1. UNDERSTANDING INCOME STATEMENTS 1Đặng Thị Thu Hằng

2. INCOME STATEMENT COMPONENTS AND FORMAT What is the income statement? Equation: Revenues – Expenses = Net income 2Đặng Thị Thu Hằng

3. COMPONENTS OF THE INCOME STATEMENT Revenues: amounts reported from the sale of goods and services in the normal course of business. Revenue less adjustments for estimated returns and allowances  What is this??? 3Đặng Thị Thu Hằng

4. Expenses: amounts incurred to generate revenue and include cost of goods sold, operating expenses, interest and taxes. Gain and losses: which result in an increase (gains) or decrease (losses) of economic benefits. Net income = Revenues – Ordinary expenses + Other income – Other expense + Gains - Losses 4Đặng Thị Thu Hằng

5. BHG COMPANY INCOME STATEMENT for the year ended December 31, 20X7 Revenue$ 579,312 Cost of goods sold(362,520) Gross profit216,792 Selling, general, and administrative expense(109,560) Depreciation expense(69,008) Operating profit38,224 Interest expense(2,462) Income before tax35,762 Provision for income taxes(14,305) Income from continuing operations21,457 Earnings (losses) from discontinued operations, net of tax 1,106 Net income$22,563 5Đặng Thị Thu Hằng

6. WHEN REVENUE IS RECOGNIZED? According to IFRS: -The risk and reward of ownership is transferred -There is no continuing control or management over the goods sold -Revenue can be reliably measured -There is a probable flow of economic benefits -The cost can be reliably measured 6Đặng Thị Thu Hằng

7. According to US.GAAP: -There is evidence of an arrangement between the buyer and seller -The product has been delivered or the service has been rendered -The price is determined or determinable -The seller is reasonably sure of collecting money 7Đặng Thị Thu Hằng

8. UNEARNED REVENUE Firm receives cash before revenue recognition is complete Is liability on the balance sheet Give example??? 8Đặng Thị Thu Hằng

9. SPECIFIC REVENUE RECOGNITION APPLICATIONS Long term contracts: - Include the percentage of completion method and the completed contract method. - The percentage of completion method is used both IFRS and US.GAAP - The completed contract method is used when the outcome of the project can not be reliably estimated. 9Đặng Thị Thu Hằng

10. EXAMPLE 1 Assume that AAA Construction Corp. has a contract to build a ship for $1000 and a reliably estimate of the contract’s total cost is $800. Project costs incurred by AAA are as follows: AAA Project Costs Year20X520X620X7Total Cost incurred $400$300$100$800 10Đặng Thị Thu Hằng

11. EXAMPLE 2 Assume that AAA Construction Corp. has a contract to build a ship for $5000 and a reliably estimate of the contract’s total cost is $800. Project costs incurred by AAA are as follows: 11 Year20X520X620X7Total Cost incurred 4003005001200 Đặng Thị Thu Hằng

12. SPECIFIC EXPENSE RECOGNITION Expenses: are subtracted from revenue to calculate net income. IFRS: “expenses are decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants”. 12Đặng Thị Thu Hằng

13. INVENTORY EXPENSE RECOGNITION Remind: -What is FIFO, LIFO, weighted average cost, specific identification??? -FIFO and average cost are permitted under both US.GAAP and IFRS -LIFO is allowed under US.GAAP but is prohibited under IFRS 13Đặng Thị Thu Hằng

14. SUMMARIZES THE EFFECTS OF THE INVENTORY METHODS MethodAssumptionCost of Goods sold consists of Ending Inventory consists of FIFO (US.GAAP and IFRS) The items first purchased are the first to be sold First purchasedMost recent purchases LIFO (only US.GAAP) The items last purchased are the first to be sold Last purchasedEarliest purchases Weighted average cost (US.GAAP and IFRS) Items sold are a mix of purchases Average cost of all items 14Đặng Thị Thu Hằng

15. EXAMPLE: INVENTORY COSTING Use the inventory data in the table below to calculate the COGS and ending inventory under each of the three methods: 15 January 1 (beginning inventory) 2 units @ $2 per unit = $4 January 7 purchase3 units @ $3 per unit = $9 January 19 purchase5 units @ $5 per unit = $25 COGS available10 units = $38 Units sold during January7 units Đặng Thị Thu Hằng

16. DEPRECIATION EXPENSE RECOGNITION The cost of long – lived assets must also be matched with revenue. Long – lived assets are expected to provide economic benefits beyond one accounting period. The allocation of cost over an asset’ life is known as: depreciation, depletion, amortization 16Đặng Thị Thu Hằng

17. STRAIGHT LINE DEPRECIATION (SL) 17 Example: Littlefield Company recently purchased a machine at a cost of $12.000. The machine is expected to have a residual value of $2000 at the end of its useful life in five years. Calculate depreciation expense using the straight line method. Đặng Thị Thu Hằng

18. ACCELERATED DEPRECIATION Speeds up the recognition of depreciation expense in a systematic way  recognize more depreciation expenses in the early years of the asset’s life & less depreciation expense in the later years of its life. Total depreciation expense over the life of the asset will be the same as it would be if straight line depreciation were used. 18Đặng Thị Thu Hằng

19. DECLINING BALANCE METHOD (DDB) 19 Example: Littlefield Company recently purchased a machine at a cost of $12.000. The machine is expected to have a residual value of $2000 at the end of its useful life in five years. Calculate depreciation expense using the DDB. Đặng Thị Thu Hằng

20. CONVERT INCOME STATEMENTS TO COMMON – SIZE INCOME STATEMENTS A vertical common – size income statements: expresses each category of the income statement as a percentage of revenue. The common size format standardizes the income statement by eliminating the effects of size. 20Đặng Thị Thu Hằng

21. INCOME STATEMENTS North Co.South Co. Revenue$75,000,000$3,500,000 COGS52,500,000700,000 Gross profit$22,500,000$2,800,000 Administrative expense 11,250,000525,000 Research expense 3,750,000700,000 Operating profit$7,500,000$1,575,000 21Đặng Thị Thu Hằng

22. COMMON – SIZE INCOME STATEMENT North Co.South Co. Revenue100% COGS70%20% Gross profit30%80% Administrative expense 15% Research expense5%20% Operating profit10%45% 22Đặng Thị Thu Hằng

23. EVALUATE A COMPANY’S FINANCIAL PERFORMANCE 23Đặng Thị Thu Hằng

24. COMPREHENSIVE INCOME Comprehensive income: the sum of net income and other comprehensive income. Includes transactions that are not included in net income, such as: -Foreign currency translation gains and losses -Adjustments for minimum pension liability -Unrealized gains and losses from CF hedging derivatives -Unrealized gains and losses from available for sale securities. 24Đặng Thị Thu Hằng

25. EXAMPLE: CALCULATING COMPREHENSIVE INCOME Calculate comprehensive income for Triple C corporation using the selected financial statement data found in the following table: 25 NET INCOME$1000 Dividends received from available for sale securities60 Unrealized loss from foreign currency translation(15) Dividends paid(110) Reacquire common stock(400) Unrealized gain from CF hedge30 Unrealized loss from available for sale securities(10) Realized gain on sale of land65 Đặng Thị Thu Hằng