R21 Understanding Income Statements 01

FRA Reading #21 - Understanding Income Statements

1. Net income equation Net Income = Revenues - 20. accelerated when assets generate more benefits in
Expenses depreciation the early years of their economic life
method
2. How are expenses grouped? by their nature or function
21. when does early years of an asset's life
3. Depreciation expense is an by nature
straight line
example of what kind of
depreciation
grouping
result in lower
4. Combining all costs associated by function depreciation
with manufacturing is an expense?
example of what kind of
22. straight line
grouping
depreciation
5. consolidated statement firm has controlling interest formula
in a subsidiary (cost-residual value)/useful life
6. gross profit revenue - cost of goods 23. declining balance applies a constant rate of depreciation
sold method to an asset's (declining) book value each
year
7. operating profit gross profit - operating
expenses 24. double declining
balance method
8. bottom line net income
applies two times the straight line rate to
9. net income Operating Income - Income the declining balance
Taxes
25. Amortization the allocation of the cost of an
10. accounts receivable asset to recognize revenue intangible asset over its useful life
from the sale of goods
26. what is not intangible assets with indefinite lives
made on credit
amortized
11. unearned revenue The liability created by
27. how does increases current net income
receiving revenue in
delayed expense
advance.
recognition affect
12. central principle for new firm should recognize net income
revenue recognition standard revenue when it has
28. where do firms footnotes anf MD&A
transferred a good or
disclose their
service to customer
accounting
13. how is revenue recognized for based on a firm's progress policies and
long term contracts towards completing a significant
performance obligation estimates
14. matching principle expenses to generate 29. do discountinued nope
revenue are recognized in operations affect
the same period as the net income from
revenue continuing
15. period costs expensed in the period operations
incurred 30. EPS is reported common stock
16. When is FIFO used inventory with a limited for only what
shelf life types of stock

17. when is LIFO used inventory that does not 31. simple capital contains no potentially dilutive
deteriorate with age structure securities

18. depreciation allocation of cost over an 32. what is not common stock, nonconvertible debt and
asset's life potentially nonconvertible preferred stock
dilutive securities
19. straight line depreciation equal amount of
depreciation expense each
period
R21 Understanding Income Statements 02

33. what is a contains potentially dilutive securities 45. When are stock When their exercise prices are less than
complex capital options and the average market price of the stock
structure warrants dilutive? over the year.
34. what are options, warrants and convertible 46. what method do treasury stock method
potentially securities you use when
dilutive securities options and
warrants are
35. basic eps
dilutive

(net income - preferred dividends) / 47. Treasury Stock Assumes that the funds received by the
weighted average number of common Method company from the exercise of options
shares outstanding would be used to repurchase shares at
average market price
36. weighted the number of shares outstanding during
average number the year, weighted by the portion of the 48. common size expresses items as a percentage of
of common year they were outstanding income statement revenues.
shares 49. effective tax rate Income Tax Expense / Pretax Income
37. stock dividend The distribution of additional shares to 50. margin ratios measures profitablity
each shareholder in an amount
proportional to their current number of 51. gross profit
shares margin

38. stock split division of each "old" share into a specific Gross Profit/revenue
number of "new" (post-split) shares 52. net profit margin
39. what is the none, their proportional ownership is
change to the unchanged Net Income/Revenue
shareholder in
53. retained earnings net income - dividends
both a stock split
and stock 54. comprehensive all changes in equity except for owner
dividend income contributions and distributions
40. dilutive securities stock options, warrants, convertible debt, 55. other transactions that are not included in net
or convertible preferred stock that would comprehensive income
decrease EPS if exercised or converted to income
common stock
56. four things part of 1. foreign currency translation gains and
41. Antidilutive stock options, warrants, convertible debt, other losses
securities or convertible preferred stock that would comprehensive 2. adjustments for minimum pension
increase EPS if exercised or converted to income liability
common stock 3. unrealized gains and losses from cash
flow hedging derivatives
42. If convertible the convertible preferred dividends must
4. unrealized gains and losses from
preferred stock be added to earnings available to
available-for-sale securities
is dilutive... common shareholders.
57. trading securities debt securities that a firm owns but
43. If convertible then the bonds' after-tax interest expense
(GAAP) intends to sell
bonds are is not considered an interest expense for
dilutive... diluted EPS. Hence, interest expense 58. trading securities reported on the income statement along
multiplied by (1 - the tax rate) must be are (I.S.) with any unrealized gains and loses
added back to the numerator.
59. Debt securities firm does not intend to sell prior to
44. Diluted EPS held to maturity maturity
formula
60. Held-to-maturity reported at amortized cost
securities unrealized gains/losses are not reported
see picture
R21 Understanding Income Statements 03

61. Available-for-sale securities securities that are held with the intent of selling them sometime in the future but not in
near future
62. Available-for-sale securities are unrealized gains and loses are reported as other comprehensive income
reported as