International Financial Statement Analysis Workbook. Elaine Henry
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income statement. Under US GAAP, two such items are specified 1) discontinued operations and 2) extraordinary items (IFRS prohibit reporting any item of income or expense as extraordinary). Both of these items are required to be reported separately from continuing operations, under US GAAP.
● For other items on a company's income statement, such as unusual items and accounting changes, the likelihood of their continuing in the future is somewhat less clear and requires the analyst to make some judgments.
● Non-operating items are reported separately from operating items on the income statement.
● Basic EPS is the amount of income available to common shareholders divided by the weighted average number of common shares outstanding over a period. The amount of income available to common shareholders is the amount of net income remaining after preferred dividends (if any) have been paid.
● If a company has a simple capital structure (i.e., one with no potentially dilutive securities), then its basic EPS is equal to its diluted EPS. If, however, a company has dilutive securities, its diluted EPS is lower than its basic EPS.
● Diluted EPS is calculated using the if-converted method for convertible securities and the treasury stock method for options.
● Common-size analysis of the income statement involves stating each line item on the income statement as a percentage of sales. Common-size statements facilitate comparison across time periods and across companies of different sizes.
● Two income-statement-based indicators of profitability are net profit margin and gross profit margin.
● Comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation.
PROBLEMS
1. Expenses on the income statement may be grouped by:
A. nature, but not by function.
B. function, but not by nature.
C. either function or nature.
2. An example of an expense classification by function is:
A. tax expense.
B. interest expense.
C. cost of goods sold.
3. Denali Limited, a manufacturing company, had the following income statement information:
Denali's gross profit is equal to
A. $280,000.
B. $500,000.
C. $1,000,000.
4. Under IFRS, income includes increases in economic benefits from:
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