ACC 250 CH 4

Recognizing Revenue

Income Statement

Reports a company's profit during a particular reporting period

Comprehensive Income

Includes a few types of gains and losses excluded from the standard income statement

Statement of Cash Flows

Provides information about cash receipts and cash disbursements during a period

Single-Step Income Statement

Formats revenues and gains together first then deducts all expenses and losses together without intermediate profit totals

Multiple-Step Income Statement

Groups intermediate profit measures like gross profit and operating income to show key relationships

Gross Profit

Highlights the relationship between sales revenue and cost of goods sold

Operating Income

Measures profitability resulting strictly from normal primary operations

Income Before Tax

Measures overall earnings before tax expense to allow comparison across different companies

Net Income

Bottom-line profitability including all revenues gains expenses losses and taxes

Revenues

Inflows of resources resulting from providing goods or services to customers

Expenses

Outflows or using up of resources incurred while generating revenue

Matching Principle

The standard requiring expenses to be recognized in the exact same period as the revenue they helped cause

Gains and Losses

Increases or decreases in equity from fringe transactions not involving primary revenues expenses or owner investments

Nonoperating Items

Income statement components related only tangentially to core business operations such as interest or investment sales

Earnings Quality

The ability of reported net income to accurately predict a company's future earnings performance

Temporary Earnings

Income statement items resulting from transactions not likely to recur or likely to have a different future impact

Permanent Earnings

Income components resulting from core transactions that are expected to generate similar profits consistently

Income Smoothing

Altering estimates within GAAP rules to create a steady non-volatile pattern of reported earnings over time

Classification Shifting

Misclassifying operating expenses into nonoperating sections to artificially inflate operating income

Restructuring Costs

Expenses associated with management plans to materially alter the scope of company operations

Impairment Loss

The write-down of long-lived tangible or intangible asset balances when their fair value experiences a significant drop

Non-GAAP Earnings

Voluntary profit disclosures that adjust standard income to exclude specific items like restructuring or stock compensation

Discontinued Operations

Component disposals that represent strategic shifts with major long-term effects on financial results

Discontinued Component Sold

Reporting category containing operational results up to the sale date plus the net gain or loss on asset disposition

Discontinued Component Held for Sale

Reporting category containing annual operational results plus an impairment loss if fair value less cost to sell is below book value

Earnings per Share

Ratio indicating the amount of net income allocated to each individual common share

Basic EPS

Simple performance metric showing net income available to common stockholders divided by weighted-average common shares

Basic EPS (formula)

(Net Income - Preferred Stock Dividends) / Weighted-Average Number of Common Shares Outstanding

Diluted EPS

Earnings metric reflecting potential reduction in share value from convertible securities and stock options

Other Comprehensive Income

Nonowner equity changes excluded from net income such as foreign currency translations and derivative adjustments

Comprehensive Income (formula)

Net Income + Other Comprehensive Income

Accumulated Other Comprehensive Income

Equity balance sheet account holding the cumulative total of historical nonowner gains and losses excluded from net income

Retained Earnings

Equity balance sheet account holding the cumulative total of historical net income minus dividends

Operating Activities

Cash flows directly tied to items reported on the income statement

Direct Method (Cash Flows)

Operating cash flow presentation that lists individual cash receipts and payments directly

Indirect Method (Cash Flows)

Operating cash flow presentation starting with net income and adjusting for noncash and working capital items

Investing Activities

Cash flows related to purchasing and selling long-term operating assets and investment securities

Financing Activities

Cash flows related to transactions with business owners and non-trade debt creditors

Noncash Investing and Financing Activities

Significant asset or equity financing transactions that involve zero cash exchanges during the period

Asset Turnover Ratio

Evaluates how efficiently a business utilizes its total assets to generate sales

Asset Turnover Ratio (formula)

Net Sales / Average Total Assets

Receivables Turnover Ratio

Measures how many times accounts receivable are collected during a period

Receivables Turnover Ratio (formula)

Net Sales / Average Accounts Receivable (net)

Average Collection Period

Evaluates the approximate number of days receivables remain uncollected

Average Collection Period (formula)

365 / Receivables Turnover Ratio

Inventory Turnover Ratio

Measures the speed at which average inventory balances are sold throughout the year

Inventory Turnover Ratio (formula)

Cost of Goods Sold / Average Inventory

Average Days in Inventory

Measures the length of time it takes to sell out inventory on hand

Average Days in Inventory (formula)

365 / Inventory Turnover Ratio

Profit Margin on Sales

Evaluates the percentage of revenue converted into net profit

Profit Margin on Sales (formula)

Net Income / Net Sales

Return on Assets

Measures overall management efficiency at generating earnings from total company assets

Return on Assets (formula)

Net Income / Average Total Assets

Return on Equity

Measures return earned by stockholders on their equity investment

Return on Equity (formula)

Net Income / Average Shareholders' Equity