LEARNING OUTCOMES

The candidate should be able to:

1. describe the components of the income statement and alternative presentation formats of that statement;

2. describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis;

3. calculate revenue given information that might influence the choice of revenue recognition method;

4. describe key aspects of the converged accounting standards issued by the International Accounting Standards Board and Financial Accounting Standards Board in May 2014;

5. describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis;

6. describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, unusual or infrequent items) and changes in accounting policies;

7. distinguish between the operating and non-operating components of the income statement;

8. describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures;

9. distinguish between dilutive and antidilutive securities and describe the implications of each for the earnings per share calculation;

10. convert income statements to common-size income statements;

11. evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement;

12. describe, calculate, and interpret comprehensive income;

13. describe other comprehensive income and identify major types of items included in it.

1. INTRODUCTION

The income statement presents information on the financial results of a company’s business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue. The basic equation underlying the income statement, ignoring gains and losses, is Revenue minus Expenses equals Net income. The income statement is also sometimes referred to as the “statement of operations,” “statement of earnings,” or “profit and loss (P&L) statement.” Under International Financial Reporting Standards (IFRS), the income statement may be presented as a separate statement followed by a statement of comprehensive income that begins with the profit or loss from the income statement or as a section of a single statement of comprehensive income.1 US generally accepted accounting principles (US GAAP) permit the same alternative presentation formats.2 This reading focuses on the income statement, but also discusses comprehensive income (profit or loss from the income statement plus other comprehensive income).

Investment analysts intensely scrutinize companies’ income statements.3 Equity analysts are interested in them because equity markets often reward relatively high- or low-earnings growth companies with above-average or below-average valuations, respectively, and because inputs into valuation models often include estimates of earnings. Fixed-income analysts examine the components of income statements, past and projected, for information on companies’ abilities to make promised payments on their debt over the course of the business cycle. Corporate financial announcements frequently emphasize information reported in income statements, particularly earnings, more than information reported in the other financial statements.

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Has LSD affected your philosophical outlook?

Hofmann
From my LSD experiments, including the very first terrifying one, I have received knowledge of not only one, but of an infinite number of realities. Depending upon the condition of our senses and psychic receptors we experience a different reality. I realized that the depth and richness of the inner and outer universe are immeasurable and inexhaustible, but that we have to return from these strange worlds to our homeland and live here in the reality that is provided by our normal, healthy senses. It's like astronauts returning from outer space flights: they must readjust to this planet.

In some of my psychedelic experiences I had a feeling of ecstatic love and unity with all creatures in the universe. To have had such an experience of absolute beatitude means an enrichment of our life.

If, at a given quantity, the highest price that buyers are willing to pay is equal to the lowest price that sellers are willing to accept, we say the market has reached its equilibrium quantity. Alternatively, when the quantity that buyers are willing and able to purchase at a given price is just equal to the quantity that sellers are willing to offer at that same price, we say the market has discovered the equilibrium price. So equilibrium price and quantity are achieved simultaneously, and as long as neither the supply curve nor the demand curve shifts, there is no tendency for either price or quantity to vary from their equilibrium values.

Although a good’s own price is important in determining consumers’ willingness to purchase it, other variables also have influence on that decision, such as consumers’ incomes, their tastes and preferences, the prices of other goods that serve as substitutes or complements, and so on. Economists attempt to capture all of these influences in a relationship called the demand function. (In general, a function is a relationship that assigns a unique value to a dependent variable for any given set of values of a group of independent variables.) We represent such a demand function in Equation 1:

Equation (1) 

Qdx=f(Px,I,Py,...)

where Qdx represents the quantity demanded of some good X (such as per household demand for gasoline in gallons per week), P_x is the price per unit of good X (such as $ per gallon), I is consumers’ income (as in $1,000s per household annually), and P_y is the price of another good, Y. (There can be many other goods, not just one, and they can be complements or substitutes.) Equation 1 may be read, “Quantity demanded of good X depends on (is a function of) the price of good X, consumers’ income, the price of good Y, and so on.”

To build a suitable portfolio for a client, investment advisers should first seek to understand the client’s investment goals, resources, circumstances, and constraints. Investors can be categorized into broad groups based on shared characteristics with respect to these factors (e.g., various types of individual investors and institutional investors). Even investors within a given type, however, will invariably have a number of distinctive requirements. In this reading, we consider in detail the planning for investment success based on an individualized understanding of the client.

Portfolio planning can be defined as a program developed in advance of constructing a portfolio that is expected to satisfy the client’s investment objectives. The written document governing this process is the investment policy statement (IPS).

The assumptions of the CAPM include:

• All investors are Markowitz efficient investors who want to target points on the efficient frontier where their utility maps are tangent to the line. The exact location on the efficient frontier and, therefore, the specific portfolio selected, will depend on the individual investor's risk-return utility function.
  
• All investors have the same one-period time horizon (e.g., one year).

• All investors have homogeneous expectations: that is, they estimate identical probability distributions for future rates of return.

• All investments are infinitely divisible, which means that it is possible to buy or sell fractional shares of any asset or portfolio.

• All investors are price takers. Their trades cannot affect security prices.

questo esame non finisce mai, sempre presenti per l'appello, stanchi, ancora in ballo, l'intervallo qui non arriva mai. e' meglio che la inventi la risposta quando non la sai, perche' poi sono sempre pronti a screditarti, a biasimarti, e subito pronti a rubarti il posto quando stai per rilassarti, non puoi adagiarti. conviene piu' studiare perché sarai sempre ignorante se e' la vita e' il professore, mio signore, dammi la forza per alzarmi anche domani, e di guadagnarmi il pane con le mie mani, ma... i figli della mia citta'nascono muti e la colomba bianca ormai si nutre di rifiuti. e' una pioggia malata che ci bagna, un blues che ci accompagna, in piedi alla lavagna abbiamo...zero tempo per giocare sai perche' c'e' che... c'e' che ogni giorno tocca a me. zero tempo per giocare sai perche' c'e' che... ogni giorno tocca a me. zero tempo per giocare sai perche' c'e' che... c'e' che tocca a me, tocca a me. zero tempo per giocare sai perche' c'e' che... quando tocca a me, tocca a me.ogni giorno tocca a me, zero tempo per giocare, lo vorrei fare, ma questa scuola non si puo' bigiare, lo sa mia madre la mattina che va a lavorare, lo sa ogni uomo su questa terra messo alla sbarra che non puo' più volare, lo sa mio nonno che ha sparato e pianto in guerra. soffoco, manca ossigeno, sono carico di zavorra, raggi di odio creano questo effetto serra, dentro il cuore noto un senso di torpore, l'amore sembra dormire invece muore. e un rumore il cervello spacca, chi non combatte schiatta ed una voce urla : "scappa, scappa ! !". ma io non voglio, dalle paure mi spoglio perche' un giorno se avro'n figlio mi guardi con orgoglio. credimi rido in faccia ai demoni, ma canto sotto il fuoco del nemico perciò non gioco.zero tempo per giocare sai perche' e' che... c'e' che ogni giorno tocca a me. zero tempo per giocare sai perche' c'è che... ogni giorno tocca a me. zero tempo per giocare sai perché c'e' che... c'e' che tocca a me, tocca a me. zero tempo per giocare sai perche' c'e' che... quando tocca a me, tocca a me.c'e' chi pensa che sono cambiato, c'e' chi no, c'e' chi mi ha sempre disprezzato, c'e' chi no, quindi vado come credo, dove credo, e a chi parla fuori dal mio ritmo non ci bado neanche un po', no, rispetto al cemento che mi chiede il suo battesimo, di cui son figlio ennesimo, magari il trentunesimo, do credito ai miei fratelli dedico, anche se ora eretico mi cresimo, so come funziona, e' un assioma, sembrano tutti tuoi amici quando hai fortuna, parassiti sopra la mia schiena. non voglio nessuna corona da chi scappa appena una nota stona, e sono sempre solo davanti a un guaio, nel corridoio buio e in fondo aspetta l'avvoltoio, guardo il diario, niente ore buche nell'orario e, pronto o no, usciro' io volontario quindi ho...zero tempo per giocare sai perche' c'e' che... c'è che ogni giorno tocca a me. zero tempo per giocare sai perche' c'e' che... ogni giorno tocca a me. zero tempo per giocare sai perche' c'e' che... c'e' che tocca a me, tocca a me. zero tempo per giocare sai perche' c'e' che... quando tocca a me, tocca a me

The CAPM

Capital market theory builds on portfolio theory. CAPM refers to the capital asset pricing model. It is used to determine the required rate of return for any risky asset.

In the discussion about the Markowitz efficient frontier, the assumptions are:

• Investors have examined the set of risky assets and identified the efficient frontier.
• Every investor will choose the optimal portfolio of risky assets on the efficient frontier. The optimal portfolio lies at the point where the highest indifference curve is tangent to the efficient frontier.

The CAPM uses the SML or security market line to compare the relationship between risk and return. Unlike the CML, which uses standard deviation as a risk measure on the X axis, the SML uses the market beta, or the relationship between a security and the marketplace.

The use of beta enables an investor to compare the relationship between a single security and the market return rather than a single security with each and every other security (as Markowitz did). Consequently, the risk added to a market portfolio (or a fully diversified set of securities) should be reflected in the security's beta. The expected return for a security in a fully diversified portfolio should be:

E(R_M) - R_f is the market risk premium, while the risk premium of the security is calculated by β[E(R_M) - R_f].

Note that the "expected" and the "required" returns mean the same thing. The expected return based on the CAPM is exactly the return an investor requires on the security.

• To compute the required rate of return:.
• To compute the expected rate of return of an individual security, you need to use forecasted future security price and dividend: R = (Future price - current price + dividend) / Current price.

The SML represents the required rate of return, given the systematic risk provided by the security. If the expected rate of return exceeds this amount, then the security provides an investment opportunity for the investor. The difference between the expected and required return is called the alpha (α) or excess rate of return. The alpha can be positive when a stock is undervalued (it lies above the SML) or negative when the stock is overvalued (it falls below the SML). The alpha becomes zero when the stock falls directly on the SML (properly valued).

Security Market Line vs. Capital Market Line:

• The CML examines the expected returns on efficient portfolios and their total risk(measured by standard deviation). The SML examines the expected returns on individual assets and their systematic risk (measured by beta). If the relationship between expected return and beta is valid for any individual securities, it must also be valid for portfolios constructed with any of these securities. So, the SML is valid for both efficient portfoliosand individual assets.
• The CML is the graph of the efficient frontier and the SML is the graph of the CAPM.
• The slope of the CML is the market portfolio's Sharpe ratio and the slope of the SML is the market risk premium.
• All properly priced securities and efficient portfolios lie on the SML. However, only efficient portfolios lie on the CML.

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The trivium includes those aspects of the liberal arts that pertain to mind, and the quadrivium, those aspects of the liberal arts that pertain to matter

Logic is the art of thinking; grammar, the art of inventing symbols and combining them to express thought; and rhetoric, the art of communicating thought from one mind to another, the adaptation of language to circumstance

In the exercise of the liberal arts, the action begins in the agent and ends in the agent, who is perfected by the action

ANALOGY: The intransitive character of the liberal arts The carpenter planes the wood. The rose blooms. The action of a transitive verb (like planes) begins in the agent but “goes across” and ends in the object (the wood). The action of an intransitive verb (like blooms) begins in the agent and ends in the agent (the rose, which is perfected by blooming).

The three classes of goods—valuable, useful, and pleasurable

Valuable goods are those which are not only desired for their own sake but which increase the intrinsic worth of their possessor. For instance, knowledge, virtue, and health are valuable goods.

Useful goods are those which are desired because they enable one to acquire valuable goods. For instance, food, medicine, money, tools, and books are useful goods

Pleasurable goods are those which are desired for their own sake because of the satisfaction they give their possessor. For instance, happiness, an honorable reputation, social prestige, flowers, and savory food are pleasurable goods.

The liberal arts, in contrast, teach one how to live; they train the faculties and bring them to perfection; they enable a person to rise above his material environment to live an intellectual, a rational, and therefore a free life in gaining truth. Jesus Christ said, “You shall know the truth, and the truth shall make you free” (John 8:32).3

Each of the liberal arts is both a science and an art in the sense that in the province of each there is something to know (science) and something to do (art). An art may be used successfully before one has a formal knowledge of its precepts. For example, a child of three may use correct grammar even though the child knows nothing of formal grammar

Grammar is an experimental knowledge of the usages of languages as generally current among poets and prose writers. It is divided into six parts: (1) trained reading with due regard to prosody [versification]; (2) exposition, according to poetic figures [rhetoric]; (3) ready statement of dialectical peculiarities and allusion; (4) discovery of etymologies; (5) the accurate account of analogies; (6) criticism of poetical productions which is the noblest part of grammatical art.

The accumulation of facts is mere information and is not worthy to be called education since it burdens the mind and stultifies it instead of developing, enlightening, and perfecting it. Even if one forgets many of the facts once learned and related, the mind retains the vigor and perfection gained by its exercise upon them. It can do this, however, only by grappling with facts and ideas. Moreover, it is much easier to remember related ideas than unrelated ideas

Each of the liberal arts has come to be understood not in the narrow sense of a single subject but rather in the sense of a group of related subjects

The three R’s—reading, writing, and reckoning—constitute the core not only of elementary education but also of higher education

Competence in the use of language and competence in handling abstractions, particularly mathematical quantities, are regarded as the most reliable indexes to a student’s intellectual caliber

The function of the trivium is the training of the mind for the study of matter and spirit, which together constitute the sum of reality

The Language Arts and Reality The three language arts can be defined as they relate to reality and to each other. Metaphysics or ontology,10 the science of being, is concerned with reality, with the thing-as-it-exists. Logic, grammar, and rhetoric have the following relation to reality

Logic is concerned with the thing-as-it-is-known.

Grammar is concerned with the thing-as-it-is-symbolized

Rhetoric is concerned with the thing-as-it-is-communicated

Rhetoric is the master art of the trivium,12 for it presupposes and makes use of grammar and logic; it is the art of communicating through symbols ideas about reality

Phonetics prescribes how to combine sounds so as to form spoken words correctly. Spelling prescribes how to combine letters so as to form written words correctly. Grammar prescribes how to combine words so as to form sentences correctly. Rhetoric prescribes how to combine sentences into paragraphs and paragraphs into a whole composition having unity, coherence, and the desired emphasis, as well as clarity, force, and beauty. Logic prescribes how to combine concepts into judgments and judgments into syllogisms and chains of reasoning so as to achieve truth

Of all the arts the first and most general is logic, then grammar, and last of all rhetoric

Correctness is the norm of phonetics, spelling, and grammar. Effectiveness is the norm of rhetoric. Truth is the norm of logic. Correctness in thinking is the normal means to reach truth, which is the conformity of thought with things as they are—with reality

The function of language is threefold: to communicate thought, volition, and emotion

Man, like other animals, may communicate emotions such as fright, anger, or satisfaction by means of cries or exclamations which in human language are called interjections

Volition (desires) or appetition (appetites) may be expressed by cries or exclamations, as when a baby cries or a dog barks for food.

desires multiply as knowledge increases, they are rational and therefore have something to say, social and therefore have someone to say it to, and animal and therefore require a physical mode of communicating ideas from one mind, which is isolated from all others in the body, to another mind likewise isolated, Pure spirits, such as angels, communicate thought, but their communication is not properly called language because it does not employ a physical medium.

MEANS OF COMMUNICATION There are possible only two modes of communicating ideas through a physical or material medium—by imitation or by symbol.

An imitation is an artificial likeness, for example: a painting, photograph, cartoon, statue, pantomime, a gesture such as threatening with a clenched fist or rejecting by pushing away with the hands, and picture writing

A symbol is an arbitrary sensible sign having a meaning imposed on it by convention. A sign is sensible, for it can be perceived by the senses. Every sign has meaning either from nature or from convention. A cloud, which is a sign of rain, and smoke, which is a sign of fire, have meaning from nature. A green light, which is a sign that traffic should move, has meaning from convention.

Permanent symbols: traffic lights, flags, a soldier’s salute, affirmation, heraldry, hieroglyphics, chemical formulas, numbers.

Some symbols are less convenient than others for the same purpose. For example, Roman numerals are less convenient for computation than Arabic numerals.

Common symbols or words, such as French, German, Chinese, or Greek words, constitute the common languages

Basic English is a careful selection of 850 English words, which through paraphrase are designed to do duty for a wider vocabulary

It is the nature of language to communicate through symbols.

A word, like every other physical reality, is constituted of matter and form. A word is a symbol. Its matter is the sensible sign; its form is the meaning imposed upon it by convention

Matter and form are metaphysical concepts necessary to the philosophical understanding of any material whole, for together they constitute every such whole.7 Matter is defined as the first intrinsic and purely potential principle of a corporeal essence; as such, it cannot actually exist without form, for it is not a body but a principle of a body, intrinsically constituting it.

Form is the first intrinsic and actual principle of a corporeal essence

ILLUSTRATION: Matter and form In animals, the body is the matter and the soul is the form. In water, the matter consists of hydrogen and oxygen; the form is the precise mode of their union in a molecule of water and may be expressed by the chemical formula H2O