24 Understanding Income Statemen

presentation under IFRS and U.S. GAAP

1.the income statement can be combine with other comprehensive income as a single statement of comprehensive income
2.the income statement and the statement of comprehensive income can be presented separately

income statement

revenues - expenses = net income

revenues: revenue - adjustments for estimated returns and allowances = net revenue

expenses: grouped together by their nature or function

• nature: present all depreciation expense from manufacturing and administration together
• function: combine all costs associated with manufacturing as cost of goods sold

gains and losses: may or may not result from ordinary business activities

net income = revenues - ordinary expenses + other income -other expense + gains - losses

noncontrolling interest: the subsidiary's income not owned by parent (should be subtracted in arriving at net income)

毛利润、营业收入、净收入
gross profit=revenue - direct costs of producing a product or service (COGS)
operating profit = gross profit - operating expenses
net income = operating profit - interest expense - income taxes

revenue recognition

long-term contracts

outcome can be reliably estimated, both IFRS and U.S. GAAP

• percentage-of-completion method 完工程度法 aggressive, subjective, smooth

outcome cannot be reliably estimated, under U.S. GAAP

• completed-contract method 全部完工法

outcome cannot be reliably estimated, under IFRS

• revenue is recognized to the extent of contract costs
• profit is recognized only at completion

cash flows are the same

installment sales

under U.S. GAAP

• collectibility is certain: normal revenue recognition criteria

• collectibility cannot be reasonably estimated: installment method 分期付款法 aggressive

  • profit is equal to the cash collected during the period multiplied by the total expected profit as a percentage of sales

• collectibility is highly uncertain: cost recovery method 成本回收法

  • profit is recognized only when cash collected exceeds costs incurred

under IFRS

• discounted present value
  • recognized as interest over time
• cost recovery method

barter transactions (non-monetary exchange)

under U.S GAAP:

• fair value only if the firm has historical experience to determine fair value
• carrying value of the asset surrendered

under IFRS

• fair value from similar nonbarter transactions with unrelated parties

gross and net reporting of revenue
gross revenue reporting: sales revenue and cost of goods sold reported separately
net revenue reporting: only the difference in sales and cost is reported

• should be used when the firm is acting essentially as a selling agent and does not stock inventory, take credit risk, or have control over supplier and price

recognizing revenue
1.identify the contract with a customer
2.identify the performance obligations in the contract
3.determine the transaction price
4.allocate the transaction price to the performance obligations in the contract
5.recognize revenue when the entity satisfies a performance obligation

expense recognition

matching principle: both the revenue and the expense are recognized when the inventory is sold, not the period in which the inventory was purchased

inventory expense recognition
identify exactly: specific identification
FIFO: U.S. GAAP and IFRS
LIFO: U.S. GAAP (tax benefits, higher cost of goods sold in an inflationary environment)
weighted average cost: U.S. GAAP and IFRS

depreciation expense recognition (tangible asset)
straight-line depreciation 直线折旧法
SL depreciation expense= (cost - residual value)/ useful life
accelerated depreciation 加速折旧法
declining balance method DB余额递减折旧法 constant rate of depreciation
double-declining balance DDB加倍折旧法
DDB depreciation =(2/useful life)(cost - accumulated depreciation)

amortization expense recognition (intangible asset)
definite lives: straight-line amortization
indefinite lives: be tested for impairment at least annually

non-recurring items

discontinued operations 已停止经营的业务
unusual or infrequent items 或有项目 (gains, losses, impairments. write-offs, write-downs, restructuring costs)
extraordinary items 非经常性项目 (not allowed under U.S. GAAP and IFRS)

changes in accounting policies

changes in accounting principles

• retrospective application 追溯调整法 all of the prior-period financial statements currently presented are restated to reflect the change

changes in accounting estimates

• applied prospectively and does not require the restatement of prior financial statements

prior-period adjustments

• restate results for all prior periods presented in the current financial statement

EPS earning per share

capital structure
1.simple capital structure: no potentially dilutive securities (only basic EPS)
2.complex capital structure: contains potentially dilutive securities (basic and diluted EPS)

basic EPS = (net income - preferred dividends)/weighted average number of common shares outstanding
weighted average number of common shares outstanding 流通期加权平均普通股数

stock dividend 股票红利
stock split 股票分割
each shareholder's proportional ownership in the company is unchanged

dilutive securities: would decrease EPS if exercised or converted to common stock
antidilutive securities: would increase EPS if exercised or converted to common stock

treasury stock method

• assumes that funds received by the company from the exercise of the options would be used to hypothetically purchase shares of the company's common stock in the market at the average market price
• net increase = options exercised - number of shares hypothetically repurchased

diluted EPS
numerator: (net income - preferred dividends)+(convertible preferred dividends)+(convertible debt interest)(1 - t)
denominator: (weighted average shares)+(shares from conversion of convertible preferred shares)+(shares from conversion of convertible debt)+(shares issuable from stock options)
each potentially dilutive security must be examined separately to determine if it is actually dilutive

判别指标
convertible debt: convertible debt interest × (1-t) / convertible debt shares
convertible preferred stock: preferred dividend / the number of shares that will be created
options or warrants: (average market price - exercise price) / average market price × number of common shares that can be converted into

common-size income statement 同型损益表

the income statement as a percentage of revenue

financial ratios

gross profit margin= gross profit / revenue
net profit margin = net income / revenue
operating profit margin = operating profit / revenue
pretax margin = pretax accounting profit / revenue

comprehensive income

comprehensive income = net income + other comprehensive income
other comprehensive income
1.foreign currency translation gains and losses
2.adjustments for minimum pension liability
3.unrealized gains and losses from cash flow hedging derivatives
4.unrealized gains and losses from available-for-sale securities