Alternate names for income statement
Statement of Operations
Statement of earnings
Revenue - Cost of Goods sold
Gross Profit - Selling Administrative and General - R&D Expenses
Interest paid to minority shareholders when the parent company does not own 100% of its subsidiary (Example, Comcast owning NBC).
Different methods of revenue recognition
Before goods are delivered -> % of completion method
At the time of goods being delivered -> Recognize revenue using normal revenue recognition
After delivery of goods -> Installment and cost recovery method.
Under this method, no revenue is reported, until the contract/obligation is completed.
Revenue/Profit is recognized, based on the money collected.
Cost recovery method
Profit is recognized only when the collected revenue is more than cost of goods sold.
Barter transactions - Round trip transaction
When two companies exchanges the products between them, is known as barter transactions.
Gross Reporting vs Net Reporting
Gross revenue - When a company recognizes revenue fully
Net Revenue - When a company acts as a middleman where it simply facilitates between buyer and seller.
1. Matching principle , where expenses are recognized.
2. Period costs, When a company incurs an expense, that are not matched with revenues (Ex: Admin cost)
Goods and services provided to the customers but the money is no longer collectible. (Default by customers).
Recognized as an expense.
When a service is provided, a company is expected to provide certain % of revenue for warranties.
Systematically allocating costs of long lived assets over the period.
Straight line depreciation
Average cost of annual depreciation
Annual depreciation using straight line method
(Cost - Residual ) / Estimated value
Accelerated methods of depreciation
The depreciation is being sped up to the early years of asset's useful life.
Diminishing balance method
Each year, the balance is depreciated by a certain % and it continues till the balance reaches its residual value.
Analyst eliminated the discontinued operations from future expectations.
Unusual or infrequent income or expense.
Shares whose prices go up when the company does well and the loss is high when the company goes out of business.
Simple and Complex capital structure
In simple Capital structure, only common shares are available.
In complex capital structure, both common and convertible shares are given.
Basic vs Diluted EPS
Basic EPS takes Earnings/common stocks.
Diluted EPS Earnings/All dilutive securities converted to common stocks.
Treasury stock method
What EPS would have been if the options had been exercises and proceeds to repurchase the common stocks.
The inclusion of these shares increases the diluted EPS over simple EPS.
Common size analysis statement
Comparing in %, instead of real values.
For example, cost of goods sold is x% of Gross income.
Net Profit Margin
Net Income / Gross Revenue
Gross Profit Margin
Gross Profit / Gross Revenue
Operating income / Gross Revenue
Pretax margin (EBITDA)
Earnings before taxes / Gross Revenue
Change in equity of a business from transactions from non owner sources.
Includes Net income and other incomes.
Examples of comprehensive incomes
1. Foreign currency translation adjustments.
2. Unrealized gains or losses from investments
3. Changes in company's health and retirements benefits.