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Lecture 7  Income Statement Rw
 

Lecture 7 Income Statement Rw

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    Lecture 7  Income Statement Rw Lecture 7 Income Statement Rw Presentation Transcript

    • Reporting Performance
      Income Statement and Statement of Cash Flow
    • Balance Sheet shows where I am now
      Balance Sheet shows where I was
      Cash Flow explains how cash changed
      Assets
      Liabilities
      &
      Equity
      Cash
      Cash Flow Statement
      Assets
      Liabilities
      &
      Equity
      Cash
      Income Statement shows how I got there
      Income Statement
    • Income Statement
      Income Statement: measures performance over a certain period of time
      Compares inflows (“Revenue” or “Sales”) with outflows (“Costs” or “Expenses”)
      Revenue – Expenses = Net Income
    • Financial Statements
    • Personal Income Statement
    • Business Income Statement
      A business income statement reports on operating and non-operating activities.
      It lists amounts for revenues less expenses over a period of time.
      Sales less expenses yield the “bottom-line” net income amount.
    • Income Statement Components
      Revenues: value received from the exchange of goods or services to customers
      Expenses: cost of doing business; assets and resources used to provide those revenues
      Net income: revenues less the expenses associated with getting those revenues
    • 80
    • Income Statement is on Accrual Basis
      • The Accrual Income Statement reflects the economics of the tradewith the customer
      • Revenue is the value of what the company gives to the customer, regardless of when it gets paid. Customer gives back
      Cash
      or
      Accounts Receivable (cash later)
      • Expenses are the value of the resources used to produce whatever it is that was traded
      • Might be paid for before used, when used or paid later
    • The Income Statement
      Every company is different but follows same general format…
      Sales / Revenue (“top-line”)
      -Cost of Sales
      = Gross Profit
      -SGA, R&D, Marketing Expenses
      = Income From Operations
      +/- Interest Expense / Income
      = Income before Taxes
      - Tax
      = Net Income (“bottom line”)
      Direct cost of goods
      provided to customers
    • 80
    • 80
      EBITDA
      Earnings before Interest, Taxes, Depreciation & Amortization
      Measures operating results before
      costs of capital structure and taxes
    • EBITDA Example
      Two Companies exactly the same:
      Revenue
      Products
      Customers
      Industry
      Employees
      Net Income:
      Company A $200
      Company B $ 20
    • EBITDA Example
      AB
      Revenue 1000 1000
      Expenses 980 780
      Net Income 20 220
      Interest 120 10
      Tax 60 10
      Depreciation /
      Amortization 50 10
      EBITDA 250 250
      14
    • Accrual Accounting
      Assets, liabilities, revenues, and expenses are put on the financial statements when the transaction that causes them occurs, not when cash is paid or received.
      Cash may be paid or received at same time, but this has NOTHING to do with when the info goes on the financial statements
      Required by GAAP.
    • Accrual Basis
      Revenues are earned and recorded when goods or services are provided to customers
      Expenses are incurred and recorded when the resources are used to create the goods and services provided to the customer
      The matching principle requires that expenses be recorded in the same period as the associated revenue, NOT the period in which they are paid
    • ExerciseBig and Rich Hats LLC - 2008
      Buys hats from suppliers: value of $175k
      $25k paid in 2008, balance on credit
      Sells goods to customers: invoice value of $200k
      Received $150k in cash
      Remainder to be paid in 2009
    • Big and Rich Performance
      19
    • Big and Rich Performance
      20
    • Revenue Recognition Rules in GAAP
      …often lots of judgment in determining revenue
      Revenue is recognized when all conditions are met:
      Persuasive evidence of an arrangement exists
      Delivery of products or services has occurred
      Price is fixed and determinable
      Collection is reasonably assured
    • Revenue Recognition Rules in GAAP
      …often lots of judgment in determining revenue
      Revenue is recognized when all conditions are met:
      Persuasive evidence of an arrangement exists
      Delivery of products or services has occurred
      Price is fixed and determinable
      Collection is reasonably assured
    • 24
      85 – 88
    • 25
      87
    • Revenue Games ExerciseBlue Train Computer Corp.
      List Price: Hardware $20
      Software License $1 / month
      Full Maintenance $2 / month
      Mingus Inc. purchases system for $20; includes 3 months of software license and 1 month warranty
      “Irrevocable” contract signed Nov 24. 2009:
      $5 non refundable deposit with contract
      $5 per month Jan 2010 – Mar 2010
      If no pay, only recourse is take back hardware
      Dec 31, 2009: ½ hardware delivered
      Jan 31, 2010: ½ hardware delivered
      Feb 28, 2010: software delivered
      Mar 31, 2010: system up and running
      26
    • Percentage-of-Completion
      For certain industries requiring long-term contacts, revenue is by determining the costs incurred to date compared with the project’s total expected costs.
      Percentage-of-completion method requires an estimate of total anticipated costs.
      This estimate is made at the beginning of the contract and is used to initially bid the contract.
    • Percentage-of-Completion
      2005 10-K report footnotes of Raytheon Company:
    • Unearned Revenue
      Deposits from customers are liability until service obligation is fulfilled
    • Expense Rules in GAAP
      Once revenue is determined, then expenses are recorded
      The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue
    • Expense Rules in GAAP
      Once revenue is determined, then expenses are recorded
      The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue
      …even more judgment in expenses
    • Accrual-Based Measurement of Expenses
      If benefit is for current period, report the cost as…
      Expense
      As the benefits are used up, reduce the asset and report this cost as…
      If benefit extends to future periods, initially report the cost as…
      Asset
      A capitalized cost is the cost that is reported as an asset on the balance sheet.
      Company incurs a cost.
    • 80
    • 34
      95
    • Earnings Per Share
    • 36
      102 – 103