Income Statement Analysis Flashcards
(20 cards)
Total Comprehensive Income
EBT (-) Tax = EAT (Continued operation) + Profit from discontinued operation net of tax = EAT + OCI (Unrealized G/L from AFS securities, Unrealized G/L from CF hedging, Foreign currency translation G/L, Pension Obligation)
Holding
Subsidiary > 50% Associate 20 - 50% Other Investment < 20% (Holding > 12m - AFS (Unrealized G/L shown in OCI). Holding < 12m - Trading securities (Unrealized G/L shown in P&L). Other investments are always shown at Fair value in BS & Dividend in P&L
Non operating income
Always show in pre tax basis
Profit from discontinued operation
Only line item that will be shown net of tax basis in P&l
Revenue recognition
Identify contract with customer, identify the separate or distinct performance obligations in the contract, determine the transaction price, allocate it to the performance obligations in the contract & recognize revenue when (or as) the entity satisfies a performance obligation. Revenue should be recognized only when it is highly probable that it will not be subsequently reversed. If it is likely to be reversed, the seller will record a minimal amount of revenue upon sale and recognize a refund liability and “right to returned goods” asset on the balance sheet based on the carrying amount of inventory less costs of recovery.
Principal - Agent
Principal - revenue is recorded as the total amount of considerations received for
the transfer of the product. Agent - records revenue only for the portion of the considerations, which amounts
to its fee or commission.
Franchise
Franchiser - recognizes the royalty fee as revenue, not the total sales of the franchisees’ restaurants. Upfront fees are initially recognized as deferred revenue
and subsequently amortized to revenue on a straight-line basis over the term of each respective franchise agreement
License to use software
Other party takes possession of software & install it in their own computer - report the revenue from the license over the term of the license, if under the contract or the company’s normal business activities (the software provider will continue to undertake activities that significantly
affect the software (e.g., upgrades / enhancements), rights expose the customer to positive or negative impacts from
those activities, and activities do not result in a transfer of goods or services). If these criteria are not met, then the revenue is recognized when the license is transferred to the customer
Revenue from perpetual software license vs software support & updates
Revenues from term and perpetual
software licenses are generally recognized at the point in time when the software is made available to the customer. Revenue from software support and updates is recognized as the support and updates are provided, which is generally ratably over the contract term.
Performance Obligation SOT if
customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (or) entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced (or) entity’s performance does not create an asset with alternative use to the entity and the entity has an enforceable right to payment for performance completed to date (e.g., construction of a large unique asset that may not be able to be sold to another customer such as a weapons system).
Measurement of extent of progress towards completion
Output method (Unit completed) or Input method (Cost incurred)
Bill & Hold arrangement
Reason for the bill and hold arrangement must be substantive (e.g., the customer has requested the arrangement) & product must be identified separately as belonging to the customer & product currently must be ready for physical transfer to the customer & entity cannot have the ability to use the product or to direct it to another customer
Expense Recognition model
the matching principle (COGS), expensing as incurred (Period cost - administrative cost), and capitalization with subsequent depreciation or amortization.
Interest
Capitalized - Investing Cash flow
Expensed - US GAAP (Operating CF), IFRS (O or F CF). Both capitalized & expensed interest is considered in calculating ICR
Exceptional items
gains on asset disposals, receipts from a legal case, costs of integrating an acquisition, and impairment of intangible assets, among others
Modified retrospective approach
Companies were not required to revise previously reported financial statements. Instead, they adjusted opening balances of retained earnings (and other applicable accounts) for the cumulative impact of the new standard.
A/cing estimate changes
Changes in accounting estimates are handled prospectively, with the change affecting the financial statements for the period of change and future periods. No adjustments are made to prior statements, and the adjustment is not shown on the face of the income statement
EPS
Stock split or Bonus shares will be considered retrospectively.
Common size analysis
Each line item of income statement presented as a % of revenue. Facilitates comparison across time & companies
Tax is presented as a % of
Pre tax income
