Common-size Income Statements
Conversion of the income statement to a common-size income statement facilitates an assessment of a company’s performance across time periods (time series analysis), and across companies (cross-sectional analysis). Common-size analysis of the income statement is performed by stating each line…
Comprehensive Income
‘Comprehensive income’ and ‘other comprehensive income’ are two components of the income statement that can have a material effect on the profitability of a company. It is therefore very important to understand the difference between these two items and the…
Other Comprehensive Income
Based on accounting conventions, certain items of revenue and expense are excluded from the net income calculation. These excluded items are referred to as ‘other comprehensive income.’ Under both IFRS and US GAAP, there are four types of items that…
Quality of Financial Reports and Earnings
Financial reporting quality relates to the quality of the information that is contained in financial reports, including note disclosures. High-quality reporting provides relevant, decision-useful information, which objectively represents the economic reality of a company’s activities during the reporting period. Further,…
A Spectrum for Assessing Financial Reporting Quality
When financial reporting and earnings quality are combined, the overall quality of financial reports from a user’s perspective may be viewed as spanning a continuum from the highest to the lowest point. Financial Reporting Quality Spectrum A quality spectrum provides…
Measurement of Bonds
Bonds refer to the contractual promises made by a company to pay its lenders or bondholders cash in future in exchange for cash in the present. Generally speaking, bonds involve promises to make two types of future cash payments to…
The Effective Interest Method
Typically, companies maintain the historical cost (sales proceeds) of bonds after issuance, and any discount or premium is amortized over the life of the bonds. Some companies report the bonds at their current fair values. Under IFRS, bonds are reported…
The Role of Debt Covenants in Protecting Creditors
Debt covenants are restrictions included in bond indentures that protect creditors by restricting the activities of the borrower. They are beneficial to the borrowers to the extent that they lower the risk to the creditors and thereby reduce the cost…
Presentation and Disclosures Relating to Debt
Depending on the maturity structure of a company’s debt obligations, its debt (or portions of it) can be reported either in the non-current liabilities section or the current liability section of the balance sheet. Notes to the financial statements can…