The document discusses key components of the income statement, balance sheet, and cash flow statement. It provides definitions and formulas for items such as net income, revenue, expenses, assets, liabilities, equity, operating activities, investing activities, financing activities, and common liquidity and profitability ratios. Calculation of items like net cash from operating activities using both the direct and indirect method is also covered.

1. Components of the Income Statement
• Revenue
• Net Revenue
• Expenses
• Net Income
• Gross Profit
• Operating Profit
Study Session 8, Reading 24

2. • Net Income can be calculated by the equations:
Net Income = Income – Expenses
Or
Net Income = Revenue + Other Income + Gains – Expenses
Or
Net Income = (Revenue – Expenses in the Ordinary Activities of
Business) + (Other Income – Other Expenses) + (Gains – Losses)
Study Session 8, Reading 25

3. • Multi-step format
• Single step format.
Study Session 8, Reading 25

4. • Revenue is recognized when it is earned and revenue is
recorded in financial records when the risk and reward of
ownership is transferred.
• Revenue recognition policies must be disclosed by companies
in the notes to the financial statements
Study Session 8, Reading 25

5. • Revenue from the sale of goods can be recognized if:
- significant risks and rewards of ownership have been
transferred
- amount of revenue and cost incurred or to be
incurred can be measured reliably
Study Session 8, Reading 25

6. • percentage-of-completion method
• completed contract method
Study Session 8, Reading 25

7. • percentage-of-completion method - percentage of contract
completed is estimated
• completed contract method - no income is reported until the
contract is substantially completed
Study Session 8, Reading 25

8. Gross vs Net Reporting
 Gross revenue - the sales amount received from customers
 net revenue - sale proceeds less costs
Study Session 8, Reading 25

9. • Expenses are deducted from the revenue to calculate net
profit or loss.
• Expenses include losses as well as expenses that arise during
the course of ordinary activities.
Study Session 8, Reading 25

10. • Specific Identification Method
• FIFO
• LIFO
• Weighted Average Cost
Study Session 8, Reading 25

11. • Straight line method
• Accelerated method
• Diminishing balance method
Study Session 8, Reading 25

12. • Separate expenses and income items related to prior years
that are likely to continue in the future from those items that are
less likely to continue.
Study Session 8, Reading 25

13. • Extraordinary items and items related to discontinued
operations should be shown separately in the income
statement.
Study Session 8, Reading 25

14. • Non-operating items are shown separately from operating
items in the income statement.
Study Session 8, Reading 25

15. • Basic EPS is calculated by dividing the reported earning
available to common shareholders by weighted average number
of shares outstanding. It is calculated as:
Study Session 8, Reading 25

16. Diluted EPS in Case of Outstanding Preferred Shares
Diluted EPS in the Case of Outstanding Convertible Debt
Study Session 8, Reading 25

17. • The formula for calculating diluted EPS is:
Study Session 8, Reading 25

18. • Obtained by stating each line item of the income statement as
a percentage of sales.
Study Session 8, Reading 25

19. • Different ratios used to measure profitability are:
• Gross Profit Margin
• Net Profit Margin
• Operating Profit Margin
• Pre-tax Profit Margin.
Study Session 8, Reading 25

20. Calculation of Margins
Net Profit Margin
Gross Profit Margin
Study Session 8, Reading 25

21. Includes both:
• Net Income (from the Statement of Financial Performance)
• Other Comprehensive Income.
Study Session 8, Reading 25

22. • Foreign Currency Translation Adjustments
• Unrealized Gains or Losses on Derivative Contracts Accounted
as Hedges
• Unrealized Holding Gains and Losses on Available-for-Sale
Securities
• Defined Benefit Post Retirement Plans costs
Study Session 8, Reading 25

23. The basic elements of the Balance Sheet are:
• Assets
• Liabilities
• Equity
• The equation of balance sheet is:
Assets = Liabilities + Equity
Study Session 8, Reading 26

24. • Provides information about the financial position of an
enterprise
• Helps analysts measure the liquidity and solvency position of
the company.
Study Session 8, Reading 26

25. Statement of Financial Position
Study Session 8, Reading 26
Current Year Previous Year
ASSETS
Total Current Assets(A)
Total Non-Current Assets (B)
Total Assets (A) + (B) = (C)
EQUITIES AND LIABILITIES
Total Current Liabilities (D)
Total Non-Current Liabilities (E)
Total Liabilities (D) + (E) = (F)
Total Equity (C ) – (F) = (G)
Equity and Liabilities (F) + (G)

26. Study Session 8, Reading 26
Current Year Previous Year
ASSETS
Total Current Assets (A)
All Other Assets (B)
Total Assets (A) + (B) = (C)
LIABILITIES AND SHAREHOLDER’S EQUITY
Total Current Liabilities (D)
Total Non-Current Liabilities (E)
Total Liabilities (D) + (E) = (F)
Total Shareholders’ Equity (C ) – (F) = (G)
Total Liabilities and Shareholder’s Equity (F)+(G)

27. • Current assets - held for the purpose of trading or expected to
be sold
• Non-current assets - purchased for a longer term perspective
• Current Liabilities - liabilities that are expected to be settled
within one year or one operating cycle
• Non-current liabilities - liabilities other than current liabilities
Study Session 8, Reading 26

28. • Capital Contributed by Owners
• Preferred Shares
• Treasury Shares
• Retained Earnings
• Accumulated Other Comprehensive Income
• Non-Controlling Interest or Minority Interest
Study Session 8, Reading 26

29. • The analysis of the balance sheet helps in assessing the
solvency and liquidity position of the company.
• The Statement of Changes in Equity shows the details of the
increase or decrease in company’s equity over a reporting
period.
Study Session 8, Reading 26

30. • In vertical common size analysis, each balance sheet item is
shown as a percentage of total assets.
Study Session 8, Reading 26

31. • Used in comparing the financial position of a company over
a period of time.
• Used to compare the financial position of companies across
the same industry.
• Facilitate the comparison between different size companies.
Study Session 8, Reading 26

32. Liquidity Ratios
Current Ratio = Current Assets Current Liabilities
Quick Ratio/Acid Ratio = (Cash + Marketable securities +
Receivables) Current Liabilities
Cash Ratio = (Cash + Marketable securities) Current liabilities
Study Session 8, Reading 26

33. Long-Term Debt-to-Equity Ratio = Total Long-Term Debt Total
Equity
Debt-to-Equity Ratio = Total Debt Total Equity
Total Debt Ratio = Total Debt Total assets
Financial Leverage = Total Assets Total Equity
Study Session 8, Reading 26

34. Two categories of assets in the balance sheet:
• Current assets
• Long term assets
Liabilities are split into:
• long term liabilities
• current liabilities.
Study Session 8, Reading 26

35. The first step in preparing the cash flow statement is
determining the cash flows from operating activities. There are
two methods to complete this:
• The direct and
• Indirect methods
Study Session 8, Reading 27

36. • Cash received from customers can be calculated as:
= Opening Accounts Receivable + Sales (Credit) – Closing
Accounts Receivable
= Revenue – Increase in Account Receivable
Study Session 8, Reading 27

37. • Cash paid to suppliers or creditors figures can be calculated as:
= Cost of Goods Sold + Increase in Inventory – Increase in
Accounts Payable
= Opening Creditors + Purchases (Credit) – Closing Creditors
Study Session 8, Reading 27

38. • Amount paid as salary and wages is calculated as:
= Opening Outstanding Salaries and Wages + Salary and Wages
Expense – Closing Balance of Outstanding Salaries and Wages
• Cash paid for other operating expenses is computed by:
=Other Operating Expenses – Increase in Prepaid Expenses –
Increase in Other Accrued Liabilities
Study Session 8, Reading 27

39. • Cash interest paid can be calculated as:
= Interest Expense (+ Decrease in Interest Payable) or ( – Increase
in Interest Payable)
= Beginning Interest Payable + Interest Expense – Ending Interest
Payable
• Cash paid for income taxes can be calculated as:
= Income Tax Expense (+ Increase in Income Tax Payable) or (-
Decrease in Income Tax Payable)
Study Session 8, Reading 27

40. • Dividends paid can be calculated by:
Beginning Retained Earnings + Net Income – Ending Retained
e=Earnings, or from Dividends Declared and any Change in
Dividends Payable.
• Net Cash Flow from Creditors= New Borrowing – Repaid
Principal
Study Session 8, Reading 27

41. Under both IFRS and US GAAP, cash flow activities are divided
into three categories:
• Operating Activities
• Investing Activities
• Financial Activities
Study Session 8, Reading 27

42. • There is no flow of cash in non-cash transactions. Hence, these
transactions are not represented in the Cash Flow Statement.
• As these transactions affect a company’s capital and asset
structure, significant non-cash transactions are disclosed in a
separate note or a supplementary schedule to the cash flow
statement.
Study Session 8, Reading 27

43. • Under IFRS, companies are given choice to report transactions
relating to dividend and interest as:
Study Session 8, Reading 27
Interest Paid Operating or Financing
Activity
Interest Received Operating or Financing
Activity
Dividends Paid Operating or Financing
Activity
Dividends Received Operating or Financing
Activity

44. • Direct method - operating cash inflows by sources and operating
cash outflows by uses are disclosed.
• Indirect method - net income is reconciled to operating cash
flows.
Study Session 8, Reading 27

45. Cash Balance (Opening Balance Sheet) xxxx
Add: Cash inflows from operating, investing
and financing activities xxxx
Less: Cash outflows from operating, investing
and financial activities __xxxx___
Cash Balance (Closing Balance Sheet) __xxxx__
Study Session 8, Reading 27

46. Step 1: Aggregate all revenues and expenses.
Step 2: All non cash items are removed from the aggregated
revenue and expenses. The remaining items are broken into
relevant cash flow items.
Step 3: Accrual amounts are converted to cash flow amounts by
adjusting for working capital changes.
Study Session 8, Reading 27

47. Study Session 8, Reading 27
Cash flow statement analysis includes
• Evaluation of the sources and uses of cash
• Common size analysis
• Calculation of cash flow ratios
• Free cash flow measures

48. There are two approaches to converting a cash flow statement
to a common size cash flow statement:
1) Total cash inflows/total cash outflows method
2) Percentage of net revenue method
Study Session 8, Reading 27

49. Free Cash Flow To The Firm (FCFF)
• FCFF can be calculated as:
FCFF = NI + NCC + Int (1-Tax Rate) – FCInv – WCInv
• FCFF can also be calculated from cash flow from operating
activities(CFO):
FCFF =CFO + Int(1-Tax Rate) – FCInv
Study Session 8, Reading 27

50. • FCEE can be calculated as:
FCEE = CFO – FCInv + Net Borrowing
• In case of debt repayments being more than borrowings, FCEE is
calculated as:
FCEE = CFO – FCInv – Net Debt Repayment
Study Session 8, Reading 27

51. Cash flow to revenue = CFO Net Revenue
Cash return on assets = CFO Average total assets
Cash return of equity = CFO Average shareholders’ equity
Cash to Income = CFO Operating Income
Cash flow per share = (CFO – Preferred dividend) Number of
common shares outstanding
Study Session 8, Reading 27

52. Debt coverage = CFO Total debt
Interest coverage = (CFO+ Interest paid + Taxes paid) Interest paid
Debt payment = CFO Cash paid for long term debt repayment
Reinvestment = CFO Cash paid for long-term assets
Investing and = CFO Cash outflows for investing and financing
Financing activities
Dividend payment = CFO Dividends paid
Study Session 8, Reading 27