Income Statements

Question 0

Revenues

Answer 0

Amts reported from sale of goods and services in normal course of business

Question 1

Net income

Answer 1

Revenues - expenses

Question 2

Expenses

Answer 2

Amts incurred to generate revenue: COGS, operating expenses, interest, taxes

Question 3

Percentage of completion revenue recognition

Answer 3

LT projects under contract with reliable estimates of variables

= sales price • (total cost to date)/(total cost)

Question 4

Completed contract revenue recognition

Answer 4

LT contracts with no contract or unreliable estimates

Revenue and expenses are not recognized until project is complete

Question 5

Installment sales revenue recognition

Answer 5

Cannot estimate likelihood of collection
Cost is known
Revenue and profit are based on percentage of cash collected

= cost • sales for period/total sales

Question 6

Cost recovery method of revenue recognition

Answer 6

Cost is unknown and firm cannot estimate the likelihood of collection

Recognize profit after all costs are recovered

Question 7

Percentage of completion v. Completed contract method

Answer 7

Cash flows: same
Net income: POC > CC
Income volatility: CC > POC
Total assets: POC > CC
Equity: POC > CC

Question 8

Matching principle

Answer 8

Match costs against associated revenues
Recognize in same period
Ex: inventory, depreciation/amortization, warranty expense, doubtful debt expense

Question 9

Period costs

Answer 9

Expensed in period incurred

Not directly tied to revenue generation (ie admin costs)

Question 10

Unusual or infrequent items

Answer 10

Reported pretax before net income from continuing operations

• disposal of business segment or assets
• sale of investment in subsidiary
• environmental remediation
• impairments, write offs, restructuring

Question 11

Discontinued operations

Answer 11

Reported net of taxes from continuing operations

Assets, operations, and financing activities must be operationally distinct from firm

Question 12

Extraordinary items

Answer 12

Items both unusual and infrequent
Reported net of taxes after net income from continuing operations
Prohibited under IFRS

Question 13

Change in accting principle

Answer 13

IFRS & GAAP: prior years’ data shown in financial statements must be adjusted

Question 14

Change in accounting estimate

Answer 14

Does not require restatement of prior period earnings
Disclose in footnotes
Changes do not affect CFs

Question 15

Non-operating items for non-financial service companies

Answer 15

Interest
Dividends
Gains/losses on disposal

Question 16

Basic EPS

Answer 16

= (net income - pref div) / wtd ave shares of common stock

Question 17

Stock dividend

Answer 17

Increase in shares outstanding by X%

Apply retroactively to beginning of year

Question 18

Stock split

Answer 18

Increases shares outstanding by split

Split is applied retroactively to beginning of the year

Question 19

Weighted average # shares outstanding

Answer 19

Multiply each share issuance by number of months, sum together, divide by 12

Question 20

Dilutive convertible preferred stock

Answer 20

Div/new shares < basic EPS

Question 21

Dilutive convertible debt

Answer 21

Interest(1-t)/new shares < basic EPS

Question 22

Dilutive warrants/options

Answer 22

Avg price > exercise price

Question 23

Diluted EPS

Answer 23

= adjusted income available for common shares / WTD ave common and potential common shares outstanding

Question 24

Adjusted income for common shares diluted

Answer 24

= net income
- preferred dividends
+ convertible preferred dividends
+ conv debt interest•(1-t)

Question 25

Diluted EPS denominator (adj # shares)

Answer 25

= WTD ave # common shares
+ shares from conv pref stock
+ shares from conv debt
+ shares issuable from stock options

Question 26

Stock option: treasury stock method

Answer 26

1. Calculate cash raised on exercise
2. Repurchase shares at average price
3. New shares = exercised - repurchased

Question 27

Comprehensive income

Answer 27

= net income + other comprehensive income

Question 28

Other comprehensive income

Answer 28

• foreign currency translation
• minimum pension liability
• unrealized gains/losses on derivatives contracts used for hedges
• unrealized gains/losses on avail for sale securities
• change in equity from transactions from non-ownership sources