BAB 6 Analyzing Operating Activities

ANALYZING
OPERATING ACTIVITIES
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Aspek yang dianalisis

ACCOUNTING INCOME income yang diperoleh / diukur /
dicatat berdasarkan standar akuntansi - accrual basis.
Mencakup:
Net income (dipengaruhi oleh Revenue, Expense, Gain,
dan Loss)
Other Comprehensive Income (OCI)
digabungkan menjadi Comprehensive Income (CI) (proxi
akuntan terhadap economic income)
Terdapat pelaporan bagian (porsi) untuk non controlling
(minority) interest in equity serta EPS (basic & diluted EPS)
Perhatikan !!!
Income is not equal to the amount of cash generated

from the successful operation of the business.
Income is a return over and above the investment.
It is the amount that an entity could return to its investors

and still leave the entity as well-off at the end of the
period as it was at the beginning.
Revenue/Gain Recognition
Revenue is important for
Company valuation
Accounting-based contractual agreements
Management pressure to achieve income expectations
Management compensation linked to income
Valuation of stock options
Analysis must assess whether revenue reflects business reality
Assess risk of transactions
Assess risk of collectibility
Circumstances fueling questions about revenue recognition include:
Sale of assets or operations not producing cash flows to fund
interest or dividends
Lack of equity capital
Existence of contingent liabilities
Revenue recognition (recording on the book) does not necessarily
occur when cash is received ( ACCRUAL BASIS).
Revenues and gains are recognized when: (GAAP criteria)
1. they are realized or realizable, and
2. they have been earned through substantial completion of the
activities involved in the earnings process (and no significant
added effort is necessary)
. Risk of ownership is effectively passed to the buyer
. Revenue, and related expense, are measured or estimated with
accuracy
. Revenue recognized normally yields an increase in cash,
receivables (claims to cash), or securities (from the exchange of
inventory or other assets)
Transaction is not subject to revocation (dibatalkan / ditarik)
Those criteria generally are met at point of sale (full accrual)
and expenses charge against revenue at time of sale or rendering
of service
Revenue is not recognized prior to the point of sale because either:
A valid promise of payment has not been received from the
customer.
The company has not provided the product or service.
Exceptions to these rules:
The customer provides a valid promise of payment.
Conditions exist that contractually guarantee the sale.
point of completed production
(for mining & agricultural products)
AICPA Statement of Position 97-2 gives companies more

guidance through a checklist of 4 factors that amplify the 2 criteria:
1) Persuasive evidence of an arrangement exists.
2) Delivery has occurred.
3) The vendors fee is fixed or determinable.
4) Collectibility is probable.
The FASB is engaged in a revenue recognition project in

conjunction with the IASB (as of June 2010) conjunction GAAP
with IFRS
The FASB has tentatively decided to move away from the

realization and substantial completion criteria and to instead
emphasize the measurement of a sellers satisfaction of
performance obligations created through contracts with customers.
Key objective: Recognize revenue to depict (menggambarkan)
the transfer of goods or services to customers in an amount that
reflects the consideration that the company receives, or expects to
receive, in exchange for these goods or services
5 steps process for revenue recognition:
1. Identify the contract with customers
2. Identify the separate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the separate performance
obligations
5. Recognize revenue when each performance obligation is
satisfied
Principle: Recognize revenue in the accounting period when the
performance obligation is satisfied
Step 1: Identify the contract with customers
A contract is an agreement that creates enforceable rights or

obligations
Revenue from a contract with a customer cannot be recognized until

a contract exists
A company does not recognize contract assets or liabilities until one

or both parties to the contract perform. Until the performance
occurs, no net assets or net liability occurs
A company applies the revenue guidance to contracts with

customers and must determine if new performance obligations are
created by a contract modification (change the contract terms while
it is ongoing)
When a contract modifications occurs, companies determine

whether a new contract (and performance obligation) results or
whether it is modification of the existing contract
Additional products are not a separate performance obligation if the new

products are not priced at the proper standalone selling price, or they are
not distinct, so companies generally account for the modification using a
prospective approach company should account for the effect of the
change in the period of change as well as future periods if the change
affects both, and should not change previously reported results
A company accounts for a new contract modification as a new contract

(separate performance obligation) if both of the following conditions are
satisfied:
1. The promised goods or services are distinct (i.e., the company sells
them separately and they are not interdependent with other goods &
services), and
2. The company has the right to receive an amount of consideration
that reflects the standalone selling price of the promised goods or
services
NOTE: whether a modification is treated as a separate performance obligation or
prospectively, the same amount of revenue is recognized before and after
the modification

Apply revenue guidance to contract if
.
Disregard revenue
guidance to contract if .
The contract has commercial substance
The contract is wholly

unperformed, and
The parties to the contract have

approved the contract & are committed
to perform their respective obligation
Each party can internally

terminate the contract
without compensation
The company can identify each partys

rights regarding the goods or services
to be transferred, and
The company can identify the payment

terms for the goods and services to be
transferred
It is probable that the company will

collect the consideration to which it will
be entitled
Step
Step2:
2:Identify
Identifythe
theseparate
separateperformance
performanceobligations
obligationsin
inthe
thecontract
contract
Revenue Recognition Classified by Nature of Transaction
Type of
Transaction
Sale of product
from inventory
Rendering a
service
Permitting use
of an asset
Sale of asset
other than
inventory
Description
of Revenue
Revenue from
sales
Revenue from
fees or
services
Revenue from
interest, rents,
and royalties
Gain or loss on
disposition
Timing of
Revenue
Recognition
Date of sale
(date of
delivery)
Services
performed and
billable
As time passes
or assets are
used
Date of sale or
trade-in
LO 1 Apply the revenue recognition principle.
Step 2: Identify the separate performance obligations in the contract
A performance obligation is a promise in a contract to provide a product

or service to a customer. A performance obligation exists if the customer
can benefit from the good or service on its own or together with other
readily available resources
The company must provide a distinct product or service before recognize

revenue because a contract may be comprised of multiple
performance obligations
To determine whether a company has to account for multiple

performance obligations, it evaluates whether the product is distinct
within the contract.
If the performance obligation is not highly dependent on, or

interrelated with, other promises in the contract, then each
performance obligation should be accounted for separately.
Conversely, if each of these services is interdependent and

interrelated, these services are combined and reported as one
performance obligation
Step 3: Determine the transaction price

Transaction price is the amount of consideration that a company
expects to receive from a customer in exchange for transferring
goods or services
The transaction price in a contract is often easily determined
because the customer agrees to pay a fixed amount to the
company over a short period of time.
In other contract, companies must consider the following factors:
a. Variable considerations
b. Time value of money
c. Non-cash consideration
d. Consideration paid or payable to customers

Variable considerations
This factor was considered if the price of goods or services is

dependent on future events (discounts, rebates, credits,
performance bonuses, or royalties), so the company estimates
the amount of variable consideration it will receive from the
contract to determine the amount of revenue to recognized
Company uses either the expected value, which is a

probability-weighted amount, or the most likely amount in a
range of possible amounts to estimate variable consideration
Companies select among these two methods based on which

approach better predicts the amount of consideration to which
a company is entitled
A company only allocates variable consideration if it is

EXPECTED VALUE
MOST LIKELY
AMOUNT
May be appropriate if a company

has a large number of contracts
with similar characteristics
Can be based on a limited
number of discrete outcomes &
probabilities
May be
appropriate if the
contract has only
two possible
outcomes
Companies therefore may only recognize variable consideration

if:
(1) they have experience with similar contract and are able to
estimate the cumulative amount of revenue, and
(2) based on experience, it is highly probable that there will not
be a significant reversal of revenue previously recognized

If those criteria are not met, revenue recognition is constrained
Conditions such as one of the following would indicate that the

revenue is constrained (not recognized):
(1) The amount of consideration is highly susceptible to factors
outside the companys influence (volatility in a market, the
judgment of third parties, weather conditions, and a high
risk of obsolescence of the promised good or service)
(2) The uncertainty about the amount of consideration is not
expected to be resolved for a long period of time
(3) The companys experience (or other evidence) with similar
types of performance obligations is limited
(4) The contract has a large number and broad range of
possible consideration amounts

Time Value of Money (TVM) extended payment terms
Companies account for TVM if the contract (sales transaction)
involves a significant financing component (i.e., interest is
accrued on consideration to be paid over time), so the fair
value is determined either by measuring the consideration
received or by discounting the payment using an imputed
interest rate
The imputed interest rate is the more clearly determinable of
either:
(1) the prevailing rate for a similar instrument of an issuer with a
similar credit rating
(2) a rate of interest that discounts the nominal amount of the
instrument to the current sales price of the goods or
services

Non-cash considerations
Companies generally recognize revenue on the basis of the fair
value of what (consideration) is received
If company cannot determine this amount, then it should
estimate the selling price of the service performed and
recognize this amount as revenue
Consideration paid or payable to customers
Considerations paid or payable to customers (discounts, volume
rebates, coupons, free products, or services as part of a
revenue arrangement) reduce the consideration received and
the revenue to be recognized
Step 4: Allocating the transaction price to Separate Performance

Obligations
The transaction price allocated to the various performance
obligations is based on their relative fair values (FV). The best
measure of FV is what the company could sell the good or service
for on a standalone basis, referred to as the standalone selling
price.
If this information is not available, companies should use their best
estimate of what good or service might sell for a standalone unit (
with allocation approach)
When a company sells a bundle of goods or services, the selling
price of bundle is often less than the sum of the individual
standalone prices, so the company should allocate the discount to
the product(s) that is causing the discount and not to the entire
bundle
Step 4: Allocating the transaction price to Separate Performance

Obligations
Allocation
approach
Implementation
Adjusted
market
assessment
approach
Evaluate the market in which it sells goods or

services and estimate the price that customers in
that market are willing to pay for those goods or
services. That approach also might include
referring to prices from the companys
competitors for similar goods or services and
adjusting those prices as necessary to reflect the
companys costs & margins
Expected cost
plus a margin
approach
Forecast expected costs of satisfying a

performance obligation and then add an
appropriate margin for that good or service
Residual
approach
If the standalone selling price of a good or service

is highly variable or uncertain, then a company
may estimate the standalone selling price by
reference to the total transaction price less the
sum of the observable standalone selling prices
Step 5: Recognize revenue when each performance obligation is

satisfied
A company satisfies its performance obligation when the customer
obtains control of the good or service
1. The company has a right to payment for the asset
2. The company has transferred legal title to the asset
3. The company has transferred physical possession of the asset
4. The customer has significant risks and rewards of ownership
(the customer has the ability to direct the use of and obtain
substantially all the remaining benefits from the asset or
service, and has the ability to prevent other companies from
directing the use of, or receiving the benefits, from the asset
or service)
5. The customer has accepted the asset
. Companies satisfy performance obligations either at a point in time or
over a period of time.
Companies recognize revenue over a period of time if:
(1) the customer controls the asset as it is created, or
(2) the company does not have an alternative use for the asset
Other revenue recognition issues / Special revenue

recognition situations:
Issue
Description & implementation
Right of
return
Return of product by customer (e.g., due to

dissatisfaction with the product) in exchange for
refunds (full or partial), a credit against amounts
owed or that will be owed, and/or another product in
exchange
Seller may recognize (a) an adjustment to revenue for
the products expected to be returned, (b) a refund
liability, and (c) an asset for the right to recover the
product (and corresponding adjustment to COGS)
Repurchase
agreement
Seller has an obligation or right to repurchase the

asset at a later date
Generally, if the company has an obligation or right to
repurchase the asset for an amount greater than its
selling price, then the transaction is a financing
(borrowing) transaction

Issue
Bill and hold Result when the buyer is not yet ready to take
delivery but does take title and accept billing,
because of (1) lack of available space for the
product, (2) delays in its production schedule, or (3)
more than sufficient inventory in its distribution
channel
Revenue is recognized depending on when the
customer obtains control of that product
Principal
agent
relationship
Arrangement in which the principals performance

obligation is to provide goods or perform services for
a customer. The agents performance obligation is to
arrange for the principal to provide these goods or
services to a customer
Amounts collected on behalf of the principal are not
revenue of the agent. Instead, revenue for the agent
is the amount of the commission it receives. The
principal recognizes revenue when the goods or
services are sold to a third-party customer

Issue
Consignme
nts
A principal-agents relationship in which the consignor

(manufacturer or wholesaler) ships merchandise to
the consignee (dealer), who is to act as an agent for
the consignor in selling the merchandise
The consignor recognizes revenue only after receiving
notification of the sale and the cash remittance from
the consignee (consignor carries the merchandise as
inventory throughout the consignment). The
consignee records commission revenue (usually some
% of the selling price)
Warranties
Warranties can be assurance-type (product meets

agreed-upon specification) or service-type (provides
additional service beyond the assurance type
warranty)
A separate performance obligation is not recorded for
assurance-type warranties (considered part of the
product). Service-type warranties are recorded as a
separate performance obligation. Companies should
allocate a portion of the transaction price to servicetype warranties, when present.

Issue
Non
refundable
upfront fees
Upfront payment generally relate to initiation,

activation, or setup activities for a good or service to
be delivered in the future
The upfront payment should be allocated over the
periods benefited
Installment
sales
method
It is used most commonly in cases of real estate

sales where contracts may involve little or no down
payment, payments are spread over 10 to 30 to 40
years, a high probability of default in the early years
exists because of a small investment by the buyer,
and the market prices of the property often are
unstable.
Revenue and/or income recognized at collection of

cash. Usually a portion of the cash payment is
recognized as income
Expenses defer to be matched against a part of
each cash collection. Usually done by deferring the
estimated profit

Issue
Cost This method is used only when the circumstances

recovery
surrounding a sale are so uncertain that earlier
(zero profit)
recognition is impossible.
method for
long term
(constructio
cash, but only after all costs are recovered (no
n & service)
income is recognized on a sale until the cost of the
contract
item sold it recovered through cash receipts).
Expenses defer to be matched against total cash
collected.
Loss on an unprofitable contract company must
recognize the entire expected contract loss in the
current period
Cash
(collection)
method
This method is used if the probability of recovering

product or service costs is remote. Seldom would this
method be applicable for sales of merchandise or real
estate because the right of repossession would leave
considerable value to the seller.

Issue
Percentage
of
completion
method for
long term
constructio
n contract
Company must have some basis for measuring the

progress toward completion at particular interim
dates. One of the most popular input measures used
to determine the progress toward completion is the
cost to cost basis.
Using the cost to cost basis, a company measures
the % of completion by comparing cost incurred to
date with the most recent estimate of the total costs
to complete the contract. Engineers are often called
in to help provide estimates
The company applies the % to the total revenue or
the estimated total gross profit on the contract, to
arrive at the amount of revenue or gross profit to be
recognized to date.
Loss in current period on a profitable contract the
estimated cost increase requires a current-period
adjustment of excess gross profit recognized on the
project in prior period
Loss on an unprofitable contract company must

Issue
Percentage
of
completion
method for
long term
constructio
n contract
(
continued)
A company satisfies a performance obligation and

recognizes revenue over time if at least one of the
following criteria is met:
1. The companys performance creates or enhances
an asset (e.g., work in process) that the customer
controls as the asset is created or enhanced.
2. The companys performance does not create an
asset with an alternative use, for example, the
asset cannot be used by another customer. In
addition to this alternative-use element, at least
one of the following criteria is met:
a) The customer simultaneously receives &
consumes the benefits of the entitys
performance as the entity performs
b) Another company would not need to
substantially re-perform the work the company
has completed to date if that other company
were to fulfill the remaining obligation to the
customer
c) The company has a right to payment for its
performance completed to date, and it expects
to fulfill the contract as promised

Issue
Completedcontract
method
This method should be used only when an entity has

primarily short term contracts, when the conditions of
using percentage of completion method accounting
are not met, or when there are inherent uncertainties
in the contract.
This method is also used when more than one act
must be performed and when the final act is so
significant to the entire transaction taken as a whole
that performance cannot be considered to have taken
place until the performance of that final act occurs.
The company waits until the production or service
period (contract) is complete to recognize revenue &
gross profit (as the point of sale). All income from the
contract is related to the year of completion.
Specific
performanc
e method
This method is used when performance consists of

the execution of a single act, so revenue is
recognized at the time the act takes place

Issue
Proportiona This method is used when performance consists of a

number of identical or similar acts.
l
a) If the service transactions involves a specified number
performanc
of identical or similar act, an equal amount of
e method
revenues is recorded for each act performed
(for long
b) If the service transactions involves a specified number
term
of defined but not identical or similar act, the revenue
service
recognized for each act is based on the formula:
contract)
(direct cost of individual act / total estimated direct
costs of the transaction) x total revenues from
complete transactions
c) If the service transactions involves an unspecified
number of defined over a fixed time period for
performance, revenue is recognized over the period
during which the acts will be performed by using the
straight line method unless a better method of
relating revenue and performance is appropriate
) Most service contracts involve three different types of

costs:
a) Initial direct costs related to obtaining and performing
initial services on the contract
b) Direct costs related to performing the various service
acts

Issue
Layaway
sales
This is agreement in which seller reserves an item for a

customer until the consumer completed all the
payments necessary to pay for that item. Because
there is little risk involved to the seller, this sales can
be readily offered to those with bad credit.
If the transaction is not completed, the item is
returned to stock, the customers money may be
returned in whole, returned less a fee, or forfeited
entirely.
No interest is charged, the price is fixed, availability is
guaranteed by reserving the item in stock, and an item
being purchased as a gift can be kept secret.
Consumers may also gain a sense of living within their
means
Partial cash payment for goods was recognized as
initial layaway payment (deposit received from
customers). Receipt of the final cash payment and the
delivery of goods to customers requires two entries
(record the sale, and removing the item from inventory
and recording its COGS).

Issue
Franchises In a franchise arrangement, the franchisor satisfies its

revenue
performance obligation for a franchise license when
control of the franchise rights is transferred, generally
when the franchisee begins operations of the
franchise.
In situations where the franchisor provides access to
the rights rather than transferring control of the
franchise rights, the franchise rights revenue is
recognized over time rather than at point in time.
Franchisors recognize continuing franchise fees as
uncertainty related to the variable consideration is
resolved, that is over time
Customer
Acceptanc
e
Provisions
This is agreement in which the sale is not complete

until the product item is installed at the customers
place of business.
Full cash payment for goods was recognized as
advance payments received from customers
When customer had accepted the installed product

Issue
Contract
assets &
liabilities
(asset
liability
approach)
Contract assets :
1. unconditional rights to receive consideration
because the company has satisfied its
performance obligation with a customer
(reported as receivable), and
2. Conditional rights to receive consideration
because the company has satisfied one
performance obligation but must satisfy another
performance obligation in the contract before it
can bill the customer (reported as contract
assets)
Contract liability is a companys obligation to transfer
goods or services to a customer for which the
company has received consideration from the
customer (reported as unearned revenue).
Expense / Loss Recognition

1. Direct matching (matching expense to specific revenue)
Product cost (COGM), COGS, & selling expense (shipping costs
and sales commissions) related to sales revenue
2. Systematic & rational allocation
Depreciation, amortization, depletion, & insurance expense
(spread cost of assets that benefit more than one period across the
periods of expected benefit)
3. Immediate recognition (not related to specific revenues but are
incurred to obtain goods & services that indirectly help to generate
revenues; recognized in the period in which they are incurred)
Period cost, administrative expense, & loss
Unsur pembentuk net income - Income

statement
Revenue from sales

Cost of goods sold (COGS)
Gross profit
Selling & administrative expense
Other income & gain / other expense & loss (*)
Income from operation (operating income)
Interest expense (financing cost)
Income before income tax
Income tax expense (perhatikan: deferred tax assets / liabilities)
Income from continuing operation
Net income
Gain / loss on discontinued operation (net of tax)
Operating income/loss from discontinued operations until the
measurement date
Gain/loss on disposal
Net income
Unsur pembentuk net income - Income

statement
Other income & gain / other expense & loss

a) Gain / loss on sales / write offs / write downs / abandonment / impairment
of investment, intangible assets, inventory (obsolescence), plant assets,
receivables, deferred R/D cost, productive asset
b) Gain/loss on disposal of part of division (business segment)
c) Dividend & interest revenue
d) Rent revenue / expense
e) Investment income (net income from companies accounted for by equity
method)
f) Loss from a major casualty / strike (flood, fire, earthquake, hurricane,
tornado, etc.) (including those against competitors and major suppliers)
g) Loss from expropriation (pengambilalihan)
h) Insurance gain on fire / damage loss
i) Gain / loss on litigation settlement
j) Gain / loss from early retirement of debt
k) Refund on litigation with government
l) Gain / loss on restructuring (restructuring charges)
m) Adjustments of accruals on long term contracts
Unsur pembentuk OCI- Statement of CI
Net income
OCI:
o Unrealized holding gain/loss on non trading (held for collection /
available for sale) equity / marketable securities (changes in FV)
(net of tax)
o Translation gain/loss (adjustment / remeasurement) on foreign
currency (exchange differences) (net of tax)
o Gain/loss on changes in revaluation surplus (revaluation of office
building) (net of tax)
o Actuarial gain/loss (adjustment) in pension plan & other post
retirement benefits (net of tax)
o Unrealized gain/loss on hedging transaction & derivative
instruments (net of tax)
Unsur pembentuk R/E- Statement of R/E

Retained earnings (R/E)
Prior period adjustment for R/E (efek accounting changes &
errors yang bersifat retroaktif / retrospektif)
Net income
Dividend
Unsur pembentuk Statement of Changes in

Equity
Capital stock
Preferred Stock (P/S)
Ordinary / Common Stock (C/S)
Treasury stock (T/S)
Paid in capital in excess of par (P/S, C/S, T/S)
R/E
OCI
Analyzing accounting changes
Are cosmetic and yield no cash flows
Can better reflect economic reality
Can reflect earnings management (or even manipulation)
Impact comparative analysis (apples-to-apples)
Affect both economic and permanent income

For permanent income, use the new method and ignore the cumulative
effect
For economic income, evaluate the change to assess whether it reflects
reality
Analyzing asset impairment / write off
Special Items (unusual or infrequent transaction / event)
Challenges for analysis

a) Often little GAAP guidance
b) Economic implications are complex
c) Discretionary nature serves earnings management aims
Asset Impairment when asset FV is below carrying (book) value

a) Decline in demand for asset output
b) Technological obsolescence
c) Changes in company strategy
Accounting for impairments

. Report at the lower of market or cost
. No disclosure about determination of amount
. No disclosure about probable impairments
. Flexibility in determining when and how much to write-off
. No plan required for asset disposal
. Conservative presentation of assets
Analyzing restructuring charges
Special Items (unusual or infrequent transaction / event)
Challenges for analysis

a) Often little GAAP guidance
b) Economic implications are complex
c) Discretionary nature serves earnings management aims
Restructuring Charges costs usually related to major changes in

company business
. Extensive reorganization
. Divesting business units
. Terminating contracts and joint ventures
. Discontinuing product lines
. Worker retrenchment
. Management turnover
. Write-offs combined with investments in assets, technology, or manpower
Accounting for estimated costs of restructuring program

. Establish a provision (liability) for estimated costs
. Charge estimated costs to current income
. Actual costs involve adjustments against the provision when incurred
Analyzing special items

Earnings Management with Special Charges
1. Special charges often garner less investor attention under an
assumption they are non-recurring and do not persist
2. Managers motivated to re-classify operating charges as special
one-time charges
3. When analysts ignore such re-classified charges it leads to low
operating expense estimates and overestimates of company value

Income Statement Adjustments
1. Permanent income reflect profitability of a company under normal
circumstances
Most special charges constitute operating expenses that need
to be reflected in permanent income
Special charges often reflect either understatements of past
expenses or investments for future profitability
2. Economic income reflects the effects on equity of all events that
occur in the period
Entire amount of special charges is included

Balance Sheet Adjustments
Balance sheets after special charges often better reflect
business reality by reporting assets closer to net realizable
values
Two points of attention
1. Retain provision or net against equity?
If a going-concern analysis, then retain
If a liquidating value analysis, then offset against equity
2. Asset write-offs conservatively distort asset and liability values
Analyzing Deferred Charges
Deferred charges costs incurred but deferred because they are

expected to benefit future periods
4 categories of deferred costs
Research and development (R & D) costs
Computer software costs
Costs in extractive industries
Miscellaneous (Other) costs
Accounting for R & D cost is problematic due to :*)
High uncertainty of any potential benefits
Time period between R&D activities & determination of success
Intangible nature of most R&D activities
Difficulty in estimating future benefit periods
*) These accounting problems are similar to those encountered with
employee training programs, product promotions, advertising
Hence:
U.S. accounting requires expensing R & D when incurred
Only costs of materials, equipment, and facilities with alternative
future uses are capitalized as tangible assets
Intangibles purchased from others for R & D activities with
alternative future uses are capitalized
Computer Software Costs :

Accounting for costs of computer software to be sold, leased, or
otherwise marketed identifies a point referred to as technological
feasibility]
Prior to technological feasibility, costs are expensed when
incurred
After technological feasibility, costs are capitalized as an
intangible asset
Search and development costs for natural resources is

important to extractive industries including oil, gas, metals, coal,
nonmetallic minerals 2 basic accounting viewpoints:
Fullcost view all costs, productive and nonproductive,
incurred in the search for resources are capitalized and
amortized to income as resources are produced and sold
Successful efforts view all costs that do not result directly
in discovery of resources have no future benefit and should be
expensed as incurred. Prescribed for oil and gas producing
companies
Analyzing employee benefits
Employee benefits Increase in employee benefits

supplementary to salaries and wages
Some supplementary benefits are not accorded (diijinkan) full
or timely recognition:
Compensated absences
Deferred compensation contracts
Stock appreciation rights (SARs)
Junior stock plans
Employee Stock Options (ESOs)

ESOs (a popular form of incentive compensation)
Reasons:
Enhanced employee performance
Align employee and company incentives
Viewed as means to riches
Tool to attract talented and enterprising workers
Do not have direct cash flow effects
Do not require the recording of costs

Option Facts
Option to purchase shares at specific price on/after future date
Exercise price (the price a holder has the right to purchase
shares at). Exercise price often set equal to stock price on grant
date
Vesting date (the earliest date the employee can exercise option)
In-the-Money (when stock price is higher than exercise price)
Out-of-the-Money (when stock price is less than exercise price)
Two main accounting issues

Determining dilution of earnings per share (EPS)
ESOs in-the-money are dilutive securities and affect
diluted EPS
ESOs out-of-the-money are antidilutive securities and
do not affect diluted EPS
Determining compensation expense
Determine cost of ESOs granted
Amortize cost over vesting period
Analyzing interest expense
Interest (1) compensation for use of money

(2) excess cash paid beyond the money (principal)
borrowed
Interest rate determined by risk characteristics of borrower
Interest expense/revenue determined by interest rate, principal, and
time
Interest on convertible debt is controversial by ignoring the cost of

conversion privilege
Diluted earnings per share uses number of shares issuable in event

of conversion of convertible debt
Analysts view interest as a period costnot capitalizable
Changes in a company borrowing rate, not explained by market

trends, reveal changes in risk
Analyzing income tax expense
Permanent difference >< Temporary differences
Temporary income tax differences (taxable income F/S income)

differences that are temporary in nature
expected to reverse in the future
mainly in the nature of timing differences between tax and
accounting standard (IFRS)
accounted for using deferred tax adjustments
Income Tax Accounting

Identify types and amounts of temporary differences and the
nature and amount of each type of operating loss and tax credit
carry forward
Measure total deferred tax liability for taxable temporary
differences
Compute total deferred tax asset for deductible temporary
differences and operating loss carry forwards
Analyzing income tax expense
Income Tax Accounting

Measure deferred tax assets for each type of tax credit carry
forward
Reduce deferred tax assets by a valuation allowance
Income Tax Analysis

Financial Statement Adjustments
Present Valuing Deferred Tax Assets and Liabilities
Forecasting Future Income and Cash Flows
Analyzing Permanent and Temporary Differences
Earnings Management and Earnings Quality
Aspek lain yang penting untuk dianalisis

Fixed cost, variable cost, & semi variable/fixed cost atas product costs
(Direct Material, Direct Labor, FOH) serta expense / period cost (selling &
administrative expenses)
Job Order Costing & Process Costing
Just In Time & Back flush Costing
Perlakuan atas produk yang hilang & rusak
Main Product & By Product
Cost of Goods Manufactured (COGM)
Cost of Goods Sold (COGS)
Alokasi service cost ke product cost (direct, step, & simultaneous method)
Contribution margin (CM), gross profit, & net income
Margin of safety & iron (safety) stock
Economic Order Quantity (EOQ)
Break even point (BEP)
Varians (selisih antara anggaran dan realisasinya)
Relevant Cost / Differential Cost
Transfer price
Price
Referensi
Kieso, Donald E., Jerry J. Weygandt, and Terry D. Garfield, Intermediate
Accounting: IFRS edition, edisi 2, Wiley, 2014
Stice, James D., Earl K. Stice, and K. Fred Skousen, Intermediate
Accounting, edisi 16, International Student Edition, Thomson South
Western, 2007
Stice, James D. and Earl K. Stice, and K. Fred Skousen, Intermediate
Financial Accounting, edisi 18, 2012
Subramaniam, K R and John J. Wild, Financial Statement Analysis, edisi 10,
McGraw Hill Irwin, 2009

BAB 6 Analyzing Operating Activities

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BAB 6 Analyzing Operating Activities

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ANALYZING

Aspek yang dianalisis

Income is not equal to the amount of cash generated

Income is a return over and above the investment.

It is the amount that an entity could return to its investors

AICPA Statement of Position 97-2 gives companies more

The FASB is engaged in a revenue recognition project in

The FASB has tentatively decided to move away from the

Step 1: Identify the contract with customers

A contract is an agreement that creates enforceable rights or

Revenue from a contract with a customer cannot be recognized until

A company does not recognize contract assets or liabilities until one

A company applies the revenue guidance to contracts with

When a contract modifications occurs, companies determine

Step 1: Identify the contract with customers

Additional products are not a separate performance obligation if the new

A company accounts for a new contract modification as a new contract

Step 1: Identify the contract with customers

The contract has commercial substance

The contract is wholly

The parties to the contract have

Each party can internally

The company can identify each partys

The company can identify the payment

It is probable that the company will

Revenue Recognition Classified by Nature of Transaction

LO 1 Apply the revenue recognition principle.

Step 2: Identify the separate performance obligations in the contract

A performance obligation is a promise in a contract to provide a product

The company must provide a distinct product or service before recognize

To determine whether a company has to account for multiple

If the performance obligation is not highly dependent on, or

Conversely, if each of these services is interdependent and

Step 3: Determine the transaction price

Step 3: Determine the transaction price

This factor was considered if the price of goods or services is

Company uses either the expected value, which is a

Companies select among these two methods based on which

A company only allocates variable consideration if it is

Step 3: Determine the transaction price

May be appropriate if a company

Companies therefore may only recognize variable consideration

Step 3: Determine the transaction price

If those criteria are not met, revenue recognition is constrained

Conditions such as one of the following would indicate that the

Step 3: Determine the transaction price

Step 3: Determine the transaction price

Step 4: Allocating the transaction price to Separate Performance

Step 4: Allocating the transaction price to Separate Performance

Evaluate the market in which it sells goods or

Forecast expected costs of satisfying a

If the standalone selling price of a good or service

Step 5: Recognize revenue when each performance obligation is

Other revenue recognition issues / Special revenue

Description & implementation

Return of product by customer (e.g., due to

Seller has an obligation or right to repurchase the

Other revenue recognition issues / Special revenue

Description & implementation

Arrangement in which the principals performance

Other revenue recognition issues / Special revenue

Description & implementation

A principal-agents relationship in which the consignor

Warranties can be assurance-type (product meets