Chapter 4 Vocabulary - The Income Statement, Comprehensive Income, and the Statement of Cash Flows

Income Statement

Statement of operations or statement of earnings that is used to summarize the profit-generating activities that occurred during a particular reporting period

Comprehensive Income

Represents total nonowner changes in shareholders’ equity for the period; equal to net income plus other comprehensive income

Other Comprehensive Income (OCI)

Changes in shareholders’ equity other than transactions with owners and other than items that affect net income

Revenues

Inflows and other enhancements of assets or settlements of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying other activities

Expenses

Outflows or other using-up of assets or incurrences of liabilities (or a combination of both) from delivering or producing of goods, rendering services, or carrying out other activities that constitute the entity’s ongoing operations

Gains

Increases in equity (net assets) from transactions affecting an entity except those that result from revenues or investments by owners

Losses

Decreases in equity from transactions affecting an entity except those that result from expenses or distributions to owners

Income from Continuing Operations

Revenues, expenses (including income taxes), gains, and losses, excluding those related to discontinued operations

Operating Income

Includes revenues, expenses, gains, and losses, directly related to the primary revenue-generating activities of the company

Nonoperating Income

Includes revenues, expenses, gains, and losses not related to primary activities of the company

Single-Step

Income statement format that groups all revenues and gains together and all expenses and losses together

Multiple-Step

Income statement format that includes a number of intermediate subtotals before arriving at income from continuing operations

Earnings Quality

Refers to the ability of reported earnings (income) to predict a company’s future earnings

Restructuring Costs / Restructuring Expense / Reorganization Costs

Costs associated with shutdown or relocation of facilities or downsizing of operations

Non-GAAP Earnings

Actual (GAAP) earnings reduced by any expenses the reporting company feels are unusual and should be excluded

Discontinued Operations

The discontinuance of a component of an entity whose operations and cash flows can be clearly distinguished from the rest of the entity

Prior Period Adjustment

Addition to or reduction in the beginning retained earnings balance in a statement of shareholders’ equity due to a correction of an error in a prior period

Restatement

Process of correcting errors in previous years’ financial statements

Earnings Per Share (EPS)

The amount of net income earned by a company expressed on a per share basis

Basic EPS

Equals total net income (less any dividends to preferred shareholders) divided by the weighted-average number of common shares outstanding

Diluted EPS

Incorporates the dilutive (reducing) effect of all potential common shares in the calculation of EPS

Net Income

All revenues and gains minus all expenses and losses reported in the income statement

Retained Earnings

Amounts earned by the corporation on behalf of its shareholders and not *yet) distributed to them as dividends

Accumulated Other Comprehensive Income (AOCI)

A component of shareholders’ equity that represents the sum of all the other comprehensive income reported in current and prior periods

Statement of Cash Flows (SCF)

Statement summarizing the transactions that caused cash to change during the period

Operating Cash Flows

Inflows and outflows of cash that result from activities reported in the income statement

Direct Method

Cash effect of each operating activity (i.e. income statement item) is reported directly on the statement of cash flows

Indirect Method

The net cash increase or decrease from operating activities is derived indirectly by starting with reported net income and working backwards to convert that amount to a cash basis

Investing Cash Flows

Include inflows and outflows of cash related to the acquisition and disposition of long-lived assets used in the operations of the business (such as property, plant, and equipment) and investment assets (except those classified as cash equivalents and trading securities)

Financing Cash Flows

Involve cash inflows and outflows from transactions with creditors (excluding trade creditors) and owners

Asset Turnover Ratio

Measure of a company’s efficiency in using assets to generate revenue; computed as net sales divided by average total assets

Receivables Turnover Ratio

Indicates how quickly a company is able to collect is accounts receivable; computed as net sales divided by average accounts receivable (net)

Average Collection Period

Indication of the number of days the average accounts receivable balance is outstanding; computed as 365 days divided by the receivables turnover ratio

Inventory Turnover Ratio

Shows the number of times the average inventory balance is sold during a reporting period; computed as cost of goods sold divided by average inventory

Average Days in Inventory

Indicates the average number of days it normally takes to sell inventory; computed as 365 days divided by the inventory turnover ratio

Profit Margin on Sales

Net income divided by net sales; measures the amount of net income achieved per sales dollar

Return on Assets (ROA)

Measures the return to suppliers of equity capital, the shareholders; computed as net income divided by average total assets

Return on Equity (ROE)

Amount of profit management can generate from shareholders’ equity, measured as net income divided by average shareholders’ equity

DuPont Framework

Depicts return on equity as determined by profit margin (representing profitability), asset turnover (representing efficiency), and the equity multiplier (representing leverage)