UNDERSTANDING INCOME STATEMENTS 1·ng Th»‹ Thu H±ng

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  • UNDERSTANDING INCOME STATEMENTS*ng Th Thu Hng

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  • INCOME STATEMENT COMPONENTS AND FORMATWhat is the income statement?Equation: Revenues Expenses = Net income

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  • COMPONENTS OF THE INCOME STATEMENT Revenues: amounts reported from the sale of goods and services in the normal course of business.Revenue less adjustments for estimated returns and allowances What is this???*ng Th Thu Hng

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  • Expenses: amounts incurred to generate revenue and include cost of goods sold, operating expenses, interest and taxes.Gain and losses: which result in an increase (gains) or decrease (losses) of economic benefits. Net income = Revenues Ordinary expenses + Other income Other expense + Gains - Losses*ng Th Thu Hng

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    BHG COMPANY INCOME STATEMENT for the year ended December 31, 20X7Revenue$ 579,312Cost of goods sold(362,520)Gross profit216,792Selling, general, and administrative expense(109,560)Depreciation expense(69,008)Operating profit38,224Interest expense(2,462)Income before tax35,762Provision for income taxes(14,305)Income from continuing operations21,457Earnings (losses) from discontinued operations, net of tax1,106Net income$22,563

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  • WHEN REVENUE IS RECOGNIZED?According to IFRS:The risk and reward of ownership is transferredThere is no continuing control or management over the goods soldRevenue can be reliably measuredThere is a probable flow of economic benefitsThe cost can be reliably measured*ng Th Thu Hng

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  • According to US.GAAP:There is evidence of an arrangement between the buyer and sellerThe product has been delivered or the service has been renderedThe price is determined or determinableThe seller is reasonably sure of collecting money*ng Th Thu Hng

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  • UNEARNED REVENUEFirm receives cash before revenue recognition is completeIs liability on the balance sheetGive example???*ng Th Thu Hng

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  • SPECIFIC REVENUE RECOGNITION APPLICATIONSLong term contracts: - Include the percentage of completion method and the completed contract method.- The percentage of completion method is used both IFRS and US.GAAP- The completed contract method is used when the outcome of the project can not be reliably estimated.*ng Th Thu Hng

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  • EXAMPLE 1Assume that AAA Construction Corp. has a contract to build a ship for $1000 and a reliably estimate of the contracts total cost is $800. Project costs incurred by AAA are as follows:

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    AAA Project CostsYear20X520X620X7TotalCost incurred$400$300$100$800

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  • EXAMPLE 2Assume that AAA Construction Corp. has a contract to build a ship for $5000 and a reliably estimate of the contracts total cost is $800. Project costs incurred by AAA are as follows:

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    Year20X520X620X7TotalCost incurred4003005001200

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  • SPECIFIC EXPENSE RECOGNITIONExpenses: are subtracted from revenue to calculate net income.IFRS: expenses are decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants. *ng Th Thu Hng

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  • INVENTORY EXPENSE RECOGNITIONRemind:What is FIFO, LIFO, weighted average cost, specific identification???FIFO and average cost are permitted under both US.GAAP and IFRSLIFO is allowed under US.GAAP but is prohibited under IFRS*ng Th Thu Hng

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  • SUMMARIZES THE EFFECTS OF THE INVENTORY METHODS*ng Th Thu Hng

    MethodAssumptionCost of Goods sold consists ofEnding Inventory consists ofFIFO (US.GAAP and IFRS)The items first purchased are the first to be soldFirst purchasedMost recent purchasesLIFO (only US.GAAP)The items last purchased are the first to be soldLast purchasedEarliest purchasesWeighted average cost (US.GAAP and IFRS)Items sold are a mix of purchasesAverage cost of all itemsAverage cost of all items

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  • EXAMPLE: INVENTORY COSTINGUse the inventory data in the table below to calculate the COGS and ending inventory under each of the three methods:

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    January 1 (beginning inventory)2 units @ $2 per unit = $4January 7 purchase3 units @ $3 per unit = $9January 19 purchase5 units @ $5 per unit = $25COGS available10 units = $38Units sold during January7 units

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  • DEPRECIATION EXPENSE RECOGNITIONThe cost of long lived assets must also be matched with revenue.Long lived assets are expected to provide economic benefits beyond one accounting period.The allocation of cost over an asset life is known as: depreciation, depletion, amortization*ng Th Thu Hng

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  • STRAIGHT LINE DEPRECIATION (SL)*

    Example: Littlefield Company recently purchased a machine at a cost of $12.000. The machine is expected to have a residual value of $2000 at the end of its useful life in five years. Calculate depreciation expense using the straight line method.ng Th Thu Hng

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  • ACCELERATED DEPRECIATIONSpeeds up the recognition of depreciation expense in a systematic way recognize more depreciation expenses in the early years of the assets life & less depreciation expense in the later years of its life.Total depreciation expense over the life of the asset will be the same as it would be if straight line depreciation were used.*ng Th Thu Hng

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  • DECLINING BALANCE METHOD (DDB)*

    Example: Littlefield Company recently purchased a machine at a cost of $12.000. The machine is expected to have a residual value of $2000 at the end of its useful life in five years. Calculate depreciation expense using the DDB.ng Th Thu Hng

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  • CONVERT INCOME STATEMENTS TO COMMON SIZE INCOME STATEMENTSA vertical common size income statements: expresses each category of the income statement as a percentage of revenue.The common size format standardizes the income statement by eliminating the effects of size.

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  • INCOME STATEMENTS*ng Th Thu Hng

    North Co.South Co.Revenue$75,000,000$3,500,000COGS52,500,000700,000Gross profit$22,500,000$2,800,000Administrative expense11,250,000525,000Research expense3,750,000700,000Operating profit$7,500,000$1,575,000

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  • COMMON SIZE INCOME STATEMENT*ng Th Thu Hng

    North Co.South Co.Revenue100%100%COGS70%20%Gross profit30%80%Administrative expense15%15%Research expense5%20%Operating profit10%45%

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  • EVALUATE A COMPANYS FINANCIAL PERFORMANCE*ng Th Thu Hng

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  • COMPREHENSIVE INCOMEComprehensive income: the sum of net income and other comprehensive income.Includes transactions that are not included in net income, such as:Foreign currency translation gains and lossesAdjustments for minimum pension liabilityUnrealized gains and losses from CF hedging derivativesUnrealized gains and losses from available for sale securities.

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  • EXAMPLE: CALCULATING COMPREHENSIVE INCOMECalculate comprehensive income for Triple C corporation using the selected financial statement data found in the following table:

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    NET INCOME$1000Dividends received from available for sale securities60Unrealized loss from foreign currency translation(15)Dividends paid(110)Reacquire common stock(400)Unrealized gain from CF hedge30Unrealized loss from available for sale securities(10)Realized gain on sale of land65

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