Income Statements - Chapter 3

Income statement usefulness - provides a clear overview of a company's financial performance over a specific period, allowing stakeholders to assess profitability, revenue trends, and expense management

  1. Asses past performance

  2. Help to make assessment of the future

  3. Analyze risks pertaining to future cash flows

Limitations of Income Statement:

  • Omissions of transactions that cannot be measure

  • Transaction treatment are affected by accounting method utilized

  • A lot of judgement

Content of the Income Statement:

  • Revenue - inflow of resources or assets

    • enhancement of assets

    • pertain to activities that are core to the operations of the business

    • Ex: sales revenue, fees, service, rent

  • Expenses - outflow of resources or using resources/assets during the period of carrying out the main activities of the businesses

    • Ex: COGS (how much a product cost you), depreciation, rent, salaries & wages, taxes

  • Gains and Losses

    Gains - increase equity from indirect/incidental transactions

    Losses - decrease in equity from incidental transactional

    • Ex: clippers for 800 2 years ago, depreciation of 300, now it costs 500, sold for 450 = loss

Multi-Step Income Statement:

  • Separate operating transactions from non-operating transactions

  • Matches cost and expenses with related revenue

EPS = Net Income - Preferred Dividends/ Shares Outstanding

Earnings per share - measures the dollar amount earned by each investor

Statement of Stockholders Equity:

  • Report changes in equity

  • Contributions

Revenue Recognition Principle:

  1. Recognize revenue when performance obligations met

    • transfer of goods or services is satisfied

  2. Change in control

    • right to pay

    • customer accepts

    • transfer legal rights

Five Steps in Revenue Recognition:

  1. Identify the contract with the customer

  2. Identify the separate performance obligation

  3. Determine the price

  4. Allocate the price to the performance obligation

  5. Recognize revenue if each performance is satisfied