Module 1: Balance Sheet, Income Statement, and Comprehensive Income Flashcards
(27 cards)
Single-Step income Statement: Revenues include
Revenues include:
- Sales Revenues
- Service Revenue
- Interest Revenue
- Gain on sale of available-for-sale debt securities
-Other Revenue
*Purchase discounts are netted against COGS because they are part of the cost of inventory
*Recovery of accounts written off is not included because this is part of the balance sheet
Balance Sheet
We can do the assets = liabilities + equity
What do you record in the year of disposal if an impairment loss was already recorded before?
Only the difference between the actual sale and the adjusted (impaired) value is recorded, plus any operating gains or losses for the year. Example: If last year we recorded an impairment loss of 300,000, but at the time of sale the operation was sold by 400,0000 less than CV we only account for 100,000 because we already recorded a loss of 300,000
Accumulated OCI
is reported in the balance sheet as an item of equity following retained earnings.
-A debit decreases equity and a credit increases it
Foreign Currency Transaction vs Foreign Currency Translation
-A foreign currency transaction is when buying or selling something in a different currency, and it belongs in the income statement.
-Foreign currency translation is when a company needs to translate the financial statement to another currency, and any gains or losses are reported in OCI
Fair Value Hedge
-A hedge is like insurance, and it’s a way to protect a company from losing money due to changes in things like interest rates or prices
-Fair value hedge protects the value of something the company already owns or owes (like a bond or loan)
-Gains and losses go to net income
*Offsets changes in the value of an asset or liability, so gains on the hedge balance out losses. FV hedges reflects immediate changes in value and are reported in Net Income right away
Cash flow hedges
protects future cash flows from changes in prices, interest rates, or exchange rates.
-Gains and losses go to OCI
*Since it protects future transactions, it is placed on OCI until the cash flows actually occur.
Comprehensive Income
Maybe be shown on the face of a combined “statement of income and comprehensive income” in a separate section below net income, or in a separate “statement of comprehensive income”
-Income tax expense or benefit allocated to components must be disclosed, either on the face of the statement or in the notes to the statement.
Why does an adjustment in depreciation go to selling and administrative expenses?
Because it relates to assets (like office equipment or buildings) used for business operations, not production, so the expense is part of operating (admin/selling) costs, not COGS
What are current assets
Assets expected to be used or converted to cash within 1 year:
-Cash
-Accounts Receivable
-Prepaid Insurance
-Inventory
- Allowance for doubtful accounts (negative because it reduces AR)
**Investments that are currently trading (trading securities) are included because they are expected to turn to cash quickly
What are Non-current assets?
Long-term assets that are not expected to convert to cash in 1 year:
-Investments
-PP&E
-Land
-Equipment (less Accumulated Depreciation)
What are Current Liabilities?
Obligations due within a year:
-AP
-Salaries Payable
-Current Portion of Notes Payable
-Taxes Payable
-Unearned Revenue
What is Equity made of?
Represents ownership in the company:
-Common Stock
-APIC
-Retained Earnings
-Accumulated OCI
-(Less) Treasury Stock
How is gain on disposal calculated?
Gain on Disposal = Selling Price - Book Value
*Example: Sold equipment for 12,000
Original Cost: 20,000
Accumulated Depreciation 10,000
Book Value 10,000
Gain = 12,000 - 10,000 = 2,000
** Be mindful of any brokerage fees
How do gains and losses on disposal affect income taxes?
Gain on disposal - increases taxable income - More taxes owed
Loss on disposal - Decreases taxable income - Less taxes owed (tax benefit)
Impairment Loss/Gain Formula
Impairment = Book Value - Recoverable Amount (Fair Value - Costs to Sell)
Loss is only recorded when BV>Recoverable amount
**Under GAAP most asset impairments cannot be reversed (no gain allowed later)
**Under IFRS: Reversal is allowed, but only up to what the asset would’ve been without the loss
Why is restricted cash for a bond due soon classified as a noncurrent asset?
Because it’s restricted for setting a long-term obligation, and unless the debt is reclassified as current, the fund remain noncurrent.
Reclassification Adjustments
all reclassification adjustments, including the effect on reported net income and oci, must be presented in the statement in which the components of net income and the components of other comprehensive income are presented (not the footnotes)
Foreign currency transaction (AR and AP)
AR denominated in foreign currency:
If foreign currency goes up, assets go up - Gain
If foreign currency goes down, assets go down- Loss
AP denominated in foreign currency:
If currency goes up (depreciates), liabilities go up - Loss
If foreign currency goes down (, liabilities go down - Gain
Why do unrealized gains/losses on equity securities go to net income?
Equity securities are measured at fair value and are not classified as held to maturity or AFS - all changes in value affect net income immediately.
** Equity securities are ownership shares in a company, like common or preferred stock. They give the holder a stake in the company.
Key Differences: Single-Step vs. Multiple-Step Income Statement
Single-Step: Combines all revenues and all expenses; reports one subtotal for each before net income.
Multiple-Step: Separates operating and non-operating activities; shows gross profit, operating income, and then net income—gives more detail on business performance.
What does it mean when actuarial losses or prior service costs are amortized?
It means the costs are taken out of AOCI and gradually recognized as expenses on the income statement (net income). This is a plus on AOCI or OCI because the expenses are taken out
Why is amortization of actuarial pension loss added to AOCI changed?
Because we’re removing the previously recorded loss from AOCI and recognizing it in net income, so it increases AOCI (reduced the loss sitting there)
What is the remeasurement method?
Used when the company keeps books in a foreign currency, but uses U.S. dollars as its main currency. You convert items as if they were always in dollars. Why? Because the U.S. dollar is the company’s functional currency so the foreign books must be adjusted to reflect U.S. dollar values.
**Results: Gains/losses go to net income because they affect daily operations.
***How does the method work?
-Monetary items (cash, receivales):
use current rate
-Nonmonetary items (Inventory,
PPE): use historical rate
-Gains/losses to net income
