Chapter 17

Question 1

net income =

Answer 1

revenues − ordinary expenses + other income − other expense + gains − losses

Question 2

controlling interest vs. noncontrolling interest

Answer 2

When a firm has a controlling interest in a subsidiary, the statements of the two firms are consolidated; the earnings of both firms are included on the income statement. Noncontrolling interest is subtracted from the consolidated total income to get the net income of the parent company.

Question 3

Single-Step vs. Multi-Step Income Statement

Answer 3

single-step: all revenues are grouped together and all expenses are grouped together.

multi-step: includes gross profit, revenues minus cost of goods sold.

Question 4

Gross profit

Answer 4

is the amount that remains after the direct costs of producing a product or service are subtracted from revenue

Question 5

operating profit or operating income

Answer 5

subtracting operating expenses, such as selling, general, and administrative expenses, from gross profit

Question 6

The converged standards identify a five-step process for recognizing revenue:

Answer 6

1. Identify the contract(s) with a customer.
2. Identify the separate or distinct performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Question 7

contract

Answer 7

an agreement between two or more parties that specifies their obligations and rights. Collectability must be probable for a contract to exist

Question 8

performance obligation

Answer 8

is a promise to deliver a distinct good or service.

Question 9

A “distinct” good or service is one that meets the following criteria:

Answer 9

• The customer can benefit from the good or service on its own or combined with other resources that are readily available.
• The promise to transfer the good or service can be identified separately from any other promises.

Question 10

transaction price

Answer 10

the amount a firm expects to receive from a customer in exchange for transferring a good or service to the customer.

Question 11

period costs

Answer 11

expenses that cannot be directly tied to revenue generation and are expensed in the period incurred: administrative costs

Question 12

specific identification

Answer 12

a firm can identify exactly which items were sold and which items remain in inventory: an auto dealer records each vehicle sold or in inventory by its identification number.

Question 13

first-in, first-out (FIFO)

Answer 13

the first item purchased is assumed to be the first item sold: Permited under GAAP and IFRS

Question 14

Last-in, first-out (LIFO)

Answer 14

the last item purchased is assumed to be the first item sold: Only permitted under GAAP

Question 15

straight-line depreciation

Answer 15

Straight-line depreciation (SL) allocates an equal amount of depreciation each year over the asset’s useful life as follows:

Question 16

Accelerated depreciation

Answer 16

speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation expense in the early years of the asset’s life and less depreciation expense in the later years of its life. Total depreciation expense over the life of the asset will be the same as it would be if straight-line depreciation were used.

double-declining balance (DDB):

Question 17

Amortization

Answer 17

is the allocation of the cost of an intangible asset (such as a franchise agreement) over its useful life.

Question 18

retrospective vs prospective application

Answer 18

With retrospective application, any prior-period financial statements presented in a firm’s current financial statements must be restated, applying the new policy to those statements as well as future statements. Retrospective application enhances the comparability of the financial statements over time: change in accounting policy, prior-period adjustment for an error

With prospective application, prior statements are not restated, and the new policies are applied only to future financial statements: chnage in accounting estimate

Question 19

simple capital structure

Answer 19

one that contains no potentially dilutive securities. A simple capital structure contains only common stock, nonconvertible debt, and nonconvertible preferred stock.

Question 20

complex capital structure

Answer 20

contains potentially dilutive securities such as options, warrants, or convertible securities.

Question 21

Basic EPS

Answer 21

Question 22

weighted average number of common shares

Answer 22

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

Question 23

stock dividend

Answer 23

is the distribution of additional shares to each shareholder in an amount proportional to their current number of shares. If a 10% stock dividend is paid, the holder of 100 shares of stock would receive 10 additional shares.

Question 24

stock split

Answer 24

refers to the division of each “old” share into a specific number of “new” (post-split) shares. The holder of 100 shares will have 200 shares after a 2-for-1 split or 150 shares after a 3-for-2 split.

Question 25

Dilutive vs Antidilutive securities

Answer 25

Dilutive securities are stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common stock.

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

Question 26

Diluted EPS

Answer 26

Question 27

common-size income statement

Answer 27

expresses each category of the income statement as a percentage of revenue.

Question 28

Gross profit margin

Answer 28

Question 29

net profit margin

Answer 29

Question 30

other comprehensive income (OCI) includes

Answer 30

1. Foreign currency translation gains and losses.
2. Adjustments for minimum pension liability.
3. Unrealized gains and losses from cash flow hedging derivatives.
4. Unrealized gains and losses from available-for-sale securities.

Question 31

trading securities - GAAP

Securities measured at fair value through profit and loss - IFRS

Answer 31

Debt securities that a firm owns, but intends to sell; any unrealized gains and losses during the period are reported on the income statement.

Question 32

held to maturity - GAAP

Securities measured at amortized cost - IFRS

Answer 32

Debt securities the firm does not intend to sell prior to maturity; reported at amortized cost on the balance sheet (not fair value), Therefore, unrealized gains and losses are not reported on either the income statement or as other comprehensive income.

Question 33

available-for-sale securities - GAAP

Securities measured at fair value through other comprehensive income - IFRS

Answer 33

Debt securities that are not expected to be held to maturity or sold in the near term; unrealized gains and losses on available-for-sale securities are reported as other comprehensive income, not on the income statement.