The P&L is where you go to report on the results of operations.
Below the operations data, you'll find the D-E-C effects, which are:
Below the operations data, you'll find the D-E-C effects, which are:
- Discontinued Operations
- Extraordinary Items
- Changes in Accounting Principles
REVENUE RECOGNITION
Revenues are inflows from delivering goods, services, or whatever else is the core business.
Gains are increases in equity from peripheral, incidental transactions.
Realization is what it's called when the earning process is complete (IE, you've sold the product, done the work, whatever), and when an exchange has taken place.
*****
For Contract Accounting, there are two acceptable methods of revenue recognition:
*****
For Installment Sales, payments received are treated partly as a return of costs and partly profit. A percentage of profit is this deferred and recognized as collections are made.
Installment sales typically aren't acceptable under GAAP, except when either the selling price isn't reasonably assured or the collectibility is in question; however, they're often used for tax. A few other things to consider for installment sales:
*****
When does the right of return exist? Revenue is recognized at the time of the sale only if:
*****
Real Estate Sales! For anything non-retail, full profit is recognized when determinable and reasonably assured collectibility. If either of these are unsure, use the installment, cost recovery, or deposit method.
For retail land sales, full profit is recognized with the expiration of the refund period, and collectibility is assured. If there's a problem with either, use percent-of-completion or installment.
Gains are increases in equity from peripheral, incidental transactions.
Realization is what it's called when the earning process is complete (IE, you've sold the product, done the work, whatever), and when an exchange has taken place.
*****
For Contract Accounting, there are two acceptable methods of revenue recognition:
- Completed Contract, where all costs are deferred and matched against revenue in the year of completion. This is ideal when cost estimates aren't reliable.
- Percent-Of-Completion, where revenue's recognized each year based on engineer estimates of work completed. This is idea when cost estimates are reliable.
*****
For Installment Sales, payments received are treated partly as a return of costs and partly profit. A percentage of profit is this deferred and recognized as collections are made.
Installment sales typically aren't acceptable under GAAP, except when either the selling price isn't reasonably assured or the collectibility is in question; however, they're often used for tax. A few other things to consider for installment sales:
- Create a separate AR account, so it's not co-mingled with standard trade receivables.
- Gross Profit % is what's to be recognized annually.
- Unrealized Gross Profit = GP% * AR Balance. This is what's deferred
- Realized Gross Profit = GP% * Cash Collections.
- Defaults = any losses will be Installment AR - Deferred GP. If merchandise is repo'd and recovered, record at FV, reduce the loss by this amount.
- Interest Income = report as income in period earned, separate from realized GP.
*****
When does the right of return exist? Revenue is recognized at the time of the sale only if:
- Price is fixed
- Buyer's paid in full and there's no contingency
- Future return amounts can be reasonably estimated
*****
Real Estate Sales! For anything non-retail, full profit is recognized when determinable and reasonably assured collectibility. If either of these are unsure, use the installment, cost recovery, or deposit method.
For retail land sales, full profit is recognized with the expiration of the refund period, and collectibility is assured. If there's a problem with either, use percent-of-completion or installment.
EXPENSES
The definition is that they're the using up of assets or incurring of liabilities through sales. Losses are incidental transactions which are ultimately reductions in equity.
*****
The Matching Principle is an important concept. "Let the expense follow the revenue." 3 methods to do this:
Depreciation Methods:
Royalties are expensed in the current period.
R&D are expensed in the current period.
*****
The Matching Principle is an important concept. "Let the expense follow the revenue." 3 methods to do this:
- Associating Cause & Effect, as in through sales commissions
- Systematic & Rational Allocation, as in through depreciation.
- Immediate Recognition.
Depreciation Methods:
- Straight Line: [(Cost - Scrap Value)] / Userful Life
- Activity Method [(Cost - Scrap Value)]/Userful Life Per Unit
- Sum-Of-Years Method [(Years of Life @ BGN/Sum of Years)] * (Cost - Scrap Value)
- Declining Balance Method (Book Value @ BGN) * (SL% * 2)
Royalties are expensed in the current period.
R&D are expensed in the current period.
DISCONTINUED OPERATIONS
These are reported separate to the results of continuing ops, net of tax.
A Segment of a Business is a component of a business whose activities represent a separate major LOB. Call it a sub, a division, whatever. Point is that its assets and activities need to be clearly distinguished.
The Measurement Date of Disposal is whatever date management commits to a plan to dispose of a segment.
The Disposal Date is the dale of the sale closing.
Components of Discontinued Ops:
Additional Disclosures
If there's a gain on discontinued ops, it should recognized only when realized.
A Segment of a Business is a component of a business whose activities represent a separate major LOB. Call it a sub, a division, whatever. Point is that its assets and activities need to be clearly distinguished.
The Measurement Date of Disposal is whatever date management commits to a plan to dispose of a segment.
The Disposal Date is the dale of the sale closing.
Components of Discontinued Ops:
- Income/Loss From Operation of Discontinued Segment - this, through the measurement date, is shown net of tax
- Gain/Loss on Disposal of Discontinued Segment - sum of the gain/loss from the disposal of the equity + income/loss from operating the segment from the measurement date through the disposal date.
Additional Disclosures
- Identity of the segment being discontinued
- Expected disposal date
- Expected manner of disposition
- Description of assets/liabilities of the segment at the balance sheet date
If there's a gain on discontinued ops, it should recognized only when realized.
EXTRAORDINARY ITEMS
Criteria for this classification - highly abnormal, and not expected to recur.
These are shown on the P&L net of tax, below a line called "Income Before Extraordinary Items."
If there's something that's highly abnormal or not expected to recur, but not both, that can be disclosed as separate components of income before extraordinary items. To make it clear that they're not "extraordinary," don't show them net of tax.
These are shown on the P&L net of tax, below a line called "Income Before Extraordinary Items."
If there's something that's highly abnormal or not expected to recur, but not both, that can be disclosed as separate components of income before extraordinary items. To make it clear that they're not "extraordinary," don't show them net of tax.
ACCOUNTING CHANGES
Change in Accounting Principle
Change in Accounting Estimate
Change in Reporting Entity
Correction of an Error
Prior-Period Adjustments are to be made directly to the balance of opening retained earnings, net of tax.
- Retrospective application
- If impractical, changes should be applied to balances of assets & liabilities, offset to retained earnings.
Change in Accounting Estimate
- Prospective application
Change in Reporting Entity
- Restatement of all prior periods
Correction of an Error
- Prior-period adjustment; comparative statements for prior periods are restated
- Effects from PY are presented as an adjustment to opening retained earnings.
- Error examples: non-GAAP or misapplication, math
Prior-Period Adjustments are to be made directly to the balance of opening retained earnings, net of tax.
EARNINGS PER SHARE
Basic EPS
Diluted EPS
Both items are displayed on the P&L, with equal prominence.
- Earnings available to Common Shareholders / Weighted Average Shares Outstanding
- The numerator is basically net income minus preferred dividends declared.
- For the denominator, need to consider things like stock splits, stock dividends, new shares issued, t-shares.
Diluted EPS
- Takes into account other potential effects like convertible debt/equity, options, warrants, other rights.
Both items are displayed on the P&L, with equal prominence.