This document summarizes key aspects of income statements, statements of cash flows, and related accounting standards under US GAAP and IFRS. It discusses the different sections of the income statement, how items are classified, and differences between US GAAP and IFRS standards. It also provides an overview of the key sections of the statement of cash flows, including operating, investing, and financing activities, and differences in how some items are treated under US GAAP versus IFRS. The document explains concepts like comprehensive income, earnings per share, and accounting for changes in estimates, principles, and errors.
revised schedule vi statement of profit and lossKshitiz Gupta
The document defines a statement of profit and loss (also known as an income statement) as a financial statement that summarizes the revenues, costs and expenses incurred during a period of time, usually a quarter or year. It provides information on a company's ability to generate profit by increasing revenue and reducing costs. The document then provides the standard format and sections included in a statement of profit and loss, such as revenue from operations, other income, expenses, profit/loss, and earnings per share calculations. Key expenses include cost of materials, purchases, employee costs, depreciation, and finance costs.
Bab 4 Income Statement and Related Informationmsahuleka
The document discusses key elements and objectives related to preparing and understanding income statements, including:
- The uses and limitations of income statements in evaluating past performance and predicting future cash flows
- Components of single-step and multiple-step income statements and how they differ
- Reporting of irregular items like discontinued operations, extraordinary items, and changes in accounting principles
- Intraperiod tax allocation and where earnings per share information is reported
The document discusses final accounts of banks and companies. It provides explanations of key terms like income statement, trading account, profit and loss account, assets, liabilities, and owners' equity. It also describes common adjustments made in final accounts like closing stock, prepaid/accrued items, and depreciation. Journal entries are made to transfer various items between trading, profit and loss accounts and balance sheet to determine net profit/loss for the period.
This document discusses key aspects of the income statement and related reporting issues. It covers the format and elements of the income statement, including revenues, expenses, gains and losses. It explains how items are reported within the income statement, such as gross profit, income from operations, and net income. The document also discusses reporting requirements for unusual items, discontinued operations, earnings per share, and allocation to non-controlling interests. Learning objectives cover understanding the uses and limitations of the income statement, its content and format, and how to prepare and explain the reporting of items in the statement.
Profit and Loss, Balance Sheets and RATIO ANALYSIS Patrick Rubix
The document provides an overview of profit and loss accounts and balance sheets. It explains key terms like gross profit, net profit, assets, liabilities, current assets, fixed assets, and shareholders' equity. It also gives examples of calculating profits for a pizza business over 12 months, including sales revenue, cost of goods sold, expenses, and net profit. Ratios for analyzing financial statements are also discussed, such as gross profit margin, net profit margin, and return on capital employed.
This document provides an overview of accounting concepts including the accounting cycle, T-accounts, trial balance, adjusting entries, and closing entries. It explains the steps in the accounting cycle as transactions are recorded in journals and ledgers, trial balances are prepared, adjusting entries are made, and financial statements are produced. T-accounts are introduced as the format for recording debits and credits to general ledger accounts. The roles of the trial balance, adjusting entries, and closing entries in preparing accurate financial statements are also summarized.
Bab 5 - Balance Sheet and Statement of Cash Flowsmsahuleka
The document discusses the balance sheet and statement of cash flows. It provides learning objectives about understanding the uses and limitations of the balance sheet, identifying major classifications of the balance sheet, preparing classified balance sheets, determining required supplemental disclosures, describing disclosure techniques, indicating the purpose of the statement of cash flows, identifying its content, and understanding its usefulness.
The document discusses the income statement and how it is used to report revenues and expenses to calculate income over an accounting period. Revenues increase retained earnings and are recorded as credits, while expenses decrease retained earnings and are recorded as debits. The income statement classifies expenses as operating or non-operating and reports gross profit, operating income, income before taxes, and net income. It also discusses the retained earnings statement and how the journal and ledger are used to record transactions that affect account balances over time.
revised schedule vi statement of profit and lossKshitiz Gupta
The document defines a statement of profit and loss (also known as an income statement) as a financial statement that summarizes the revenues, costs and expenses incurred during a period of time, usually a quarter or year. It provides information on a company's ability to generate profit by increasing revenue and reducing costs. The document then provides the standard format and sections included in a statement of profit and loss, such as revenue from operations, other income, expenses, profit/loss, and earnings per share calculations. Key expenses include cost of materials, purchases, employee costs, depreciation, and finance costs.
Bab 4 Income Statement and Related Informationmsahuleka
The document discusses key elements and objectives related to preparing and understanding income statements, including:
- The uses and limitations of income statements in evaluating past performance and predicting future cash flows
- Components of single-step and multiple-step income statements and how they differ
- Reporting of irregular items like discontinued operations, extraordinary items, and changes in accounting principles
- Intraperiod tax allocation and where earnings per share information is reported
The document discusses final accounts of banks and companies. It provides explanations of key terms like income statement, trading account, profit and loss account, assets, liabilities, and owners' equity. It also describes common adjustments made in final accounts like closing stock, prepaid/accrued items, and depreciation. Journal entries are made to transfer various items between trading, profit and loss accounts and balance sheet to determine net profit/loss for the period.
This document discusses key aspects of the income statement and related reporting issues. It covers the format and elements of the income statement, including revenues, expenses, gains and losses. It explains how items are reported within the income statement, such as gross profit, income from operations, and net income. The document also discusses reporting requirements for unusual items, discontinued operations, earnings per share, and allocation to non-controlling interests. Learning objectives cover understanding the uses and limitations of the income statement, its content and format, and how to prepare and explain the reporting of items in the statement.
Profit and Loss, Balance Sheets and RATIO ANALYSIS Patrick Rubix
The document provides an overview of profit and loss accounts and balance sheets. It explains key terms like gross profit, net profit, assets, liabilities, current assets, fixed assets, and shareholders' equity. It also gives examples of calculating profits for a pizza business over 12 months, including sales revenue, cost of goods sold, expenses, and net profit. Ratios for analyzing financial statements are also discussed, such as gross profit margin, net profit margin, and return on capital employed.
This document provides an overview of accounting concepts including the accounting cycle, T-accounts, trial balance, adjusting entries, and closing entries. It explains the steps in the accounting cycle as transactions are recorded in journals and ledgers, trial balances are prepared, adjusting entries are made, and financial statements are produced. T-accounts are introduced as the format for recording debits and credits to general ledger accounts. The roles of the trial balance, adjusting entries, and closing entries in preparing accurate financial statements are also summarized.
Bab 5 - Balance Sheet and Statement of Cash Flowsmsahuleka
The document discusses the balance sheet and statement of cash flows. It provides learning objectives about understanding the uses and limitations of the balance sheet, identifying major classifications of the balance sheet, preparing classified balance sheets, determining required supplemental disclosures, describing disclosure techniques, indicating the purpose of the statement of cash flows, identifying its content, and understanding its usefulness.
The document discusses the income statement and how it is used to report revenues and expenses to calculate income over an accounting period. Revenues increase retained earnings and are recorded as credits, while expenses decrease retained earnings and are recorded as debits. The income statement classifies expenses as operating or non-operating and reports gross profit, operating income, income before taxes, and net income. It also discusses the retained earnings statement and how the journal and ledger are used to record transactions that affect account balances over time.
The income statement reports revenues and expenses for a period to calculate profit or loss. It is prepared outside the double-entry system and classifies items as revenues and expenses. Gross profit is calculated by deducting cost of goods sold from net sales and is important because selling goods is typically the main revenue source. Net profit deducts remaining expenses from gross profit and revenues to determine the return to the owner. The sample income statement provided calculates gross profit, other revenues and expenses, and net profit for a business for the year ended June 30, 2004.
The document discusses various issues related to the impact of Ind AS on computation of MAT (Minimum Alternate Tax). It provides an overview of the international view on the impact of IFRS on tax computation in various countries. It then discusses the format of profit and loss statement under Ind AS and key differences compared to the previous accounting standards.
The document also discusses the interplay between Ind AS and income tax provisions in India. It outlines specific adjustments that need to be made as per section 115JB of the Income Tax Act for MAT computation of companies adopting Ind AS. Finally, it discusses several practical corporate tax issues that may arise under Ind AS such as accounting for loan to subsidiaries, fair valuation of investments, revenue recognition,
A profit and loss statement is a financial statement that reports on revenue, operating costs and expenses incurred by an entity within a nominated period of time.
This document discusses Accounting Standard 20 on Earnings Per Share. It outlines how to calculate basic and diluted EPS, including determining the weighted average number of shares, adjusting for rights issues, and the treatment of convertible instruments. Basic EPS is calculated by dividing earnings by the weighted average number of equity shares outstanding. Diluted EPS considers all dilutive potential equity shares. Disclosures required include reconciliations of EPS numerators and denominators.
Coverage Ratio helps measure a company's ability to meet its obligations. The Asset side of a Balance Sheet shows the resource utilization of the company for acquisition of different assets. Book value of equity is the difference between the book values of assets and liabilities appearing on the Balance Sheet. Accumulated losses can be shown as fictitious asset at the bottom of the Asset Side. Fixed assets are recorded in the books at their cost price.
This presentation summarizes key Indian accounting standards. It introduces accounting standards as guidelines for recording transactions and ensuring reliability of financial statements. The objectives of accounting standards are to standardize policies, add reliability, eliminate variations, and facilitate comparisons. Major standards covered include AS 6 on depreciation, AS 12 on government grants, AS 1 on disclosure of policies, AS 2 on inventory valuation, AS 13 on investments, AS 11 on foreign exchange rates, AS 19 on leases, AS 3 on cash flow statements, AS 10 on fixed assets, and AS 9 on revenue recognition. The presentation provides an overview of the purpose and requirements of these important accounting standards.
This document provides a tutorial on preparing three basic financial statements: the income statement, statement of retained earnings, and balance sheet. It explains the purpose and format of each statement. The income statement reports revenues, expenses and net income for a period. The statement of retained earnings shows the changes in retained earnings from net income and dividends. The balance sheet reports assets, liabilities, and equity as of a point in time. The tutorial also discusses the accounts that make up each statement and the order they should be prepared.
Accounting Standard 25 outlines the requirements for interim financial reporting, including:
- Minimum content of interim reports which includes condensed financial statements and selected explanatory notes
- Principles for recognizing and measuring items in interim reports, which should be consistent with annual financial statements
- Periods for which interim reports must be presented, which is normally on a year-to-date basis
- Disclosures in annual financial statements if a separate interim report is not issued for the final interim period
This document discusses financial statements and provides examples from furniture companies Ethan Allen Interiors Inc. and Bassett Furniture Industries Inc. It defines the four primary financial statements - balance sheet, income statement, statement of cash flows, and statement of shareholder equity - and what each measures. Key financial ratios for Ethan Allen and Bassett from 2009-Q3 2009 are also presented. The document provides references used to research financial information on the furniture industry and sample companies.
The income statement shows a company's revenues and expenses over a period of time, with the goal of showing whether the company made a profit or loss. It displays revenues, costs of goods sold that generated the revenues, and all other expenses. The difference between total revenues and total expenses is the net income or loss for the period. Key sections include revenues, costs of goods sold, gross profit, operating expenses, operating income, non-operating items, and net income. The income statement is an important financial statement that helps managers and investors understand a company's financial performance over time.
This document defines key accounting terms related to revenue, expenses, and financial statements. It explains that revenue accounts record income from sales or services, interest earned, and rent. Expense accounts record costs of goods sold, interest paid, repairs, rent paid, supplies, salaries, depreciation, permits, insurance, utilities, and miscellaneous small expenses. The salaries expense account records wages earned during an accounting period, whether paid or not.
This document provides an overview of several accounting standards including AS 10 on fixed assets, AS 20 on earnings per share, and AS 26 on intangible assets. It discusses the key objectives, applicability, recognition criteria, measurement, and disclosure requirements for accounting and reporting for fixed assets, EPS calculation, and intangible assets according to the relevant accounting standards. The document also covers terminology, components of cost, impairment, amortization, and other accounting treatments for these items to ensure compliance with Indian accounting standards.
This document discusses Indian Accounting Standard 3 on cash flow statements. It defines key terms like cash, cash equivalents, operating activities, investing activities and financing activities. It explains the direct and indirect methods of preparing cash flow statements and requirements around classification of cash flows from various transactions like tax, foreign exchange, dividends and interest. The standard aims to provide useful information on changes in cash balances to investors and other stakeholders.
This document discusses accounting concepts for managers, including:
1. The trading account is used to calculate gross profit by subtracting the cost of goods sold from sales. Opening and closing inventory are debited and credited, respectively, and purchases less returns are debited.
2. The profit and loss account calculates net profit by subtracting expenses from gross profit. Expenses are debited whether paid or not, and incomes are credited whether received or not.
3. Capital expenditures provide long-term benefits while revenue expenditures only benefit the current year and are debited to the profit and loss account. Trading and profit and loss accounts determine profit or loss over a period.
Reconciliation of cost and financial accountsNeeruJaswal2
This document discusses the reconciliation of cost and financial accounts. It defines reconciliation as tallying or equating the results shown in cost accounts and financial accounts. There can be disagreements between the profits in the two accounts due to items only being included in one set of accounts or differences in stock valuation or depreciation methods. Reconciling the accounts ensures accuracy and reliability. The two main methods of reconciliation are preparing a reconciliation statement, which adds or subtracts reconciling items to the base profit of one account to match the other account's profit, and preparing a memorandum reconciliation account in ledger format.
The document summarizes key aspects of the accounting process discussed in Chapter 2, including the accounting equation, accounting cycle, adjusting and closing entries, and key financial statements. It provides an example of 12 transactions for a clothing company to illustrate recording of journal entries, preparation of an unadjusted trial balance, adjusting entries, and an adjusted trial balance. It also discusses the use of worksheets, subsidiary ledgers, and special journals to facilitate the accounting process.
1. The document discusses accounting for costs associated with acquiring and disposing of property, plant, equipment, and intangible assets. It covers topics like capitalizing acquisition costs, allocating lump-sum purchase prices, accounting for non-cash acquisitions and donations, capitalizing self-constructed assets, and accounting for research and development costs.
2. Examples are provided for allocating costs of land and building improvements, capitalizing costs to install new equipment, accounting for patent and goodwill acquisitions, and exchanging assets in non-cash transactions.
3. The treatment of interest costs depends on whether assets are constructed for a company's own use or for sale/lease, with some interest capital
The document discusses accounting for property, plant, equipment, and intangible assets. It covers topics like cost allocation, depreciation methods, impairment testing, and accounting for changes and errors. The document provides examples and exercises to illustrate accounting for asset utilization and impairment.
The document provides an overview of key components and purposes of the balance sheet, including assets, liabilities, and shareholders' equity. It discusses current versus noncurrent items and compares US GAAP and IFRS standards. Additional sections cover disclosure notes, management responsibilities, auditors' reports, and financial metrics like liquidity and financing ratios.
This document provides an overview of accounting concepts related to cash, receivables, and notes receivable. It defines types of cash and cash equivalents, internal controls over cash, and differences between US GAAP and IFRS treatment of cash. It also discusses accounts receivable, allowances for uncollectible accounts, notes receivable, and factors to consider when determining whether a transfer of receivables is a sale or secured borrowing.
The document discusses inventory systems and accounting entries related to inventory. It covers two main inventory systems - perpetual and periodic. For the perpetual system, inventory balances are continuously updated as purchases and sales occur. For the periodic system, inventory is only adjusted at the end of an accounting period. The document also discusses inventory cost flow methods like FIFO, LIFO, and weighted average. It provides examples of journal entries for recording inventory purchases, sales, and returns under both systems. Finally, it covers topics like dollar value LIFO and required disclosures for using LIFO for financial reporting.
The income statement reports revenues and expenses for a period to calculate profit or loss. It is prepared outside the double-entry system and classifies items as revenues and expenses. Gross profit is calculated by deducting cost of goods sold from net sales and is important because selling goods is typically the main revenue source. Net profit deducts remaining expenses from gross profit and revenues to determine the return to the owner. The sample income statement provided calculates gross profit, other revenues and expenses, and net profit for a business for the year ended June 30, 2004.
The document discusses various issues related to the impact of Ind AS on computation of MAT (Minimum Alternate Tax). It provides an overview of the international view on the impact of IFRS on tax computation in various countries. It then discusses the format of profit and loss statement under Ind AS and key differences compared to the previous accounting standards.
The document also discusses the interplay between Ind AS and income tax provisions in India. It outlines specific adjustments that need to be made as per section 115JB of the Income Tax Act for MAT computation of companies adopting Ind AS. Finally, it discusses several practical corporate tax issues that may arise under Ind AS such as accounting for loan to subsidiaries, fair valuation of investments, revenue recognition,
A profit and loss statement is a financial statement that reports on revenue, operating costs and expenses incurred by an entity within a nominated period of time.
This document discusses Accounting Standard 20 on Earnings Per Share. It outlines how to calculate basic and diluted EPS, including determining the weighted average number of shares, adjusting for rights issues, and the treatment of convertible instruments. Basic EPS is calculated by dividing earnings by the weighted average number of equity shares outstanding. Diluted EPS considers all dilutive potential equity shares. Disclosures required include reconciliations of EPS numerators and denominators.
Coverage Ratio helps measure a company's ability to meet its obligations. The Asset side of a Balance Sheet shows the resource utilization of the company for acquisition of different assets. Book value of equity is the difference between the book values of assets and liabilities appearing on the Balance Sheet. Accumulated losses can be shown as fictitious asset at the bottom of the Asset Side. Fixed assets are recorded in the books at their cost price.
This presentation summarizes key Indian accounting standards. It introduces accounting standards as guidelines for recording transactions and ensuring reliability of financial statements. The objectives of accounting standards are to standardize policies, add reliability, eliminate variations, and facilitate comparisons. Major standards covered include AS 6 on depreciation, AS 12 on government grants, AS 1 on disclosure of policies, AS 2 on inventory valuation, AS 13 on investments, AS 11 on foreign exchange rates, AS 19 on leases, AS 3 on cash flow statements, AS 10 on fixed assets, and AS 9 on revenue recognition. The presentation provides an overview of the purpose and requirements of these important accounting standards.
This document provides a tutorial on preparing three basic financial statements: the income statement, statement of retained earnings, and balance sheet. It explains the purpose and format of each statement. The income statement reports revenues, expenses and net income for a period. The statement of retained earnings shows the changes in retained earnings from net income and dividends. The balance sheet reports assets, liabilities, and equity as of a point in time. The tutorial also discusses the accounts that make up each statement and the order they should be prepared.
Accounting Standard 25 outlines the requirements for interim financial reporting, including:
- Minimum content of interim reports which includes condensed financial statements and selected explanatory notes
- Principles for recognizing and measuring items in interim reports, which should be consistent with annual financial statements
- Periods for which interim reports must be presented, which is normally on a year-to-date basis
- Disclosures in annual financial statements if a separate interim report is not issued for the final interim period
This document discusses financial statements and provides examples from furniture companies Ethan Allen Interiors Inc. and Bassett Furniture Industries Inc. It defines the four primary financial statements - balance sheet, income statement, statement of cash flows, and statement of shareholder equity - and what each measures. Key financial ratios for Ethan Allen and Bassett from 2009-Q3 2009 are also presented. The document provides references used to research financial information on the furniture industry and sample companies.
The income statement shows a company's revenues and expenses over a period of time, with the goal of showing whether the company made a profit or loss. It displays revenues, costs of goods sold that generated the revenues, and all other expenses. The difference between total revenues and total expenses is the net income or loss for the period. Key sections include revenues, costs of goods sold, gross profit, operating expenses, operating income, non-operating items, and net income. The income statement is an important financial statement that helps managers and investors understand a company's financial performance over time.
This document defines key accounting terms related to revenue, expenses, and financial statements. It explains that revenue accounts record income from sales or services, interest earned, and rent. Expense accounts record costs of goods sold, interest paid, repairs, rent paid, supplies, salaries, depreciation, permits, insurance, utilities, and miscellaneous small expenses. The salaries expense account records wages earned during an accounting period, whether paid or not.
This document provides an overview of several accounting standards including AS 10 on fixed assets, AS 20 on earnings per share, and AS 26 on intangible assets. It discusses the key objectives, applicability, recognition criteria, measurement, and disclosure requirements for accounting and reporting for fixed assets, EPS calculation, and intangible assets according to the relevant accounting standards. The document also covers terminology, components of cost, impairment, amortization, and other accounting treatments for these items to ensure compliance with Indian accounting standards.
This document discusses Indian Accounting Standard 3 on cash flow statements. It defines key terms like cash, cash equivalents, operating activities, investing activities and financing activities. It explains the direct and indirect methods of preparing cash flow statements and requirements around classification of cash flows from various transactions like tax, foreign exchange, dividends and interest. The standard aims to provide useful information on changes in cash balances to investors and other stakeholders.
This document discusses accounting concepts for managers, including:
1. The trading account is used to calculate gross profit by subtracting the cost of goods sold from sales. Opening and closing inventory are debited and credited, respectively, and purchases less returns are debited.
2. The profit and loss account calculates net profit by subtracting expenses from gross profit. Expenses are debited whether paid or not, and incomes are credited whether received or not.
3. Capital expenditures provide long-term benefits while revenue expenditures only benefit the current year and are debited to the profit and loss account. Trading and profit and loss accounts determine profit or loss over a period.
Reconciliation of cost and financial accountsNeeruJaswal2
This document discusses the reconciliation of cost and financial accounts. It defines reconciliation as tallying or equating the results shown in cost accounts and financial accounts. There can be disagreements between the profits in the two accounts due to items only being included in one set of accounts or differences in stock valuation or depreciation methods. Reconciling the accounts ensures accuracy and reliability. The two main methods of reconciliation are preparing a reconciliation statement, which adds or subtracts reconciling items to the base profit of one account to match the other account's profit, and preparing a memorandum reconciliation account in ledger format.
The document summarizes key aspects of the accounting process discussed in Chapter 2, including the accounting equation, accounting cycle, adjusting and closing entries, and key financial statements. It provides an example of 12 transactions for a clothing company to illustrate recording of journal entries, preparation of an unadjusted trial balance, adjusting entries, and an adjusted trial balance. It also discusses the use of worksheets, subsidiary ledgers, and special journals to facilitate the accounting process.
1. The document discusses accounting for costs associated with acquiring and disposing of property, plant, equipment, and intangible assets. It covers topics like capitalizing acquisition costs, allocating lump-sum purchase prices, accounting for non-cash acquisitions and donations, capitalizing self-constructed assets, and accounting for research and development costs.
2. Examples are provided for allocating costs of land and building improvements, capitalizing costs to install new equipment, accounting for patent and goodwill acquisitions, and exchanging assets in non-cash transactions.
3. The treatment of interest costs depends on whether assets are constructed for a company's own use or for sale/lease, with some interest capital
The document discusses accounting for property, plant, equipment, and intangible assets. It covers topics like cost allocation, depreciation methods, impairment testing, and accounting for changes and errors. The document provides examples and exercises to illustrate accounting for asset utilization and impairment.
The document provides an overview of key components and purposes of the balance sheet, including assets, liabilities, and shareholders' equity. It discusses current versus noncurrent items and compares US GAAP and IFRS standards. Additional sections cover disclosure notes, management responsibilities, auditors' reports, and financial metrics like liquidity and financing ratios.
This document provides an overview of accounting concepts related to cash, receivables, and notes receivable. It defines types of cash and cash equivalents, internal controls over cash, and differences between US GAAP and IFRS treatment of cash. It also discusses accounts receivable, allowances for uncollectible accounts, notes receivable, and factors to consider when determining whether a transfer of receivables is a sale or secured borrowing.
The document discusses inventory systems and accounting entries related to inventory. It covers two main inventory systems - perpetual and periodic. For the perpetual system, inventory balances are continuously updated as purchases and sales occur. For the periodic system, inventory is only adjusted at the end of an accounting period. The document also discusses inventory cost flow methods like FIFO, LIFO, and weighted average. It provides examples of journal entries for recording inventory purchases, sales, and returns under both systems. Finally, it covers topics like dollar value LIFO and required disclosures for using LIFO for financial reporting.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes and errors in inventory methods.
The document provides information about financial reporting and annual reports for companies. It discusses key components of annual reports including the director's report, financial statements, audit report, income statement, balance sheet, cash flow statement, and statement of owner's equity. It also covers notes to the financial statements, stakeholders' interests in financial statements, qualities and limitations of financial statements, responsibilities for financial statements, misleading financial statements, and consequences of unreliable financial statements.
This document provides an overview of basic accounting principles including the four core financial statements - the balance sheet, income statement, statement of cash flows, and statement of shareholders' equity. It explains how each statement is structured and formatted, provides examples of how to prepare each statement, and summarizes key principles of measurement used in financial reporting such as historical cost and fair value accounting.
This document defines key stakeholders as any person associated with a business, whether internally or externally, and with monetary or non-monetary interests. It identifies common stakeholder groups like owners, managers, government, and potential owners. It also distinguishes between capital and revenue items that affect financial statements, and defines capital, deferred revenue, and ordinary revenue expenditures. Capital receipts incur an obligation to return money while revenue receipts do not. Financial statements aim to present an accurate view of financial performance and position by properly reporting items as either capital or revenue.
This document provides an overview and review of key concepts from Chapter 4 of the textbook on the income statement and related information. It discusses the purpose and limitations of the income statement, its major elements, different formats, sections, and how to report various income items such as discontinued operations, extraordinary items, and changes in accounting principles. It also covers earnings per share, the retained earnings statement, comprehensive income, and the statement of stockholders' equity.
Lecture 3Introduction to SAP Finance (FI)FIN419 Lear.docxsmile790243
Lecture 3
Introduction to SAP Finance (FI)
FIN419
Learning Objectives
Review of basic Finance management topics
Understand the goal of SAP Finance (FI)
Understand the purpose, master data and reporting of New GL
Understand the purpose, master data and reporting of AR
Understand the purpose, master data and reporting of AP
Understand the purpose, master data and reporting of AM
Understand the integration points between FI and the rest of the FI submodules.
2
Finance Review
Financial Statements
Statement of financial position - Balance Sheet
Reports the firm’s assets, liabilities and equity at a given point of time
Income Statement
Reports the firm’s income, expenses, and profits over a period of time
Statement of cash flow
Reports the firm’s cash flow activities (operation, investing and financing)
Statement of changes in equity
Explain the changes of the firm’s equity over a period of time
Finance Review
Balance Sheet
The Balance Sheet Reports the firm’s assets, liabilities and equity at a given point of time
Assets
Current (life less than one year)
Fixed (life longer than one year)
Liabilities and Owners’ Equity
Current (life less than one year)
Long term ( life longer than one year)
Balance Sheet Identity
Assets = Liabilities + Stockholders’ Equity
Assets
Fixed
Liabilities+ Equity
Equity
Current
Current
Long term
Finance Review
Working Capital and Liquidity
Net working capital
Difference between Current Assets and Current Liabilities
It indicate whether the firm has sufficient short term assets to cover its short term obligations
Liquidity
It refers to the speed and ease in which an asset can be converted to cash without significant loss of value
Liquidity is valuable in avoiding financial distress
Net working capital
Assets
Fixed
Liabilities+ Equity
Equity
Current
Current
Long term
Finance Review
Debt vs. Equity
Debt and Equity are sources of financing for the firm
The use of debt in a firm’s capital structure is called financial leverage
The more leverage, the higher the risk of financial distress
Assets
Fixed
Liabilities+ Equity
Equity
Current
Current
Long term
Finance Review
Income Statement
The income statement measures performance over a specified period of time (period, quarter, year).
Income Statement Equation(s):
EBIT = Net sales – COGS – Operating expense
Net Income = EBIT – Interest - Tax
Addition to REA = Net income - dividends
Net income elements
Dividends paid to shareholders
Addition to retained earnings
Sales (Revenue)
Net income
Dividends
Return to Equity
COGS
Operating exp (General expenses, depreciation, etc)
Interest
Tax
Gross Profit
EBIT
Finance Review
Market versus Book Value
Book value corresponds to the balance sheet value (according to US GAAPs) of the assets, liabilities, and equity and is generally not what they are actually worth.
Market value or true value corresponds ...
Accounting has branched into different types to meet the needs of users, including financial, management, governmental, tax, forensic, project, and social accounting. Financial accounting produces external financial statements following GAAP, while management accounting provides internal reports. The main financial statements are the income statement, balance sheet, statement of cash flows, and statement of changes in equity.
The document provides information about cash flow statements, including their purpose, components, and preparation process. A cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities during a specific period. It reconciles net income to the actual cash changes by adjusting for non-cash items and changes in balance sheet accounts. The statement consists of sections for operating activities, investing activities, and financing activities that report cash flows from changes in working capital accounts, long-term asset balances, and long-term debt or equity positions respectively.
1) The document provides an overview of accounting for inventory under a periodic inventory system according to IFRS and compares it to U.S. GAAP.
2) Key differences between IFRS and GAAP include IFRS allowing classification of expenses by nature or function, permitting revaluation of certain assets, and requiring two years of income statements rather than three.
3) The IASB and FASB are working on changes to financial statement presentation that would classify items similarly to the statement of cash flows and provide more detail on functional and natural line items.
The document discusses key aspects of Generally Accepted Accounting Principles (GAAP) including definitions, similarities and differences between Indian GAAP, International Financial Reporting Standards (IFRS) and US GAAP. It covers topics such as financial statements, revenue recognition, foreign currency translation and more. GAAP provides common standards for preparing financial statements to ensure consistency and comparability. While there are some differences between jurisdictions, the overall goals and many principles are largely similar across frameworks.
The document discusses key financial statements and Generally Accepted Accounting Principles (GAAP). It describes the four main financial statements - balance sheet, income statement, statement of owner's equity, and statement of cash flows - and what each reports. It also explains several important GAAP principles, including the business entity principle, objectivity principle, cost principle, going concern principle, monetary unit principle, and revenue recognition principle. These principles are designed to make financial statement information relevant, reliable, consistent and comparable.
Analysts frequently make adjustments to company financial statements to reflect a true and fair view, enable comparability between companies, and account for differences in accounting treatments. Key adjustments include reclassifying certain income/expenses as operating or non-operating, adjusting depreciation and revaluation reserves, treating goodwill and intangibles appropriately, and accounting for off-balance sheet items like operating leases. Analysts scrutinize areas like depreciation policies, impairment losses, and internally generated intangible assets to determine if reported numbers require adjustment. The purpose is to arrive at financial metrics that best indicate a company's performance, position, and credit risk.
ACC 371 Lecture 7Statement of Cash FlowsIntroductionGenerall.docxaryan532920
ACC 371 Lecture 7
Statement of Cash Flows
Introduction
Generally Accepted Accounting Principles (GAAP) typically evolves in practice, rather than being written and then followed. An example of this evolution is the financial statement called, the statement of cash flows. Managers and business owners often asked why their companies were profitable but did not have available cash, or had plenty of cash but were operating at a loss. In response to this need, accountants developed the statement of cash flows to explain how cash was provided to the company or used by the company. The statement of cash flows is now a required financial statement according to GAAP. Since the statement of cash flows was developed long after the other three statements—the balance sheet, income statement, and statement of stockholders' equity—it does not follow the same flow as the other statements and requires information from all of the other statements, as well as additional information, in order to be compiled. Today, the statement of cash flows is one of the most significant financial statements for the potential investor or creditor.
Usefulness of the Statement of Cash Flows
The statement of cash flows is useful because it shows an organization's ability to produce future cash flows, provides an indication that the organization can meet its obligations, reports the differences between net income and net cash flows, and identifies the cash and noncash investing and financing activities during the period.
Profitable operations do not always ensure positive cash flow. While net income is important, cash flow is also critical to a company's success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Both managers and analysts need to understand the various sources and uses of cash that are associated with business activities.
The cash flow statement focuses attention on a firm's ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing (Libby, Libby, & Short, 2004). It is designed to help both managers and analysts answer important cash-related questions such as these:
Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing?
Is the company adequately managing its accounts receivable and inventory?
Has the company made necessary investments in new productive capacity?
Did the company generate enough cash flow internally to finance necessary investment or did it rely on external financing?
Is the company changing the makeup of its external financing?
These questions and others can be answered through the preparation and examination of the statement of cash flows.
Operating, Investing, and Financing Activities
The statement has three main sections: (a) cash flows from operating activities, which are relate.
Recasting is the adjustment of the financial statements to truly reflect the actual financial benefits of that business ownership. Recasting is done to change the companies’ financial statements from tax basics to economic terms.
The document provides an overview of key components and purposes of the balance sheet, including assets, liabilities, and shareholders' equity. It discusses current versus noncurrent items and compares US GAAP and IFRS standards. Additional sections cover disclosure notes, management responsibilities, auditors' reports, and financial ratios used to analyze the balance sheet.
This document provides an introduction and overview of finance concepts for non-finance managers. It includes sections on understanding financial statements, revenue and expenses, income statements, cash flows, financial ratios, break-even analysis, and time value of money. Examples are provided to illustrate key points such as calculating profit, the difference between revenue and capital expenditures, and preparing an income statement. The goal is to help non-finance readers develop a basic understanding of important financial concepts.
This document provides training materials on financial reporting for agricultural cooperatives. It includes 7 activities covering key topics:
1. The balance sheet, which summarizes a company's assets, liabilities, and equity at a point in time.
2. The income statement, which presents revenues, expenses, and profits over a period of time.
3. The equity statement, which reconciles the beginning and ending owner equity amounts.
4. The cash flow statement, which shows cash inflows and outflows from operating, investing, and financing activities.
5. Management discussion and analysis (MD&A), which internal users use for planning and external users use for performance evaluation.
6.
The document discusses the Trading Profit and Loss Account, which summarizes the financial performance of a business over a year. It has two sections: the Trading Account, which shows gross profit before expenses, and the Profit and Loss Account, which shows net profit after expenses. The Trading Account lists revenue from sales and the cost of goods sold to calculate gross profit. The Profit and Loss Account starts with gross profit and lists additional revenue and expenses to calculate net profit. Managers use the Trading Profit and Loss Account to evaluate the business's financial results over time and compare performance to previous years and competitors.
The document discusses the key aspects of final accounts of banks and companies. It explains that final accounts comprise the income statement (trading and profit & loss account) and balance sheet. It provides details on various expenses like direct, indirect, administrative etc. It also discusses elements of assets and liabilities like fixed assets, current assets, owners' funds, reserves, secured and unsecured loans. Key adjustments in final accounts like closing stock, outstanding expenses, depreciation etc. are also summarized.
The document discusses inventory systems and accounting entries related to inventory. It covers two main inventory systems - perpetual and periodic. For the perpetual system, inventory balances are continuously updated as purchases and sales occur. For the periodic system, inventory is only adjusted at the end of an accounting period. The document also discusses inventory cost flow methods like FIFO, LIFO, and weighted average. It provides examples of journal entries for recording inventory purchases, sales, and returns under both systems. Finally, it covers topics like dollar value LIFO and required disclosures for using LIFO for financial reporting.
This document provides an overview of accounting concepts related to cash, receivables, and notes receivable. It defines types of cash and cash equivalents, discusses internal controls over cash, and compares US GAAP and IFRS treatment of cash. It also covers accounts receivable, allowances for uncollectible accounts, cash discounts, sales returns, and notes receivable. The document concludes with a discussion of transferring receivables through factoring or sale and calculating receivables management ratios.
The document discusses revenue recognition principles and methods under US GAAP. It covers the realization principle, revenue recognition at delivery, after delivery using installment and cost recovery methods, long-term construction contracts using percentage of completion and completed contract methods, and other topics like software revenue recognition.
This document summarizes key aspects of income statements, statements of cash flows, and related accounting standards under US GAAP and IFRS. It discusses the different sections of the income statement, how items are classified, and differences between US GAAP and IFRS standards. It also outlines the three sections of the statement of cash flows - operating, investing, and financing activities - and describes how cash flows are calculated and presented in the statement. Finally, it notes some differences between US GAAP and IFRS standards in how items are reported in the statement of cash flows.
The document summarizes key aspects of the accounting process discussed in chapter 2, including:
1) It introduces the basic accounting equation for assets, liabilities, and equity.
2) It discusses the accounting cycle of journalizing transactions, posting to accounts, preparing an adjusted trial balance and financial statements.
3) It provides an example of 12 transactions recorded for a new business and the resulting unadjusted and adjusted trial balances.
4) It explains the purpose of adjusting entries, the accrual basis of accounting, and how temporary and permanent accounts are treated.
The document discusses the key concepts and framework of financial accounting. It covers the main users of financial information, the relevant financial statements, and the difference between cash and accrual accounting methods. It also summarizes the standard-setting bodies that establish accounting principles, the role of auditors, and reforms to enhance ethics and integrity in financial reporting. The conceptual framework that guides the development of accounting standards is also outlined.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes between methods and errors in beginning or ending inventory balances.
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6. Earnings Quality / Manipulating Income (page 175) Earnings quality: if good quality, reported earnings helps to predict a company’s future earnings. Transitory Earnings versus Permanent Earnings (examples: next slide)
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9. Separately Reported Items (text pages 180-187) Reported separately, net of taxes: 1) Discontinued operations 2) Extraordinary items 3) A third separately reported item, the cumulative effect of a change in accounting principle, might be included for certain mandated changes in accounting principles .
10. Intraperiod Income Tax Allocation (text pages 180-182) Income Tax Expense must be associated with each component of income that causes it. Show Income Tax Expense related to Income from Continuing Operations. Report effects of Discontinued Operations and Extraordinary Items net of related income tax effect .
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14. Unusual or Infrequent Items Items that are material and are either unusual or infrequent— but not both —are included as separate items in continuing operations.
17. Change in Depreciation, Amortization, or Depletion Method … is treated the same as a change in accounting estimate ( not as a change in principle)
18. Change in Accounting Estimate (review Illustr. 4-6 on page 190) If the company revises an accounting estimate made in a prior period (say, last year) …. … we use the new estimate in current and future periods That is, you do not “correct” previously reported numbers!
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20. Correction of Accounting Errors (page 192) Errors occur when transactions are either recorded incorrectly or not recorded at all. Errors Discovered in Same Year Reverse original erroneous journal entry and record the appropriate journal entry. Record a prior period adjustment to the beginning retained earnings balance Previous years’ financial statements are retrospectively restated to reflect the correction. Material Errors Discovered in Subsequent Year
21. Earnings per Share Disclosure (text pages 192-193) earnings per share (EPS) shows the amount of income earned by a company expressed on a per share basis. Basic EPS Net income less preferred dividends Weighted-average number of common shares outstanding for the period Diluted EPS Reflects the potential dilution (reduction in EPS) that could occur for companies that have convertible securities that that could create additional common shares if the conversions took place.
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23. Comprehensive Income (text pages 194-197) An expanded version of income that includes four gains and losses that are not included in the traditional income statement.
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25. Accumulated Other Comprehensive Income We report other comprehensive income on a cumulative basis in the balance sheet as an additional component of shareholders’ equity.
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28. Two Acceptable Methods of Reporting the Operating Activities Reports the cash effects of each operating activity Direct Method Starts with accrual net income and converts to cash basis Indirect Method
34. Noncash Investing & Financing Activities … . THAT DO NOT INVOLVE CASH are reported eithe r in the Cash Flow Statement or in a Note EXAMPLE: Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).
Chapter 4: The Income Statement and Statement of Cash Flows The purpose of the income statement is to summarize the profit-generating activities that occurred during a particular reporting period. The purpose of the statement of cash flows is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during the period. This chapter has a twofold purpose: (1) to consider important issues dealing with income statement content, presentation, and disclosure and (2) to provide an overview of the statement of cash flows, which is covered in depth in Chapter 21.
Before we discuss the specific components of an income statement in much depth, let’s take a quick look at the general makeup of the statement. The graphic on this slide illustrates an income statement for a hypothetical manufacturing company that you can refer to as we proceed through the chapter. At this point, our objective is only to gain a general perspective of the items reported and classifications contained in corporate income statements. Notice the three general areas include income from continuing operations, separately reported items, and earnings per share.
No specific standards dictate how income from continuing operations must be displayed, so companies have considerable latitude in how they present the components of income from continuing operations. This flexibility has resulted in a variety of income statement presentations. However, we can identify two general approaches, the single-step and the multiple-step. This slide illustrates an example of a single step income statement for a hypothetical manufacturing company, Maxwell Gear Corporation. The single-step format first lists all the revenues and gains included in income from continuing operations. Then, expenses and losses are grouped, subtotaled, and subtracted—in a single step—from revenues and gains to derive income from continuing operations. Operating and nonoperating items are not separately classified.
The multiple-step income statement format includes a number of intermediate subtotals before arriving at income from operations. However, notice that the net income is the same no matter which format is used. A primary advantage of the multiple-step format is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. Similarly, the classification of expenses by function also provides useful information.
There are more similarities than differences between income statements prepared according to U.S. GAAP and those prepared applying international standards. Some of the differences are: International standards require certain minimum information to be reported on the face of the income statement. U.S. GAAP has no minimum requirements. International standards allow expenses to be classified either by function (e.g., cost of goods sold, general and administrative, etc.), or by natural description (e.g., salaries, rent, etc.). SEC regulations require that expenses be classified by function. In the United States, the “bottom line” of the income statement usually is called either net income or net loss. The descriptive term for the bottom line of the income statement prepared according to international standards is either profit or loss. As we discuss later in the chapter, we report “extraordinary items” separately in an income statement prepared according to U.S. GAAP. International standards prohibit reporting “extraordinary items.”
Financial analysts are concerned with more than just the bottom line of the income statement—net income. The presentation of the components of net income and the related supplemental disclosures provide clues to the user of the statement in an assessment of earnings quality. Earnings quality is used as a framework for more in-depth discussions of operating and nonoperating income. Earnings quality refers to the ability of reported earnings to predict a company’s future. The relevance of any historical-based financial statement hinges on its predictive value. To enhance predictive value, analysts try to separate a company’s transitory earnings effects from its permanent earnings. Transitory earnings effects result from transactions or events that are not likely to occur again in the foreseeable future, or that are likely to have a different impact on earnings in the future.
Generally accepted accounting principles require that certain transactions be reported separately in the income statement, below income from continuing operations. There are two types of events that, if they have a material effect on the income statement, require separate reporting below income from continuing operations as well as separate disclosure: (1) discontinued operations and (2) extraordinary items. In fact, these are the only two events that are allowed to be reported below continuing operations. The presentation order is as shown on the slide. The objective is to separately report all the income effects of each of these items. The process of associating income tax effects with the income statement components that create them is referred to as intraperiod tax allocation, which we will address in the next section. A third separately reported item, the cumulative effect of a change in accounting principle, might be included for certain mandated changes in accounting principles. Before 2005, most voluntary changes in accounting principles also were treated this way, by including the cumulative effect on the income of previous years from having used the old method rather than the new method in the income statement of the year of change as a separately reported item below extraordinary items. Now, most voluntary changes in accounting principles require retrospective treatment. We no longer report the entire effect in the year of the change. Instead, we retrospectively recast prior years’ financial statements when we report those statements again (in comparative statements, for example) so that they appear as if the newly adopted accounting method had been used in those years presented. We discuss the retrospective approach later in this chapter and in subsequent chapters.
Part I Intraperiod tax allocation associates (or allocates) income tax expense (or income tax benefits if there is a loss) with each major component of income that causes it. As a result, the two items reported separately below income from continuing operations are presented net of the related income tax effect. For example, assume a company experienced an extraordinary gain during the year. The amount of income tax expense deducted from income from continuing operations is the amount of income tax expense that the company would have incurred if there were no extraordinary gain. The effect on income taxes caused by the extraordinary item is deducted from the extraordinary gain in the income statement. Part II Assume that the Maxwell Gear Corporation had income from continuing operations before income tax expense of $200,000 and an extraordinary gain of $60,000 in 2011. The income tax rate is 40% on all items of income or loss. Therefore, the company’s total income tax expense is $104,000 (40% × $260,000). However, as illustrated on this slide, the total tax expense of $104,000 must be allocated, $80,000 to continuing operations and $24,000 (40% × $60,000) to the extraordinary gain.
Extraordinary items are material events and transactions that are both unusual in nature and infrequent in occurrence and are reported net of related tax effects. These criteria must be considered in light of the environment in which the entity operates. There is obviously a considerable degree of subjectivity involved in the determination. A key point in the definition of an extraordinary item is that determining whether an event satisfies both criteria depends on the environment in which the firm operates. The environment includes factors such as the type of products or services sold and the geographical location of the firm’s operations. What is extraordinary for one firm may not be extraordinary for another firm. For example, a loss caused by a hurricane in Florida may not be judged to be extraordinary. However, hurricane damage in New York may indeed be unusual and infrequent.
U.S. GAAP provides for the separate reporting, as an extraordinary item, of a material gain or loss that is unusual in nature and infrequent in occurrence. In 2003, the IASB revised IAS No. 1. The revision states that neither the income statement nor any notes may contain any items called “extraordinary.” A recent survey of 500 large public companies reported that only four of the companies disclosed an extraordinary gain or loss in their 2007 income statements. Losses from two 21st century “extraordinary” events, the September 11, 2001, terrorist attacks and Hurricane Katrina in 2005, did not qualify for extraordinary treatment. The treatment of these two events, the scarcity of extraordinary gains and losses reported in corporate income statements, and the desire to converge U.S. and international accounting standards could guide the FASB to the elimination of the extraordinary item classification.
Items that are material and are either unusual or infrequent—but not both—are included as a separate item in continuing operations.
Accounting changes fall into one of three categories: (1) a change in an accounting principle, (2) a change in an accounting estimate, or (3) a change in reporting entity. The correction of an error is another adjustment that is accounted for in the same way as certain accounting changes.
A change in accounting principle refers to a change from one acceptable accounting method to another. There are many situations that allow alternative treatments for similar transactions. Common examples of these situations include the choice among FIFO, LIFO, and average cost for the measurement of inventory and among alternative revenue recognition methods. New standards issued by the FASB also require companies to change their accounting methods. GAAP requires that voluntary accounting changes be accounted for retrospectively. For each year in the comparative statements reported, we revise the balance of each account affected to make those statements appear as if the newly adopted accounting method had been applied all along. Then, a journal entry is created to adjust all account balances affected to what those amounts would have been. An adjustment is made to the beginning balance of retained earnings for the earliest period reported in the comparative statements of shareholders’ equity to account for the cumulative income effect of changing to the new principle in periods prior to those reported. When a new FASB standard mandates a change in accounting principle, the board often allows companies to choose among multiple ways of accounting for the changes. One approach generally allowed is to account for the change retrospectively, exactly as we account for voluntary changes in principles. A second approach is to allow companies to report the cumulative effect on the income of previous years from having used the old method rather than the new method in the income statement of the year of change as a separately reported item below extraordinary items.
A change in depreciation, amortization, or depletion method is considered to be a change in accounting estimate that is achieved by a change in accounting principle. We account for these changes prospectively, exactly as we would any other change in estimate.
Estimates are a necessary aspect of accounting. A few of the more common accounting estimates are the amount of future bad debts on existing accounts receivable, the useful life and residual value of a depreciable asset, and future warranty expense. Because estimates require the prediction of future events, it’s not unusual for them to turn out to be wrong. When an estimate is modified as new information comes to light, accounting for the change in estimate is quite straightforward. We do not revise prior years’ financial statements to reflect the new estimate. Instead, we merely incorporate the new estimate in any related accounting determinations from that point on, that is, prospectively. Remember that a change in depreciation, amortization, or depletion method is considered a change in estimate resulting from a change in principle. For that reason, we account for such a change prospectively, similar to the way we account for other changes in estimate. One difference is that most changes in estimate do not require a company to justify the change. However, this change in estimate is a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable.
Part I A third type of change—the change in reporting entity —involves the preparation of financial statements for an accounting entity other than the entity that existed in the previous period. Some changes in reporting entity are a result of changes in accounting rules. For example, GAAP requires companies like Ford, General Motors and General Electric to consolidate their manufacturing operations with their financial subsidiaries, creating a new entity that includes them both. For those changes in entity, the prior-period financial statements that are presented for comparative purposes should be restated to appear as if the new entity existed in those periods. Part II However, the more frequent change in entity occurs when one company acquires another one. In those circumstances, the financial statements of the acquirer include the acquiree as of the date of acquisition, and the acquirer’s prior-period financial statements that are presented for comparative purposes are not restated. This makes it difficult to make year-to-year comparisons for a company that frequently acquires other companies. Acquiring companies are required to provide a disclosure note that presents key financial statement information as if the acquisition had occurred before the beginning of the previous year. At a minimum, the supplemental pro forma information should display revenue, income before extraordinary items, net income, and earnings per share.
Errors occur when transactions are either recorded incorrectly or not recorded at all. Accountants employ various control mechanisms to ensure that transactions are accounted for correctly. In spite of this, errors occur. When errors do occur, they can affect any one or several of the financial statement elements on any of the financial statements a company prepares. In fact, many kinds of errors simultaneously affect more than one financial statement. When errors are discovered, they should be corrected. Most errors are discovered in the same year that they are made. These errors are simple to correct. The original erroneous journal entry is reversed and the appropriate entry is recorded. The correction of material errors discovered in a subsequent year is considered to be a prior period adjustment. A prior period adjustment refers to an addition to or reduction in the beginning retained earnings balance in a statement of shareholders’ equity (or statement of retained earnings if that’s presented instead). When it’s discovered that the ending balance of retained earnings in the period prior to the discovery of an error was incorrect as a result of that error, the balance is corrected. However, simply reporting a corrected amount might cause misunderstanding for someone familiar with the previously reported amount. Explicitly reporting a prior period adjustment on the statement of shareholders’ equity (or statement of retained earnings) avoids this confusion. In addition to reporting the prior period adjustment to retained earnings, previous years’ financial statements that are incorrect as a result of the error are retrospectively restated to reflect the correction. Also, a disclosure note communicates the impact of the error on income.
One of the most widely used ratios is earnings per share, which shows the amount of income earned by a company expressed on a per share basis. Companies report both basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential for dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised
Companies must disclose per share amounts for (1) income or loss before any separately reported items, (2) each separately reported item, and (3) net income or loss.
Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Comprehensive income includes net income as well as other gains and losses that change shareholders’ equity but are not included in traditional net income.
The calculation of net income omits certain types of gains and losses that are included in comprehensive income. Companies must report both net income and comprehensive income and reconcile the difference between the two. The following items are part of comprehensive income: net unrealized holding gains (losses) from investments (net of tax). gains and losses due to revising assumptions or market returns differing from expectations and prior service cost from amending the postretirement benefit plan. when a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction. gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity. (This item is discussed elsewhere in your accounting curriculum).
In addition to reporting OCI that occurs in the current reporting period, we must also report these amounts on a cumulative basis in the balance sheet. This is consistent with the way we report net income that occurs in the current reporting period in the income statement and also report accumulated net income (that hasn’t been distributed as dividends) in the balance sheet as retained earnings. Similarly, we report OCI as it occurs in the current reporting period and also report accumulated other comprehensive income (AOCI) in the balance sheet. This is demonstrated on this slide for Astro-Med Inc.
The purpose of the statement of cash flows is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period. The statement of cash flows helps investors and creditors assess future net cash flows, liquidity, and long-term solvency. A statement of cash flows is required for each income statement period reported.
Operating activities are inflows and outflows of cash related to the transactions entering into the determination of net operating income. A few examples of cash inflows and outflows from operating activities are listed on this slide. The difference between the inflows and the outflows is called net cash flows from operating activities. This is equivalent to net income if the income statement had been prepared on a cash basis rather than an accrual basis.
Two generally accepted formats can be used to report operating activities, the direct method and the indirect method. By the direct method, the cash effect of each operating activity is reported directly in the statement of cash flows. By the indirect method, cash flow from operating activities is derived indirectly by starting with reported net income and adding or subtracting items to convert that amount to a cash basis.
Under the direct method, the cash effect of each operating activity is reported directly in the statement. For example, cash received from customers is reported as the cash effect of sales activities. Income statement transactions that have no cash flow effect, such as depreciation, are simply not reported. You will recall from the previous slide that ALC’s service revenue is $90,000, but ALC did not collect that much cash from its customers. We know that because accounts receivable increased from $0 to $12,000, so ALC must have collected to date only $78,000 of the amount earned. Similarly, general and administrative expenses of $32,000 were incurred, but $7,000 of that hasn’t yet been paid. We know that because accounts payable increased by $7,000. Also, prepaid insurance increased by $4,000 so ALC must have paid $4,000 more cash for insurance coverage than the amount that expired and was reported as insurance expense. That means cash paid thus far for general and administrative expenses was only $29,000 ($32,000 less the $7,000 increase in accounts payable plus the $4,000 increase in prepaid insurance). The other expense, income tax, was $15,000, but that’s the amount by which income taxes payable increased so no cash has yet been paid for income taxes.
To report operating cash flows using the indirect method, we take a different approach. We start with ALC’s net income but realize that the $35,000 includes both cash and noncash components. We need to adjust net income, then, to eliminate the noncash effects so that we’re left with only the cash flows. We start by eliminating the only noncash component of net income in our illustration—depreciation expense. Depreciation of $8,000 was subtracted in the income statement, so we simply add it back in to eliminate it. That leaves us with the three components that do affect cash but not by the amounts reported. For those, we need to make adjustments to net income to cause it to reflect cash flows rather than accrual amounts. For instance, we saw earlier that only $78,000 cash was received from customers even though $90,000 in revenue is reflected in net income. That means we need to include an adjustment to reduce net income by $12,000, the increase in accounts receivable. In a similar manner, we include adjustments for the changes in accounts payable, income taxes payable, and prepaid insurance to cause net income to reflect cash payments rather than expenses incurred. For accounts payable and taxes payable, because more was subtracted in the income statement than cash paid for the expenses related to these two liabilities, we need to add back the differences. Note that if these liabilities had decreased, we would have subtracted, rather than added, the changes. For prepaid insurance, because less was subtracted in the income statement than cash paid, we need to subtract the difference—the increase in prepaid insurance. If this asset had decreased, we would have added, rather than subtracted, the change.
Investing activities involve the acquisition and sale of (1) long-lived assets used in the business and (2) nonoperating investment assets. A few examples of cash inflows and outflows from investing activities are listed on this slide.
Financing activities involve cash inflows and outflows from transactions with creditors and owners. A few examples of cash inflows and outflows from financing activities are listed on this slide.
This slide illustrates ALC’s statement of cash flows. Earlier we showed how to arrive at net cash flows from operating activities using either the direct or indirect method. Net cash flows from investing activities represents the difference between the inflows and outflows of the investing activities. The only investing activity for ALC is the investment of $40,000 cash for equipment. We know $40,000 was paid to buy equipment because that balance sheet account increased from no balance to $40,000. Net cash flows from financing activities is the difference between the inflows and outflows of the financing activities. ACL has two financing activities. First, a review of the balance sheet indicates that common stock increased from $0 to $50,000, so we include that amount as a cash inflow from financing activities. Second, information provided with ACL’s financial statements on an earlier slide told us that $5,000 was paid as a cash dividend, which is also a financing activity.
As we just discussed, the statement of cash flows provides useful information about the investing and financing activities in which a company is engaged. Even though these primarily result in cash inflows and cash outflows, there may be significant investing and financing activities occurring during the period that do not involve cash flows at all. In order to provide complete information about these activities, any significant noncash investing and financing activities (that is, noncash exchanges) are reported either on the face of the statement of cash flow or in a disclosure note. An example of a significant noncash investing and financing activity is the acquisition of equipment (an investing activity) by issuing either a long-term note payable or equity securities (a financing activity).
Like U.S. GAAP, international standards also require a statement of cash flows. Consistent with U.S. GAAP, cash flows are classified as operating, investing, or financing. However, the U.S. standard designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. Dividends paid to shareholders are classified as financing cash flows. IAS No. 7, on the other hand, allows more flexibility. Companies can report interest and dividends paid as either operating or financing cash flows and interest and dividends received as either operating or investing cash flows. Interest and dividend payments usually are reported as financing activities. Interest and dividends received normally are classified as investing activities.