MindMap Gallery CFA Financial Statement Analysis Income Statement (Test Points 6-10)
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CFA Financial Statement Analysis Income statement (test points 6-10)
6. Commonly used formats of income statements
net revenue-cost of good sold(COGS)=gross profit gross profit
gross profit-SG&A selling and administrative expenses=operating income operating profit
operating income /-other income /-gain/loss (natural disaster/asset restructuring/sale of assets)=EBIT
EBIT-interest expense=EBT
EBT-tax expense=net income from continuing operations
net income from continuing operations /-gain/loss from discontinued operations (eg: accounting policy adjustment) = net income
Cost classification
by nature
Depreciation of production machines and office machines are all included in Depreciation
by function by function
Depreciation of production machinery is classified as COGS, and depreciation of office machinery is classified as SG&A.
7. Recognition of income and expenses
general principles
accrual methodaccrual method
matching principlematching principle
Five steps to recognize revenue
Together: Identify the contract
Meaning: Identify performance obligations
Price: Determine the transaction price
Divide: Allocate the transaction price to each performance obligation in proportion to its fair value.
Receipt: Revenue is recognized when conditions are met
Why fake breakup
Note: If the company is an agent, the net amount method should be used to recognize revenue.
Calculating question inspection percentage completion method
Percent Complete = Cost Incurred/Total Cost
8. Earnings per share
basic EPS
new issue additional issuance/repurchase repurchase
weighted by time
stock dividend stock dividend/split stock split
Not weighted by time, only affects the number of shares before the split time
"new-for-old split"
eg: 3-for-2 split
2 shares split into 3 shares
1 stock dividend for every 2 shares
Potential factors leading to dilution
convertible preferred stock convertible preferred stock
Numerator Convertible Preferred Stock Dividends
Denominator Number of shares converted into convertible preferred stock
convertible debt convertible debt
Numerator After-tax interest on convertible bonds
Denominator: The number of shares converted into convertible bonds
call warrant
Denominator Number of warrants* (1-exercise price/average stock price for the year)
diluted EPS
If diluted EPS is greater than basic EPS, let diluted EPS = basic EPS and reject anti-dilution.
9. Comprehensive income
comprehensive income(CI)=net income(NI) other comprehensive income(OCI)
5 items recorded in OCI
foreign currency translationforeign currency conversion difference
Note that it is not a transaction transaction, the transaction should be classified as NI
DB plan defined benefit plan
unrealized gain/losses from cash flow hedging derivativesUnrealized gain/losses from cash flow hedging derivatives
Unrealized gain/losses from FVOCI Unrealized fair changes are included in the gains and losses of other comprehensive income
valuation surplus for long-lived asset long-term asset appreciation (IFRS only)
10. Analysis of the proportion of income statement to base
For companies of different sizes, comparison of income statement items should be based on Revenue.