Income Statement + Revenue Recognition

Question 1

Income statement: define gross profit

Answer 1

Sales (revenue) − COGS

Question 2

Income statement: define gross margin

Answer 2

Gross profit / Sales

Question 3

Income statement: define operating income (EBIT, for many firms)

Answer 3

Gross profit − operating expenses

Question 4

Where do interest expense and interest income typically appear?

Answer 4

Below operating income as non-operating items

Question 5

What are unusual or infrequent items?

Answer 5

Items not expected to recur regularly but included in continuing operations

Question 6

What are discontinued operations?

Answer 6

Disposed or held-for-sale business components

Question 7

How are discontinued operations presented (general)?

Answer 7

Net of tax, below income from continuing operations

Question 8

What is the difference between net income from continuing operations and net income?

Answer 8

Net income includes discontinued operations

Question 9

Why do analysts separate operating vs non-operating items?

Answer 9

To assess sustainable performance

Question 10

List the 5 steps of revenue recognition (IFRS 15/ASC 606)

Answer 10

Identify contract; identify obligations; determine price; allocate price; recognize revenue

Question 11

What is a performance obligation?

Answer 11

A distinct promised good/service

Question 12

What is the transaction price?

Answer 12

Expected consideration including variable elements

Question 13

When is revenue recognized over time vs at a point in time?

Answer 13

Over time if control transfers continuously

Question 14

What is a contract liability?

Answer 14

Obligation from advance payment

Question 15

What is bill-and-hold revenue risk?

Answer 15

Premature revenue recognition

Question 16

What is channel stuffing?

Answer 16

Inflating sales by pushing excess inventory to distributors