INT Accounting Chapter 4

Revenue

Inflows of resources from providing goods or services.

Expenses

Outflows of resources incurred while generating revenue.

Causal Relationship (Expenses)

Reported in the same period, revenue is recognized.

No Causal Relationship (Expenses)

Allocate over several periods, or expense as incurred. Cannot tie directly to a revenue activity.

Gains and Losses

increases and decreases in equity from incidental transactions. Not related to normal operations.

Operating Income

revenue, expenses, gains, and losses directly related to the primary operations of the company.

Non operating income

revenue, expenses, gains, and losses not related to primary revenue generating activities.

income tax expense

Reported in a separate line item on the income statement because of its importance and size; also called the provision for income taxes.

Single Step Income Statement

Does not separately classify operating and non-operating items. Revenue and gains are grouped and listed first. Expenses and losses are grouped and listed second. Income Tax expense is reported as a separate line item and listed third.

Multi-step Income Statement

Includes several intermediate subtotals before arriving at income from continuing operations.

Advanteges of a Multi-Step income statement

Provides information useful in analyzing trends (operating vs. non operating)

Gross Profit

Highlights the relationship between Sales Revenue and COGS

Income before taxes

Useful for comparing companies in different tax jurisdictions.

Earnings Quality

The ability of reported earnings (income) to predict a company’s future earnings.

Temporary Earnings

Arise from transactions or events that are NOT likely to occur again in a foreseeable future.

Permanent Earnings

Arise from operations that are expected to generate similar profits in the future.

Income Smoothing

Alter income down in one year but up in other years; help investors to predict future performance but also hide underlying risks.

Unusual or infrequent events

Unlikely to occur again, but are reported as part of operating income because they are closely related to the company’s core business. Would require investigation to determine whether they are permanent or temporary.

Restructuring Costs

costs associated with shutdown or relocation of facilities or downsizing of operations.

Discontinued Operation

A component of an entity or group that has been sold or disposed of, or its considered held for sale.

Held for sale

The company has decided to discontinue a component but has not sold the component by the end of the reporting period.

Impairment Loss

Reported when the book value of the assets of the (held for sale) component is GREATER than the fair value of the assets.

Earnings Per Share

(Net Income - Preferred Dividends)/Weighted Avg. Shares of Common Stock Outstanding

Comprehensive Income

Total change in equity for a reporting period other than from transactions with owners. All reported AFTER tax.

Accumulated Other Comprehensive Income

Cumulative total of OCI is reported as accumulated other comprehensive income (AOCI) on the equity section of the Balance Sheet and on the Statement of Stockholders Equity

Statement of Cash Flows (SCF)

Present for each period for which an income statement is provided.

Usefulness of the Statement of Cash Flows

Cash flow generated from operations and other cash flow activities can help assess future profitability, liquidity, and long-term solvency.

Operating Activities

Inflows and Outflows from activities reported in the income statement

Investing activities

Inflows and outflows of cash related to the acquisition and disposition of long-term assets used in the operations of the business and investments.

Financing Activities

Inflows and outflows from transactions with creditors and investors.

Activity Ratios

Measure a company’s efficiency in managing assets. Higher turnover ratios are usually preferred.

Asset Turnover

Net Sales / Avg. Total Assets

Measures a company’s efficiency in using its assets to generate revenue.

Receivable Turnover

Net credit sales / avg. accounts receivables
How quickly a company is able to collect its accounts receivable.

Average Collection Period

365 / Rec. Turnover

Inventory Turnover Ratio

COGS / Avg Inventory

Profitability Ratios

Measure a company’s ability to earn adequate return relative to sales or resources devoted to operations.

Profit Margin

Net Income / Net Sales

Amount of income achieved per sales dollar.

Return on Assets

Profit Margin * Asset Turnover

Return generated by a company’s assets.

Return on Equity

Net Income / Avg. total equity

Return to suppliers of equity capital.