Potentially dilutive securities include stock options, warrants, convertible debt, and convertible preferred stock that could decrease earnings per share (EPS) if exercised and converted to common stock.
Adjusted income available for common shares is calculated as earnings available for common shares plus dividends on dilutive convertible preferred stock plus after-tax interest on dilutive convertible debt.
Net income is the result of revenues minus expenses, representing the profit of a firm.
The matching principle requires firms to estimate bad-debt expense and/or warranty expense when selling goods or services on credit or providing warranties, ensuring that expenses are recognized in the same period as the related revenues.
A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities.
Operating profit margin is equal to operating income divided by revenue, representing the efficiency of a company's core business operations.
A revenue recognition method used when collectability cannot be reasonably estimated, where profit recognized is the proportion of cash collected multiplied by the total expected profit.
A convertible security is considered dilutive if the calculated amount of diluted EPS is less than the basic EPS, indicating that the conversion would reduce earnings per share.
A vertical common-size income statement expresses all income statement items as a percentage of sales, facilitating time-series and cross-sectional analysis and comparisons between firms of different sizes.
A simple capital structure contains no potentially dilutive securities and includes only common stock, nonconvertible debt, and nonconvertible preferred stock.
A revenue recognition method where profit is recognized only when, and to the extent that, cash collections exceed estimated total costs, typically used when collectability is highly uncertain.
Revenues are the amounts reported from the sale of goods and services in the normal course of business.
Net profit margin is the ratio of net income to sales, which can be increased by raising sales prices or cutting costs.
Basic EPS is the earnings per share calculation that does not consider the effects of any dilutive securities and is presented for firms with simple capital structures.
The last-in, first-out (LIFO) method is an inventory valuation method where the last item purchased is the first item sold, often used for inventory that does not deteriorate with age.
A barter transaction is an exchange of goods or services between two parties without any cash payment.
The matching principle is the basis for expense recognition under the accrual method of accounting, whereby expenses for producing goods and services are recognized in the period in which the revenue for those goods and services is recognized.
A performance obligation is a promise to deliver a distinct good or service.
Valuation refers to the different measurement bases for valuation that involve a trade-off between relevance and reliability, where bases like historical cost are more reliable but less relevant compared to fair value, which requires more judgment.
A revenue recognition method appropriate for long-term contracts where revenue, expense, and profit are recognized in proportion to the total cost incurred to date, divided by the total expected cost of the project.
Options and warrants are considered dilutive whenever the exercise price is less than the average stock price over the reporting period.
Expenses are the amounts incurred to generate revenue, including costs like cost of goods sold, operating expenses, interest, and taxes.
Noncontrolling interest, or minority owners' interest, is the pro-rata share of a subsidiary's income that a firm does not own, reported in the firm's income statement.
The average cost method allocates the average cost of all inventory to each unit sold, popular for its ease of use.
Amortization expense of intangible assets with limited lives is similar to depreciation; it matches the expense to the benefits or value used over the period.
The asset/liability approach focuses on balance sheet valuation, while the revenue/expense approach emphasizes the income statement.
The income statement reports the revenues and expenses of the firm for a specific period of time and is sometimes referred to as the statement of operations, statement of earnings, or profit and loss statement (P&L).
The Treasury Stock Method assumes that the hypothetical funds received from the exercise of options or warrants are used to purchase shares of the company’s common stock at the average market price over the reporting period.
Gross profit is the amount that remains after subtracting the cost of a product or service from revenue.
The double-declining balance method (DDB) is an accelerated depreciation method that uses 200% of the straight-line rate applied against the declining balance of the asset.
Pretax margin is equal to pre-tax earnings divided by revenue, indicating the profitability of a company before tax expenses.
Period costs are expenses that are not tied directly to generating revenue, such as administrative costs, and are expensed in the period incurred.
Unusual or infrequent items are recorded for events that are either unusual in nature or infrequent in occurrence, and are included in income from continuing operations. Examples include gains or losses from the sale of assets, impairments, write-offs, write-downs, and restructuring costs.
The three approaches to standard setting are: a principles-based approach that relies on a broad framework, a rules-based approach that provides specific guidance for classifying transactions, and an objectives-oriented approach that blends the other two.
Diluted EPS is the earnings per share calculated by adjusting the basic EPS denominator for the equivalent number of common shares created by the conversion of all outstanding dilutive securities, including convertible bonds and options.
Antidilutive securities are those that would increase EPS if exercised and converted to common stock.
Operating profit, or operating income, is the amount that remains after subtracting operating expenses from gross profit.
The first-in, first-out (FIFO) method is an inventory valuation method where the first item purchased is the first item sold, making it suitable for inventory with a limited shelf life.
Gross revenue reporting is when the selling firm reports sales revenue and cost of goods sold separately.
Net revenue reporting is when only the difference between sales and cost is reported.
A revenue recognition method used under U.S. GAAP when the outcome of a project cannot be reliably measured or the project is short-term, recognizing revenue, expense, and profit only when the contract is complete.
A sale where a firm finances the sale and payments are expected to be received over an extended period, with revenue recognized at the time of sale if collectability is certain.
Straight-line depreciation (SL) allocates an equal amount of depreciation each year over the asset’s useful life.
The weighted average number of shares outstanding is calculated by weighting each share issue by the portion of the year it was outstanding, with stock splits and dividends applied retroactively.
Comprehensive income is a measure that includes all changes to equity other than owner contributions and distributions, reflecting the overall financial performance of a company.
Under IFRS, revenue from barter transactions must be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties.
Prior-period adjustments are made by restating results for all prior periods when there is a change from an incorrect accounting method to one that is acceptable under GAAP or IFRS, or the correction of an accounting error.
Dilutive securities are those that would decrease EPS if exercised and converted to common stock.
Profitability ratios examine how well management has done at generating profits from sales, isolating specific costs, with higher margin ratios generally being more desirable.
Accelerated depreciation methods, such as the double-declining balance method (DDB), allocate more depreciation expense in the early years of an asset's life, which is more appropriate for matching revenues and expenses.
Diluted EPS is reported for firms with complex capital structures and accounts for the potential conversion of dilutive securities to common stock, calculated as if they were converted from the beginning of the year.
Depreciation is the allocation of the cost of long-lived assets over the asset’s useful life.
Amortization is similar to depreciation but typically refers to the allocation of the cost of intangible assets over their useful life.
Gross profit margin is the ratio of gross profit (sales less cost of goods sold) to sales, which can be increased by raising sales prices or lowering per-unit costs.
Under U.S. GAAP, revenue can be recognized at fair value only if the firm has historically received cash payments for such services and can use this historical experience to determine fair value.
The accrual method of accounting recognizes revenue when earned and expenses when incurred, regardless of cash flow.
A transaction price is the amount a firm expects to receive from a customer in exchange for transferring a good or service.
A discontinued operation is one that management has decided to dispose of, but has not yet done so, or has disposed of in the current period after generating income or losses. It must be physically and operationally distinct from the rest of the firm.
A change in accounting estimate is the result of a change in management’s judgment, usually due to new information, and is applied prospectively without requiring the restatement of prior financial statements.
A change in accounting principle refers to the change from one GAAP or IFRS method to another method, requiring retrospective application so that all prior period financial statements are restated to reflect the change.
<p>Sale of Goods:</p><ol class="tight" data-tight="true"><li><p>Revenue is recognized when ownership risk and reward is transferred,</p></li><li><p>There is no continuing control over the goods</p></li><li><p>Revenue can be reliably measured</p></li><li><p>There is a probable flow of economic benefits</p></li><li><p>Costs can be reliably measured.</p></li></ol><p>Services Rendered: </p><ol class="tight" data-tight="true"><li><p>The amount of revenue can be reliably measured. </p></li><li><p>There is a probable flow of economic benefits. </p></li><li><p>The stage of completion can be measured. </p></li><li><p>The cost incurred and cost of completion can be reliably measured.</p></li></ol><p></p>
<ol class="tight" data-tight="true"><li><p>There is evidence of an arrangement between buyer and seller.</p></li><li><p>The product has been delivered or the service has been rendered. </p></li><li><p>The price is determined or determinable.</p></li><li><p>The seller is reasonably sure of collecting money. </p></li></ol><p>Revenue is usually recognized at delivery, but revenue may be recognized before delivery occurs or after delivery takes place in some circumstances</p><p></p>
