weighted Average Cost

Answer 19

The cost per unit is calculated by dividing cost of available goods by total units available.

Question 20

Straight Line Depreciation

Answer 20

(Cost - Residual Life) / useful life

Question 21

Double Declining Balance Depreciation

Answer 21

(2/useful life)*(cost-accumulated depeciation)

Question 22

Reasons for decrease in Bad Debt Expense

Answer 22

did the firm lower its expense estimate because its collection experience improved or was the expense decreased to manipulate net income?

Question 23

Simple Capital Structure

Answer 23

contains only common stock, nonconvertible debt, and nonconvertible preferred stock.

Question 24

Basic EPS

Answer 24

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

Question 25

Weighted Average number of common shares

Answer 25

number of shares outstanding during the year, weighted by the portion of the year they were oustanding

Question 26

Dilutive Securities

Answer 26

stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common shares

Question 27

Antidilutive Securities

Answer 27

stock options, warrants, convertible debt, or convertible preferred stock that would increase EPS if exercised or converted to common stock.

Question 28

Dilutive EPS

Answer 28

[(Net Income - Preferred dividends) + (Convertible preferred dividends) + (convertible debt interest)(1-t)] / [(weighted average shares) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock options)]

Question 29

Bad Debt Expense

Answer 29

is an operating expense, therefore it is least likely considered a non-operating transaction

Question 30

How is a physically and operationally distinct division that is currently for sale treated?

Answer 30

it is treated as a discontinued operation. The income from the division is reported net of tax below income from continuing operation.

Question 31

Change in Accounting Principle

Answer 31

requires retrospective application; therefore all prior period financial statements currently presented are restated to reflect the change.

Question 32

How to determine if securities are anti-dilutive

Answer 32

If per-share impact of convertible securities are greater than the Basic EPS, the securities are anti-dilutive.

Question 33

Comprehensive Income

Answer 33

includes all changes in equity except transactions with shareholders, therefore dividends paid to common shareholders are not included in comprehensive income.