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FRA > Income Statement > Flashcards

Income Statement Flashcards

1
Q

How can you represent the income statement under IFRS?

A
  • As a section of a single statement of comprehensive income.
  • As a separate statement (with revenue and expenses) followed by a statement of comprehensive income that begins with net income.
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2
Q

How can you represent the income statement under US GAAP?

A
  • As a section of a single statement on comprehensive income.
  • As a separate statement followed by a statement of comprehensive income that begins with net income.
  • As a separate statement with the components of other comprehensive income presented in the statement of change in equity.
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3
Q

What are revenues?

A

They are usually reported on the first line of the income statement. They are amounts charged for goods and services in the ordinary activities of a business.

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4
Q

What is net revenue?

A

They are total revenue adjusted for product returns and amounts that are unlikely to be collected.

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5
Q

What are expenses?

A

They reflect outflows, depletions of assets, and recurrences of liabilities in the course of the activities of a business.

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6
Q

What is gross profit or gross margin?

A

It is the difference between revenues and the cost of goods that were sold.

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7
Q

What is operating income?

A

It’s the amount obtained after subtracting all direct and indirect costs from revenues. They are the profits earned by a company from its ordinary business activities before accounting for taxes and interest expenses.

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8
Q

What is net income?

A

It is the bottom line of the income statement. It includes profits earned from ordinary business activities as well as gains and losses.

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9
Q

Why would a company use consolidated financial statements?

A

When the company owns the majority of shares of a subsidiary, the financial statement is consolidated and the share of noncontrolling interest is deducted from the net income since it doesn’t represent income for the parent company shareholders.

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10
Q

Give an example of grouping items by nature.

A

Combining depreciation of factory equipment with the depreciation of transport vehicles and stating a single aggregate amount for depreciation on the IS.

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11
Q

Give an example of grouping items by function.

A

It is to combine direct product costs under the cost of goods sold.

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12
Q

Describe Van Dort’s income statement.

A
  • The latest year is in the extreme right column.
  • Outflows (or expenses) are shown in parenthesis to make them deductible.
    -It deducts the cost of goods sold from sales.
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13
Q

Describe the Johnson income statement.

A
  • Most recent years are represented on the left.
  • It doesn’t show expenses in parenthesis because it assumes that the users know that expenses are expenses.
  • It deducts the cost of sales.
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14
Q

What is income?

A

It is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that results in an increase in equity.

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15
Q

What is the difference between revenues and gains?

A

Revenues are from ordinary core business activities, whereas gains arise from noncore or peripheral activities.

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16
Q

What is unearned revenue?

A

It is a liability that is recorded when a company receives cash in advance and delivers the product later.

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17
Q

What is the core principle of the converge standards?

A

It is that revenue should be recognized in order to depict the transfer of promised goods or services to customers in amounts that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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18
Q

What are the 5 steps to recognize revenue?

A

1) Identify the contract 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 the entity satisfies a performance obligation.

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19
Q

What is a contract?

A

It is an agreement and commitment, with commercial substances, between the contracting parties. It only exists if collectability is probable.

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20
Q

What is the definition of “probable” under IFRS and US GAAP?

A
  • IFRS: means more likely than not.
  • US GAAP: likely to occur.
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21
Q

What are performance obligations?

A

They represent promises to transfer distinct goods or services.

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22
Q

What is a distinct good or service?

A
  • If the customer can benefit from it on its own or in combination with readily available resources.
  • If the promise to transfer it can be separated from other promises in the contract.
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23
Q

What is the transaction price?

A

It is the amount that the seller estimates it will receive in exchange for transferring the good or service.

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24
Q

Is revenue always reported?

A

No, revenue should only be recognized when it is highly probable that it will be subsequently reversed.

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25
Q

What happens when revenue is recognized?

A

It is presented as a contract asset on the BS.

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26
Q

What happens when all performance obligations have been satisfied but payment has not been received?

A

A receivable appears on the seller’s BS.

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27
Q

What happens when the payment is received in advance of transferring goods?

A

The seller presents a contract liability in the BS.

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28
Q

How should revenue be recognized when the obligations are satisfied over multiple accounting periods?

A

Revenue must be recognized over time based on progress made toward satisfying the obligation.

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29
Q

What is variable consideration?

A

It may be recognized as revenue only if the company can conclude that it will not have to reverse the cumulative revenue in the future.

30
Q

How does an agent company need to report its revenue?

A

On a net basis.

31
Q

What is an agent company?

A

When it isn’t primarily responsible for fulfilling the contract, doesn’t take any inventory risk or credit risk, doesn’t have discretion in setting the price, and receives compensation in the form of a commission.

32
Q

What is the matching principle?

A

It requires that expenses be matched with associated revenues when recognizing them on the IS.

33
Q

What are period costs?

A

They are allocated systematically with the passage of time.

34
Q

What is the first-in, first-out method (FIFO)?

A

The first items in are the first items out. Costs of the earliest items purchased are included in the cost of goods sold first.

35
Q

What is the last-in, first-out method (LIFO)?

A

The last items in are the first items out. The cost of the most recent purchases is included in the cost of goods sold first.

36
Q

What is the weighted-average cost method?

A

It distributes the total costs over the total units available for sale.

37
Q

What are the issues of expense recognition regarding doubtful accounts?

A

It is when sales are made on credit; there is a possibility that some customers will not be able to meet their payment obligations. According to the matching principles, companies are required to estimate bad debts at the time of revenue recognition.

38
Q

What are the issues of expense recognition regarding warranties?

A

When companies are providing warranties, there is a possibility that they might have to pay for repairing or replacing defective products in the future. The matching principle requires companies to estimate future warranty-related expenses. /

39
Q

What are the issues of expense recognition regarding depreciation under the cost model for IFRS and US GAAP?

A

The asset is reported at a cost less than any accumulated depreciation.

40
Q

What are the depreciation requirements under IFRS?

A
  • Each component of an asset should be depreciated separately.
  • Estimates of residual value and useful life should be reviewed annually.
41
Q

What is the straight-line method for depreciation?

A

The cost of the asset less its estimated residual value is spread evenly over the estimated useful life of the asset.

42
Q

What is the accelerated method for depreciation?

A

A greater proportion of the asset’s cost is allocated to the initial years of its use and a lower proportion later. It is used when assets are expected to be used heavily in the first years of purchase.

43
Q

What is amortization?

A

It is the allocation of the cost of an intangible asset over its useful life.

44
Q

How are intangible assets with identifiable useful lives?

A

They are amortized over their lives in the same way as long-term assets are depreciated using the straight-line method. There are no estimates for residual value involved in the calculation.

45
Q

Which assets are impaired instead of amortized?

A

Intangible assets with indefinite lives.

46
Q

What is an impaired asset?

A

It is when its current value is lower than its book value.

47
Q

What is a discounted operation?

A

It is when a company disposes of, or decides to dispose of, one of its component operations, and the component is operationally and physically separable from the rest of the firm.

48
Q

How are discounted operations reported?

A

They are net of tax as a separate line item after income from continuing operations.

49
Q

Are discontinued operations used to make expectations of revenue in the future?

A

No, because it doesn’t provide revenue in the future.

50
Q

How are unusual or infrequent items presented in the income statement?

A

They are either a separate line of income or expenses.

51
Q

How can a company make a change in its accounting policy?

A

The company needs to make a retrospective change which gives the obligation company to change all the prior financial statements to make it seem like this new account policy was always in use.

52
Q

How can a company make a change in accounting estimates?

A

It can be done prospectively which means that the company will need to make the change on their current statement and on the statement in the future.

53
Q

How can a company make a correction of prior-period errors?

A

It is done by restating all financial statements presented in the financial report.

54
Q

Does IFRS define operating activities?

A

No, but companies are free to do it as long as they assure that these activities would normally be regarded as operating.

55
Q

How does US GAAP define operating activities?

A

Activities that involve producing and delivering goods and providing services include all transactions and other events that are not defined as investing or financing activities.

56
Q

What is earning per share?

A

It is the share of the net income of a company that is owned by common shareholders only.

57
Q

What is a company with a simple capital structure?

A

It is when they don’t have any financial instruments outstanding that can be converted into common stock. Those companies are only required to report basic EPS.

58
Q

Why are preferred dividends subtracted from net income to calculate EPS?

A

Because they are not included in expenses on the income statement in the calculation of net income.

59
Q

How is the weighted average number of shares outstanding is weighted?

A

It is weighted in accordance with the proportion of the year that they were outstanding.

60
Q

What is a stock split?

A

It is when a company splits the existing shares to give each shareholder more. It increases the number of outstanding shares.

61
Q

What is a stock dividend?

A

It is dividends that are paid with additional shares rather than cash. It increases the number of outstanding shares.

62
Q

What is a complex capital structure?

A

It is a company that contains certain financial instruments that can be converted into common stock. It needs to report basic and diluted EPS.

63
Q

What is a dilutive securities?

A

It is a security that its conversion into share would decrease the new EPS under the basic EPS.

64
Q

What is anti-dilutive security?

A

It is a security that its conversion into share wouldn’t decrease the EPS under the basic EPS.

65
Q

What is the treasury stock method?

A

It assumes that all the funds received by the company from the exercise of options and warrants are used by the company to purchase shares at the average market price for the period.

66
Q

When are stock options and warrants assumed to be exercised?

A

When the strike or exercise price is lower than the average market price.

67
Q

What are the 2 indicators of profitability?

A

Gross profit margin = Net Income/Revenue
Net profit margin = Net income/Revenue

68
Q

What is the total comprehensive income for IFRS?

A

It is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.” Comprehensive income includes items of income and expenses that are “not recognized in profit or loss as required or permitted by other IFRS.

69
Q

What is the total comprehensive income under US GAAP?

A

It is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

70
Q

What are the 4 types of items of other comprehensive income?

A
  • Foreign currency translation adjustments.
  • Unrealized gains or losses on derivatives contracts accounted for as hedges.
  • Unrealized holding gains and losses on a certain category of investment securities, available-for-sale debt securities under US GAAP, and as “fair value through other comprehensive income” under IFRS.
  • Certain costs of a company’s defined benefit post-retirement plans that are not recognized in the current period.

FRA (18 decks)

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