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CONTENTS
1. Introduction
2. Components and Format of the Income Statement
3. Revenue Recognition
4. Expense Recognition
5. Non-recurring Items and Non-operating Items
6. Earnings per Share
7. Analysis of the Income Statement
8. Comprehensive Income
9. Summary
2
OVERVIEW
Subtotals:
- Gross profit (i.e., revenue less cost of sales)
- Multistep format: Income statement shows gross profit
subtotal.
- Single-step format: Income statement excludes gross profit
subtotal.
- Operating profit (i.e., revenue less all operating expenses)
- Profits before deducting taxes and interest expense and
before any other non-operating items.
- Operating profit and EBIT (earnings before interest and
taxes) are not necessarily the same.
Expense grouping
• Answer: First, can the customer benefit from the good or service on its own or
together with other readily available resources?
• Answer: Second, the seller’s ‘promise to transfer the good or service to the
customer is separately identifiable from other promises in the contract’ is not met
because it is the building which the customer has contracted, not the separate
goods or services.
Beginning Ending
Inventory Goods
Inventory
Available
Goods for
Sale Cost of
Purchased Goods Sold
What are the revenue and expense for these transactions during the year?
(Assume that the company does not expect any returns)
Ending inventory
From the 3rd quarter: 100 units at $43 per unit $4,300
From the 4th quarter: 1,900 units at $45 per unit $85,500
Total remaining (or ending) inventory cost $89,800
Inventory sales during the year 5,600 units at $50 per unit.
Assume the company does not specifically identify the units, but instead
uses the weighted average cost method of inventory costing.
• Ending inventory =
2,000 units at $42.3158 per unit $84,632
Inventory sales during the year: 5,600 units at $50 per unit.
What are the revenue and expense for these transactions during the
year?
Assume the company does not specifically identify the units, but instead
uses the FIFO (first in, first out) method of inventory costing.
COGS = $231,800
Inventory sales during the year: 5,600 units at $50 per unit.
What are the revenue and expense for these transactions during the
year?
Assume the company reports
LIFO is under under
not allowed U.S. GAAP
IFRS.and uses the LIFO
Assume
(last the company
in, first does notofspecifically
out) method identify the units, but instead
inventory costing.
uses the LIFO method of inventory costing.
COGS = $241,600
*Assumes no LIFO layer liquidation. LIFO layer liquidation occurs when the volume of sales exceeds the
volume of other purchases in the period so that some sales are assumed to be from existing, relatively low-priced
inventory rather than from more recent purchases.
Copyright © 2020 CFA Institute 29
SPECIFIC EXPENSE RECOGNITION
APPLICATIONS: DEPRECIATION
Depreciation: Process of systematically allocating costs of long-lived
assets over the period during which the assets are expected to provide
economic benefits.
- Depreciation: term commonly applied for physical long-lived assets,
such as plant and equipment (NOT land)
- Amortization: Term commonly applied to this process for intangible
long-lived assets with a finite useful life
Depreciation Methods:
- Straight line
- Accelerated (i.e., diminishing balance)
- Units of production
Basic EPS
= (Net income – Preferred dividends)/Weighted average number of
shares outstanding
= ($2,431 – $0)/488.3
= $4.98
Basic EPS:
= (Net income – Preferred dividends)/Weighted average number of
shares outstanding
= ($2,500,000 – $200,000)/1,125,000
= $2.04
Diluted EPS
= Net income/(Weighted average number of shares outstanding
+ New shares issued at conversion)
Diluted EPS
= (Net income + After-tax interest on convertible debt – Preferred
dividends)/(Weighted average number of shares outstanding + Additional
common shares that would have been issued at conversion)
Assume a company reported net income of $2.3 million for the year
ended 30 June 2018 and has the following:
- an average of 800,000 common shares outstanding
- 30,000 options with an exercise price of $35 outstanding
- no other potentially dilutive securities
Over the year, its market price averaged $55 per share.
Calculate the company’s basic and diluted EPS.
Diluted EPS
= (Net Income – Preferred dividends)/(Weighted average number
of shares outstanding + New shares issued at option exercise –
Shares that could have been purchased with cash received upon
exercise)
Calculate Denominator
= 810,909 Shares
30,000 – 19,091 = 10,909
What amount has bypassed the net income calculation by being classified as
Other comprehensive income?
Answer: €10 million.
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