Chapter 3 Flashcards: Understanding Income Statements

Flashcards covering key vocabulary and concepts related to understanding income statements, including components, revenue and expense recognition, earnings per share, and comprehensive income.

Income Statement

Also called the “statement of earnings,” “statement of operations,” and “profit and loss statement (P&L)”, it presents results of operations for the accounting period.

Gross Profit

Revenue less cost of sales

Multistep Format

Income statement shows gross profit subtotal.

Single-step Format

Income statement excludes gross profit subtotal.

Operating Profit

Revenue less all operating expenses

Revenue Recognition Standards

IFRS and US GAAP converged revenue recognition principles using a five-step model.

Revenue Recognition

The entity recognizes revenue when it is able to satisfy performance obligations by transferring control to the customer.

Matching principle

Costs are matched with revenues.

Depreciation

Process of systematically allocating costs of long-lived assets over the period during which the assets are expected to provide economic benefits.

Depreciation

Term commonly applied for physical long-lived assets, such as plant and equipment (NOT land)

Amortization

Term commonly applied to this process for intangible long-lived assets with a finite useful life

Non-Recurring Items

Separating non-recurring from recurring items of income and expense can help an analyst assess a company’s future earnings.

Earnings Per Share (EPS)

The net earnings available to common stockholders for the period divided by the weighted average number of common stock shares outstanding

Net Profit Margin

Net income/Revenue, measures the amount of income that a company was able to generate for each dollar of revenue

Gross Profit Margin

Gross profit/Revenue

Operating Profit Margin

Operating profit/Revenue

Pretax Profit Margin

Pretax profit/Revenue

Comprehensive Income

Includes net income and other comprehensive income.

Dilutive securities

Securities that, if included in a diluted EPS calculation, result in an EPS lower than the company’s basic EPS.

Antidilutive securities

Securities that, if included in a diluted EPS calculation, would result in an EPS higher than the company’s basic EPS