Understanding Income Statements Flashcards
Net Income for Firms with controlling interest in subsidiary
How is net income reported for Firms with controlling interest in subsidiary
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
How do you calculate Net Income
Net income = revenues - ordinary expenses + other income - other expenses + gains - losses
Under IASB, Revenue is recognized in five ways:
- when the risk and reward of ownership is transferred
- There is no continuing control or mgmt over goods sold
- When revenue can be reliably measured.
- When there is a probable flow of economic benefits
- When the cost can be reliably measured.
Under IASB, for services rendered, revenue is recognized when:
- The amount of revenue can be reliably measured.
- There is a probable flow of economic benefits
- The stage of completion can be measured.
- The cost incurred and cost of completion can be reliably measured.
Under FASB, revenue is recognized when:
- it is realized or realizable
2. it is earned
Under SEC, revenue is recognized when:
- There is evidence of an arrangement between the buyer and seller.
- The product has been delivered or the service has been rendered.
- The price is determined or determinable.
- The seller is reasonably sure of collecting money.
Unearned Revenue
firm receives cash before revenue recognition. ex: magazine subscriptions
It is reported on the Balance Sheet as a liability
Percentage of Completion Method
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.
Completed-Contract Method
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
Installment Sale
occurs when a firm finances a sale and payments are expected to be received over an extended period of time.
Installment Method
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.
Cost Recovery Method
profit is recognized only when cash collected exceeds costs incurred.
barter transaction
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.
Round-trip transaction
involves the sale of goods to one party with the simultaneous purchase of almost identical goods from the same party.
Financial analysts must consider what two points in analyzing firms revenue:
- how conservative are the firm’s revenue recognition policies (recognizing revenue sooner rather than later)
- the extent to which the firm’s policies rely on judgement and estimates
Expenses are:
outflows or depletions of assets or incurrence of liab
FIFO
first item purchased is the first item sold. Example: perishable food products will be sold as oldest products first.
LIFO
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.
Weighted Average Cost
The cost per unit is calculated by dividing cost of available goods by total units available.
Straight Line Depreciation
(Cost - Residual Life) / useful life
Double Declining Balance Depreciation
(2/useful life)*(cost-accumulated depeciation)
Reasons for decrease in Bad Debt Expense
did the firm lower its expense estimate because its collection experience improved or was the expense decreased to manipulate net income?
Simple Capital Structure
contains only common stock, nonconvertible debt, and nonconvertible preferred stock.
Basic EPS
(Net Income - preferred dividends) / weighted average number of common shares outstanding
Weighted Average number of common shares
number of shares outstanding during the year, weighted by the portion of the year they were oustanding
Dilutive Securities
stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common shares
Antidilutive Securities
stock options, warrants, convertible debt, or convertible preferred stock that would increase EPS if exercised or converted to common stock.
Dilutive EPS
[(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)]
Bad Debt Expense
is an operating expense, therefore it is least likely considered a non-operating transaction
How is a physically and operationally distinct division that is currently for sale treated?
it is treated as a discontinued operation. The income from the division is reported net of tax below income from continuing operation.
Change in Accounting Principle
requires retrospective application; therefore all prior period financial statements currently presented are restated to reflect the change.
How to determine if securities are anti-dilutive
If per-share impact of convertible securities are greater than the Basic EPS, the securities are anti-dilutive.
Comprehensive Income
includes all changes in equity except transactions with shareholders, therefore dividends paid to common shareholders are not included in comprehensive income.
