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Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
Lecture 7  Income Statement Rw
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Lecture 7 Income Statement Rw

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  • 1. Reporting Performance
    Income Statement and Statement of Cash Flow
  • 2. 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
  • 3. 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
  • 4. Financial Statements
  • 5. Personal Income Statement
  • 6. 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.
  • 7. 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
  • 8. 80
  • 9. Income Statement is on Accrual Basis
    • The Accrual Income Statement reflects the economics of the tradewith the customer
    • 10. 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
    • 11. 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
  • 12. 80
  • 13. 80
    EBITDA
    Earnings before Interest, Taxes, Depreciation & Amortization
    Measures operating results before
    costs of capital structure and taxes
  • 14. EBITDA Example
    Two Companies exactly the same:
    Revenue
    Products
    Customers
    Industry
    Employees
    Net Income:
    Company A $200
    Company B $ 20
  • 15. 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
  • 16.
  • 17. 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.
  • 18. 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
  • 19. 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
  • 20. Big and Rich Performance
    19
  • 21. Big and Rich Performance
    20
  • 22. 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
  • 23. 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.
  • 25. 24
    85 – 88
  • 26. 25
    87
  • 27. 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
  • 28. 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.
  • 29. Percentage-of-Completion
    2005 10-K report footnotes of Raytheon Company:
  • 30. Unearned Revenue
    Deposits from customers are liability until service obligation is fulfilled
  • 31. 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
  • 32. 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
  • 33. 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.
  • 34. 80
  • 35. 34
    95
  • 36. Earnings Per Share
  • 37. 36
    102 – 103

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