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:
- By nature: group all depre, interest, ... expense from manufacture, admin,... together
- 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
- Identify contract with a customer
- Identify the separate or distinct performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- 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:
- 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
- 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:
- Depreciation ends once reach the estimated residual value
- If residual value = 0 -> DB method will never fully depreciate it -> change to straight-line at some point in useful life
- 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
- Consider underlying reasons for a change in expense estimate
- 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:
- Changes in accounting policies / standards
- Changes in accounting method applied
- 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