Income Statement

REVENUE

EXPENSES

EPS AND
DILUTIVE EPS

PRESENTATION

Definition: amount reported from sale of goods and services of main activity of business


-> Net revenue = Revenue - Adjustment for estimated returns and allowance

Definition: amounts incurred to generate revenue and include COGS, operating expense, interest, tax


-> Can be group:

  1. By nature: group all depre, interest, ... expense from manufacture, admin,... together
  2. By function (Cost of sale method): group all costs associated w manufacture (raw materials, depre,...) as COGS

NOTE

Gain / Loss of income statement = Sale price - Book value


Net income = Rev - Ordinary exp + Other income - Other exp + Gains - Losses

If a firm has a controlling interest in a subsidiary -> statements of 2 firm: consolidated
-> Non-controlling interest / Minority interest / Minority owners' interest: share of subsidiary's income not owned by parent, reported in parent's income statement
Net income of parent company = Consolidated total income - Non-controlling interest


(Cty con: lãi suất thiểu số (dựa theo % income cty con không thuộc cty mẹ -> khi tính NI cty mẹ -> phải trừ đi trong bản hợp nhất)

Single-step

Multi-step

Interest expense is usually considered an operating expense for financial firms

Recognition

3 situations

5 steps

  1. Identify contract with a customer
  2. Identify the separate or distinct 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

Terms

Contract: agreement between >=2 parties that specifies their obligations and rights
-> For contract to exist: Collectability must be probable (Có căn cứ thu tiền)

Performance obligation: promise to deliver a distinct good / service
(Distinct:
1/ the customer can benefit from the good on its own or combined with other resources that are readily available
2/ the promise to transfer good can be identified separately from any other promises)

Transaction price: amount the firm expected to receive from customer in exchange for transferring good / service
-> usually fixed but can be variable (bonus for early delivery)

Note

Goods are exchanged for cash: Cash & Revenue

Sales of goods made on credit: Account receivable & Revenue

Payment for goods is received prior to the transfer of the goods: Cash & Unearned Revenue

Under IFRS, principles-based approach is applied to revenue recognition

Accrual Accounting Principle: Revenue should be recognized when earned

Recognize revenue only when it is highly probable that they will not have to reserve it

For long-term contract:

  1. Revenue is recognized based on Progress toward completing (measured from input sides / output side)

Progress = Total cost incurred / Total cost estimate -> Revenue = Progress Transaction P
Revenue (bonus included) to date = Progress
(Transaction cost + Bonus)


If have contract modification -> determine if extension of existing one or create a new contract
If there is agent -> Rev of agent = commission / net amt of sale # Rev of principal = transaction P / gross amt of sale


  1. Capitalize cost to secure longterm contract (sales commission)

Required disclosures

Contracts with customers by category

Assets and liabilities related to contracts, including balances and changes

Outstanding performance obligations and transaction prices allocated to them

Management judgements used to determine the amount and timing of revenue recognition, including any changes to those judgements

Matching principle: Expense to generate revenue are recognized in the same period as the revenue


Exception: Period cost (administrative cost): Expensed in the period incurred

Recognition

Inventory

Links w
balance sheet

Balance sheet: Inventory -> sold
Income statement: COGS -> recorded

Balance sheet: Supplies and Prepaid assets -> used
Income statement: Supplies expense, Insurance expense, Rent expense -> recorded

Balance sheet: PPE & Intangible -> provide benefits over a period
Income statement: Depreciation expense, Amortization expense -> record

Depreciation
(Tangible assets)

Amortization
(Intangible assets)

Bad debt
and Warrant

Specific identification: when a firm can identify exactly which item were sold and which items remain in inventory

FIFO: first purchased first sold -> COGS: first purchased, Ending inventory: most recent purchased
(US and IFRS)

LIFO: last purchased first sold -> COGS: last purchased, Ending inventory: most recent purchased
(US only since LIFO -> higher COGS -> lower income taxes)

Weighted average cost: Cost per unit = Cost of available goods / Total units available
(US and IFRS)

Straight - line method: Depreciation expense = (Cost - Residual) / Useful life
-> compared to accelerated depreciation:
in early years: lower depreciation expense, higher NI
in later years: higher depreciation expense, lower NI

Accelerated depreciation method: speed up the recognition of depreciation expense in a systematic way.
Total depreciation expense of accelerated depreciation method = Total depreciation expense of straight-line method

Declining balance method (DB): applies constant rate of depreciation to an asset's book value each year

Double-declining balance method (DDB): applies two times the straight-line rate to the declining balance
DDB depreciation expense = (2/useful life) * (cost - accumulated depreciation)


Note:

  1. Depreciation ends once reach the estimated residual value
  2. If residual value = 0 -> DB method will never fully depreciate it -> change to straight-line at some point in useful life
  3. Use timeline for better calculation

Straight-line method (the same as depreciation)

Intangible assets with indefinite lives (goodwills) -> not amortized
-> test for impairment (annually) -> expense = impairment amount (if assets is impaired - bị giảm giá trị)

Sell goods / services on credit -> Bad debt expense: lists the dollar amount of receivables your company does not expect to collect
(Chi phí nợ khó đòi)
-> Matching principle: estimate warranty expense in the period of the sale

Warranty expense: the cost that a company anticipates incurring for the replacement or repair of products customers purchase
(Chi phí bảo hành)
-> If provide warranty -> Matching principle: estimate warranty expense in the period of the sale

Implications

  1. Consider underlying reasons for a change in expense estimate
  2. Compare firm's estimates to those of other firms within industry
    (Công ty có thể delay hoặc accelerate expense recognition vi tất cả số liệu là estimated -> Nghi vấn để tránh việc công ty khống NI)

Non-recurring items
(Các hạng mục
không định kỳ)

Discontinued operations

Unusual or infrequent items

Changes in
accounting policies
and estimates

Retrospective application (Áp dụng hồi tố): Restatement of all prior - period FSs, including the current ones -> enhance comparability


Modified retrospective application: No restatement, adjust beggining value of affected account for cumulative effects of changes


-> Applied for:

  1. Changes in accounting policies / standards
  2. Changes in accounting method applied
  3. Correction of accounting errors / Prior - period adjustment

Prospectively application (Áp dụng tương lai)


-> Applied for: Changes in accounting estimate (Dùng cho thay đổi thứ yếu, không làm thay đổi CF)

Accounting policies and significant estimate -> Footnote and MD&A section

Management decides to dispose of but either has not yet done so / has disposed of in current year after the operation had generated income / loss

Gain / loss from: Assets, Operating activities, Investing activities, Financing activities -> reported separately in income statement (After "Income from continuing operation")

Gain/ loss from sales of A / part of business (not ordinary operation)
Impairment, write-offs, write-downs, restructuring cost

Past income statements must be restated -> separate income / loss from discontinued operations

Included in income from continuing operations
-> Reported before tax (Above "income from continuing operation")

Simple capital structure

No potential dilutive securities


Contains common stocks, non-convertible debt, unconvertible preferred stock


-> Report only basic EPS (reported only for shares of common stock / ordinary stock)


Common stock dividends -> not subtracted from NI


Must adjust all shares outstanding before stock dividends / stock split

Formula

Example

Complex capital structure

Contains potential dilutive securities (stock options, warrants, convertible debt / convertible preferred stock)


-> must report basic and dilutive EPS

Dilutive securities (Lợi suất pha loãng): decrease EPS if exercised / converted to common stock


Dilutive EPS =< Basic EPS
->Step 1: Calculate basic ESP -> Step 2: Calculate diluted EPS

Anti-dilutive securities: Dilutive securities (Lợi suất pha đặc): increase EPS if exercised / converted to common stock

If-convert
method

used for bonds, stocks


not really happen (estimate EPS = ? if it is converted in the beginning of the period)

Formula

Treasury stock
method

used for options, warrants


EPS is calculated as if financial instruments has been exercised

Example

Assumption: Fund 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 average market price

Note

Formula

Formula

Note

Example

Common size

Express each category as % of revenue


-> Allow comparison of items (1) over-time (time-series analysis, (2) across firm (cross-sectional analysis), (3) examine firm's strategy

Ratios

Effective tax rate = Income tax exp / Pre-tax income

Gross profit margin = Gross profit / Rev

Net profit margin = Net income / Rev

Terms

Retained earnings (RE) = NI at year-end - Dividend payment
-> Lợi nhuận giữ lại cho mục đích đầu tư (investing)

Operating expense margin = Operating exp / Rev

Pretax margin = Pre-tax income / Rev

Comprehensive income = NI + other comprehensive income