FinQuiz - Smart Summary - Study Session 8 - Reading 25
FinQuiz - Smart Summary - Study Session 8 - Reading 25
FinQuiz - Smart Summary - Study Session 8 - Reading 25
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Income Statement
Revenue
Expenses
Fair Value
Straight-Line
Available For Sale Securities
RV
DO
CF
EP
AMP
OCI
= Residual Value
= Discontinued Operations
= Cash Flows
= Exercise Price
= avg. Market price
= Other Comprehensive
Income
25.a
Presentation Formats
Single-Step format
All revenues are grouped
together & all expenses
are grouped together.
Multi-Step format
Includes gross profit
(revenue-cost of goods
sold) as a subtotal.
25.b
Accrual method revenue is recognized when earned & expenses are recognized when incurred.
According to FASB revenue is recognized when realized & earned. Four additional guidance are:
Evidence of arrangement b/w buyer & seller.
Product has been delivered or service has been rendered.
Price is determined or determinable.
Seller reasonably sure surety of money collection.
25.b
IFRS unreliable outcome, revenue is recognized to the extent of cost, cost is expensed & profit is
recognized at completion.
% of completion method is more aggressive & subjective due to cost estimates, provide smoother
earnings & better matching: C.F are same under both methods.
Installment Sales
Firm finances a sale & payments are expected over extended period.
Installment Sales
Installment Method
Collectability uncertain.
Profit recognized based on percentage of sales
price received as cash.
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Barter Transaction
Two parties exchange goods or services without cash.
Round-trip transaction sale & simultaneously identical purchase from same party.
Barter Transaction
U.S.GAAP
IFRS
25.c
Matching principle accrual based expense to generate revenue in the same period as
revenue recognized.
Period costs expenditure not directly tied to revenue generation. Expense in period of
incurrence.
Cost of long lived assets (depreciation) also matched with revenue.
Credit sale estimate bad debt expense.
Depreciation
25.d
Straight-line depreciation
Accelerated depreciation
DDB dep. =
Inventory
Specific Identification
First-in, first-out
Last-in, first-out
Easy to use.
Intangible Assets
Amortization allocation of cost of an intangible asset over its useful life.
Amortization exp should match assets economic benefits.
Intangible assets with indefinite lives must be tested for impairment annually instead
of amortized.
25.e
Discontinued operations
Extraordinary items
Unusual in nature or
infrequent in occurrence
but not both.
Examples are G/L from asset
sale, impairments & write
offs.
These items are included in
income from continuing
operations & reported
before tax.
Analyst may review these
items to determine whether
they should be used in
forecasting.
25.f
Nonfinancial firm non operating transactions may result
from investment income & financing expenses.
25. g & h
Basic EPS
=
Dilutive EPS
.
25. i
Common Size IS
25. j
Margin Ratios
GPM =
Gross Profit
Sales
OPM
Operating Profit
=
Sales
NPM =
Net Profit
Sales
25. k & l
Comprehensive income all changes to equity other than owner contributions & distributions.
C.I = net income + OCI (foreign currency G/L, minimum pension liability adjustments, unrealized
G/L on derivative contracts accounted for as hedges & AFS securities).
Transactions included in OCI affect equity but not net income.
AFS securities reported on B/S at FV, unrealized G/L as component of OCI.