FAR - Income Statement

What is the basic structure of the income statement?

The income statement includes:

• Revenues

• Expenses

• Gains and Losses

• Net Income

What are revenues in the income statement?

The amounts earned by the company through its primary business activities, such as sales of goods or services.

What is Cost of Goods Sold (COGS)?

The direct costs incurred to produce goods or services sold, including raw materials and labor.

What are Operating Expenses?

Costs incurred in normal business operations, excluding COGS. Examples include selling, general, and administrative expenses (SG&A).

What are Non-Operating Items?

Non-operating items include revenues, expenses, gains, and losses not related to the company’s core business operations (e.g., interest income, gains on asset sales).

Represents the amount a company owes in taxes based on its taxable income.

Income Tax Expense

Statement summarizes all revenues and expenses in one step, subtracting total expenses from total revenues to calculate net income.

Single-Step Income Statement

What is the difference between Basic EPS and Diluted EPS?
A:

• Basic EPS: Based on outstanding shares.

• Diluted EPS: Takes into account potentially dilutive securities (e.g., stock options, convertible bonds).

Business segments or assets sold or abandoned, which are reported separately from continuing operations if they represent a strategic shift.

Discontinued Operations

Are Extraordinary Items still reported on the income statement?

No, extraordinary items were abolished under both GAAP and IFRS. Unusual or infrequent items are reported under other income/expenses.

Includes net income plus other comprehensive income (OCI), which consists of gains or losses not yet realized (e.g., foreign currency translation adjustments).

Comprehensive Income

How do GAAP and IFRS differ in income statement presentation?

• GAAP: More detailed classifications (e.g., separating operating and non-operating income).

• IFRS: Allows more flexibility in presenting income, but still requires clear separation of operating and non-operating items.

What principle guides Revenue Recognition on the income statement?

Revenue is recognized when it is earned, regardless of when cash is received, typically when control of goods or services has passed to the customer.

What is the Matching Principle in relation to the income statement?

The matching principle requires that expenses be matched with revenues in the same period to accurately reflect profit or loss.

What criteria must be met for a disposal to be classified as Discontinued Operations?

• The disposal represents a strategic shift (e.g., a major business line or geographical area).

• It will have a significant effect on the company’s financial results (e.g., reducing operational complexity).

How are Discontinued Operations reported on the income statement?

• Income or loss from discontinued operations is shown separately, net of tax.

• Gains or losses on disposal of the discontinued segment are also shown separately.

How are Discontinued Operations presented on the balance sheet?

The assets and liabilities of discontinued operations are classified as held for sale and reported separately from continuing operations.

What qualifies as a strategic shift for a disposal to be considered discontinued operations?

• A major product line

• A major geographical area

• A subsidiary or business unit

What is the calculation for the Discontinued operation gain/loss?

Income/loss from operations + Gain/loss from sale

What is the accounting treatment for Operating income/loss? (Element of Discontinued Operation)

Recognized (net of tax) in period incurred

What is the accounting treatment for Gain on sale? (Element of Discontinued Operation)

Recognized (net of tax) in year of disposal

What is the accounting treatment for Loss on sale (actual)? (Element of Discontinued Operation)

Recognized (net of tax) in year of disposal

What is the accounting treatment for Impairment loss (anticipated)? (Element of Discontinued Operation)

Recognized immediately upon "held for sale" classification

Occurs when an asset's book value exceeds its net realizable value

What is the impact of Domestic currency (dollar) weakening

More dollars are required to buy one unit of foreign currency

Receivable denominated in foreign currency: Transaction gain

Payable denominated in foreign currency: Transaction loss

What is the impact of Domestic currency (dollar) strengthening

Fewer dollars are required to buy one unit of foreign currency

Receivable denominated in foreign currency: Transaction loss

Payable denominated in foreign currency: Transaction gain

How to report items of income/loss that are unusual and/or infrequent

Should be reported separately as part of income from continuing operations

Disclosure Requirements for Unusual and Infrequent Items

• Nature and Amount: The company must disclose the nature of the item (e.g., loss due to a natural disaster, gain from sale of an asset) and the amount of income or loss recognized.

• If the item is large or significant, the company should also provide a description of the event and any impact on the company’s financial condition.

Foreign Currency - Initial Transaction (Transaction Date)

Foreign currency amounts are recorded at the exchange rate on the transaction date.

Foreign Currency - Settlement Date (Payment or Receipt)

Use the exchange rate at the settlement date to convert the foreign currency into home currency.

Foreign Currency - Balance Sheet Date

If you have outstanding foreign currency denominated monetary items at year-end (e.g., accounts payable or receivable), you need to re-measure them using the year-end exchange rate.

Foreign Currency - Balance Sheet Date (Monetary Items)

Such as accounts payable and receivable should be re-measured at the year-end exchange rate (the spot rate).

Foreign Currency - Balance Sheet Date (Foreign Exchange Gain/Loss)

Will be recognized based on the difference between the original transaction rate and the year-end rate.

How to record Foreign Currency Gains/Losses

Are a nonoperating item and are recorded through net income. In a multi-step income statement, these gains and losses are part of nonoperating income

What is the purpose of Comprehensive Income?

To report a measure of overall enterprise performance. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners/shareholders and distributions to owners/shareholders.

Other Comprehensive Income

OCI items are not recognized in net income. They are recorded directly as increases or decreases in shareholders' equity.

Items included in OCI

• Derivative cash flow hedges  

• Excess adjustment on defined benefit pension plans  

• Net unrealized holding gains and losses on available-for-sale  

debt securities  

• Translation adjustments from foreign currency  

Accumulated other comprehensive income (AOCI)

A running total of OCI items through the balance sheet date.

What is included in AOCI?

includes cumulative OCI for all periods (ie, current and prior periods).