Accounting Income and Assets: The Accrual Concept 2 CHAPTER Accounting Income and Assets: The Accrual Concept

1.The Accrual Concept of Income: accounting income Foundations of Accrual Accounting Revenue Recognition – recognize revenues when (1) Earned (2) Realized or Realizable Expense Matching – match with corresponding revenues (1) Product costs (2) Period costs Accounting Income = Revenues - Expenses

Accounting Income Operating Cash Flow Accruals = + Relationships among accounting income, cash flow and accruals Accounting Income Operating Cash Flow Accruals = + Example: Assume an item purchased for ＄100 at the beginning of period 1 is sold for ＄120 at end of that period and replaced at the start of the next period at a cost of ＄100. if we further assume that the sale is made on credit and cash will be collected in the following period, Calculate the accounting income.

Period 1: ………… Solution: Period 1 Period 2 -＄100 ＄120 ＄120 1 2 -＄100 1 2 -＄100 -＄100 Period 1: Revenues: ＄120 Expenses: ＄100 Accounting income: ＄20 Relationships: Accounting Income Operating Cash Flow Accruals = + ＄20 = -＄100 + ＄120 Accounts receivable

Relevance of Cash Flows and Income over a Company’s Life Cycle Supplementary: Relevance of Cash Flows and Income over a Company’s Life Cycle Free cash flow + Operating cash flow Financing cash flow Income   Inception Growth Maturity Decline Investing cash flow

2. Income Statement (1) Format and classification U.S GAAP: do not specify the format the income statement Sample income statement format: (P34) Revenue from the sales of goods and services: + Other income and revenues Operating expenses Financing costs +/- Unusual or infrequent items = Pretax earnings from continuing operations Income tax expense = Net income from continuing operations +/- Income from discontinued operations (net of tax) +/- Extraordinary items (net of tax) +/- Cumulative effect of accounting changes (net of tax) = Net income

Revenue Recognition Under accrual accounting: Revenues are “recognized” (recorded) as soon as they are both: Earned, meaning the seller has performed a service or conveyed an asset to the buyer; Measurable, meaning the value to be received for that service or asset is reasonably assured and can be measured with a high degree of reliability. Expenses are expired costs—the assets used up to produce revenues—and are recorded in the same accounting period in which the revenues are recognized. Expenses are “matched” to revenues! Net income = Revenues - Expenses

Time of sale is the dominant practice in most industries Time of sale is the dominant practice in most industries. However, sometimes revenue is not recognized until after the time of sale because: Extreme uncertainty exists regarding the amount of cash to be collected from customers (customer credit risk, contingencies, right-of-return). Future services to be provided are substantial, and their costs cannot be estimated with reasonable precision.

Percentage-of-completion and Completed contract Methods Percentage-of-completion method: revenues and expenses are recognized in proportion to and as work is completed. Engineering estimates; or Ratios of costs incurred to expected total costs Completed contract Methods: revenues and expenses are recognized only at the end of the contract

Example: In 2001, Justin Corp. entered into a contract price of ＄6 million and expected costs to complete of ＄4.8 million resulting in expected profits of ＄1.2 million. Actual production costs and cash flow information over the duration of the contract are provided as follows( in ＄thousands): 2001 2002 2003 Costs incurred: current year ＄800 ＄2,800 ＄1,200 cumulative 800 3,600 4,800 Estimated remaining costs to complete (as of 4,000 1,200 0 Dec 31) Amounts billed and cash received current year ＄1,300 ＄2,500 ＄2,200 cumulative 1,300 3,800 6,000 Recognition of revenues: Costs incurred ×expected revenues Expected total costs

Income statement (in ＄thousands) Percentage-of-completion Completed contract 2001 2002 2003 Total 2001 2002 2003 Total Revenue ﹩1,000 ﹩3,500 ﹩1,500 ﹩6,000 ﹩0 ﹩0 ﹩6,000 ﹩6,000 Expense 800 2,800 1,200 4,800 (0) (0) ﹩4,800 ﹩4,800 Income ﹩200 ﹩700 ﹩300 ﹩1,200 ﹩0 ﹩0 ﹩1,200 ﹩1,200

Questions: 某集团公司将由母公司制造的但子公司在生产过程需用的机床，由母公司将机床按市场价销售给第三方，确认销售收入，再由其子公司按市场价从第三方手中购回，作为固定资产核算，并按预计使用年限计提折旧。试分析该交易对合并报表的影响。

Case: 2007年4月14日，夏新电子（600057）公布了其2006年年报，公司扭亏为盈，每股盈利0.056元。5月23日，该公司又公布了2006年度报告补充公告。5月28日，该公司股价达到10.79元，是自2005年以来的最高价。7月14日，公司公告上半年业绩预亏，原因是公司集中处理了回购产品费用，公司股价应声回落到每股6元附近。 中国证监会厦门监管局于2008年1月30日下发了“厦证监发［2008］45号整改通知书”。《通知》指出，公司施行全程保价销售方式，实际承担了商品贬值的风险，未满足确认收入所要求的“商品风险和报酬的转移”条件；计提的调价补差准备金额难以准确计量；对全程保价销售方式，公司更没有在年报附注中予以披露。显然，如果采用全程保价销售方式不符合收入确认条件，夏新电子就是将不应确认收入的销售确认了收入，并且没有在附注中披露，有操纵利润的嫌疑。

Analysis of revenue: Focus: Recognition and measurement; Sources and continuity; Comparison with AR and inventory.

Youngor

Sales form different sources

Cases: 吉林化工2000年年初应收账款为14.38亿元，年末应收账款为29.31亿元，增幅达到104%。2000年，吉林化工实现主营业务收入139亿元，与1999年同期相比上升26%，但净利润却为负的8.4亿元。由于应收账款对流动资金的占用，导致公司资金不足，迫使公司增加有息负债，使有息负债规模从年初的35.81亿元扩大到年末75.55亿元，净增40亿元。借贷规模的增加导致财务费用增加，该公司2000年财务费用达到6亿元。在6亿元的财务费用中，新增应收账款导致的财务费用据测算就超过1亿元。另外，29.31亿元的应收账款如果计提坏账准备，对公司业绩也将产生一定的影响。

深康佳A存货及主营业务收入变动表 项目 1995 1996 1997 1998 1999 2000 存货（万元） 111 217 150 529 263 028 331 209 472 709 497 754 存货增长率（%） 12.6% 35.4% 74.7% 25.9% 42.7% 5.3% 主营业务收入（万元） 361 022 500 632 634 337 857 389 1012710 901 273 收入增长率（%） 51.3% 38. 7% 26.7% 35.26% 18.1% -11.0 %

Other items: Cost of goods sold; Gross profit; SG&A; Income tax (see ch09).

Accounting issue affecting expense recognition: Deferral of marketing expenses and sales commissions; Accrual or deferral of the cost of periodic major maintenance projects; Bad debt expense; Warranty expense.

IBM Case IBM Louis V. Gerstner于1993年加盟IBM，通过处置资产实现一次性收益89亿美元，避免了巨额损失。若剔除这项非经常性收益，IBM在1993年的亏损为170亿美元 1999年，IBM的收入比1998年增加了7.1%，但净收益却增加了22.2%。表面上看，IBM给人的印象是成本费用控制成绩显著 真实情况 1999年第三季度，IBM将其账面净值为9.34亿美元的Global Network，以49.91亿美元出售得AT&T，实现了税前利得40.57 亿美元（税后为 24.95亿美元，对EPS的影响为$1.33，当年其报告的EPS为$4.12)，并将这项利得与当年处置其他下属子公司的损失15.46亿美元相抵销，反映为“销售、一般及管理费用”的减少额，且未在1999年报予以披露。后受到SEC的谴责，被迫在以后年度的财务报告中补充披露。剔除这项粉饰后，1999年经营性净收益实际上比1998年下降17.4%。

IBM Case IBM 2001年故伎重演 IBM发言人的解释 Staff Accounting Bulletin 99 2002年1月中旬，IBM宣布其2001年第四季度的盈利超过华尔街财务分析师的预测，但并未披露2001年12月28日将光学收发机业务出售给JDS Uniphase实现的3亿美元利得，并将此项利得与“销售、一般及管理费用对冲的事实 尽管2001年IBM的营业收入高达860亿美元，3亿美元看起来微不足道。但将这项利得冲抵SG&A明显误导投资者，且违反GAAP。该项目使EPS增加了$0.12，占第四季度EPS的9% IBM发言人的解释 重要性原则 Staff Accounting Bulletin 99 When you intentionally violate accounting guidelines, any amount is material. Effects on stock price must be taken into account Lynn Turner的评价 SAB 101 is very clear that gains from the sale of assets have to be in the öther income” line.

Cases: 东北制药（000597）集团股份有限公司在编制1996年财务报表时，违规把本该作为费用处理的2128万元税金转入产成品成本，留待下年处理，将亏损虚构为盈利1995万元。试分析该公司这一行为是如何导致其利润增加的。

Comparison: Youngor’s consolidated income statement for 2008

建筑业上市公司的主营业务成本占比最高，约占到主营业务收入的84. 5%；社会服务业上市公司主营业务成本占比最低，约占到主营业务收入的59 建筑业上市公司的主营业务成本占比最高，约占到主营业务收入的84.5%；社会服务业上市公司主营业务成本占比最低，约占到主营业务收入的59.99%。 证监会行业分类标准，具体是：采掘业（B）；传播与文化产业（L）；电力、煤气及水的生产和供应业（D）；房地产业（J）；建筑业（E）；交通运输、仓储业（F）；农、林、牧、渔业（A）；批发和零售贸易（H）；社会服务业（K）；信息技术业（G）；制造业-电子（C5）；制造业-纺织、服装、皮毛（C1）；制造业-机械、设备、仪表（C7）；制造业-食品、饮料（C0）；制造业-医药、生物制品（C8）。

3. Balance sheet Definition: Measurement: see chapter one Historical cost; Replacement cost; Net realizable value; Present value; Fair value.

Reports on a firm’s earnings-generating ability ; (3) Use of the balance sheet The reported balance sheet is one starting point for the analysis of a firm. Provides information about a firm’s resources and obligations, including liquidity and solvency; Reports on a firm’s earnings-generating ability ; Generates forecasts about a firm’s future cash flow needs. uses Limitations: Selective reporting; Measurement; Delayed recognition.

Financial assets hold for sale 弘业股份（600128）2007年实现营业收入22.36亿元，同比微增1.94%，利润总额6063.26万元，同比增长近三成；而净利润3430.35万元，同比增长达67.52%。公司净利润增长的主要动力来自于公司出售可供出售金融资产的投资收益。

Long-term equity Investment Long-term equity investment/total assets(%) of different industries 证监会行业分类标准，具体是：采掘业（B）；传播与文化产业（L）；电力、煤气及水的生产和供应业（D）；房地产业（J）；建筑业（E）；交通运输、仓储业（F）；农、林、牧、渔业（A）；批发和零售贸易（H）；社会服务业（K）；信息技术业（G）；制造业-电子（C5）；制造业-纺织、服装、皮毛（C1）；制造业-机械、设备、仪表（C7）；制造业-食品、饮料（C0）；制造业-医药、生物制品（C8）。

社会服务业上市公司持有的长期股权投资在总资产中所占比重最大，约为15 社会服务业上市公司持有的长期股权投资在总资产中所占比重最大，约为15.62%，其次分别是综合类和电力煤气及水的生产和供应业上市公司，平均水平分别为10.35%和8.59%。金融保险业、建筑业和制造业上市公司持有的长期股权投资相比较少，分别为1.14%、3.39%和4.02%。

吉轻工（000546）在1998年控股子公司或合资企业多达21个，经营范围涉及房地产、轻工、贸易等众多领域，地区分布涉及到珠海、海南及长春等多个省市。1999年主营业务利润只有634万元，而投资项目却造成了8198万元的亏损。2000年虽通过股权转让等措施，使公司控股或合资企业从原来的20多个降至13个，但投资项目依然出现2513万元的亏损。过度分散的投资很难形成竞争优势，最终戴上了PT“帽子”。该公司自己也称“主营业务不突出，缺乏稳定的利润来源”是制约其发展的最大瓶颈。

Investment real estates

房地产业上市公司持有的投资性房地产在总资产中所占比重最大，约为12.3%， 其次分别是综合类和批发及零售贸易业上市公司，平均水平分别为7.09%和6.52%。 电力煤气及水的生产和供应业、采掘业、交通运输仓储业、传播与文化产业上市公司持有的投资性房地产最少，还不到总资产的1%。

Fixed assets

对于电力煤气及水的生产和供应业、交通运输仓储业和采掘业上市公司，其经营特点决定了固定资产在总资产中所占的比重较大，分别达到58.46%、55.63%和49.81%。 而金融保险业和房地产业上市公司持有的固定资产相比较少，分别为1.46%、和6.78%。。

Intangible assets

采掘业、交通运输仓储业和社会服务业上市公司，无形资产在总资产中所占的比重相对较大，分别达到13. 20%、12. 99%和12 采掘业、交通运输仓储业和社会服务业上市公司，无形资产在总资产中所占的比重相对较大，分别达到13.20%、12.99%和12.45%。对于采掘业上市公司来说，所持有的无形资产主要的矿产资源的开采权。 金融保险业和房地产业上市公司持有的无形资产相比较少，分别仅为0.28%、和2.13%。

Polaroid公司1991年年报中披露，该公司起诉Kodak公司的即时成像照相机侵犯了其专利权，法院裁定Kodak公司败诉，该公司因此获得了9.245亿美元的赔偿。然而，在Polaroid公司1991年的年报中，所列示的“专利权和商标”的价值仅为1美元。显然，由于研发技术的支出在发生当期就被费用化了，Polaroid公司年报中所列示的无形资产并没有反映其真实的经济价值。

Further reading: not required [1] Machuga, S. 2000. Use of Fuller's Technique to Reduce Measurement Error in the Returns/Earnings Association. Review of Quantitative Finance and Accounting, Vol 14, No.3. [2] Abad, D., S.Sanabria and J.Yagüe. 2009. Strategic timing of annual earnings announcements: evidence from an order-driven market. Review of Quantitative Finance and Accounting, Vol 32, No.3. [3] Barton, J. 2001. Does the use of financial derivatives affect earnings management decisions. Account Review, Vol 76, No.1. [4] Ariff, M., C. Loh and P. Chew. The Impact of Accounting Earnings Disclosures on Stock Prices in Singapore. Asia Pacific Journal of Management, Vol 14, No.1.

Presentation: required Recurring vs. nonrecurring items See page 37-38, and 52-61 15 -20 minutes