Income Statement.ppt

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Income Statement.ppt

  1. 1. UNDERSTANDING FINANCIAL STATEMENTS <ul><li>INCOME STATEMENT </li></ul><ul><li> ( Chapter 3) </li></ul>
  2. 2. Income Statement <ul><li>Revenues less Expenses = Net Income </li></ul><ul><li>Earnings Per Share is reported on face of IS </li></ul><ul><li>Also called the Statement of Earnings </li></ul><ul><li>Comparative financial statements enable users to analyze performance over multiple periods and identify significant trends. </li></ul><ul><li>Consolidated financial statements combine the financial results of a “parent company” with its subsidiaries. </li></ul>
  3. 3. Income Statement <ul><li>Income reported on income statement </li></ul><ul><li>is based on Accrual Accounting , all revenues earned in the year & all expenses incurred in that year ( NOT on the cash generated or cash paid during accounting period) </li></ul><ul><li>Income Statement may be presented in the multi-step or single step form. </li></ul>
  4. 4. Income Statement <ul><li>Single-step </li></ul><ul><ul><ul><li>All operating revenues and gains are reported first, followed by all operating expenses and other losses. </li></ul></ul></ul><ul><ul><ul><li>No separate section is prepared for COGS and gross profit. </li></ul></ul></ul><ul><li>Multiple-step </li></ul><ul><ul><ul><li>Divided into separate sections, various subtotals are reported. </li></ul></ul></ul><ul><ul><ul><li>Involves separate sections for gross profit, operating income, other income/losses, income before income taxes, and net income. </li></ul></ul></ul>Gross Profit Operating Income Other Income/losses
  5. 5. Common size Income Statement <ul><li>Analytical tool to compare firms with different level of sales. </li></ul><ul><li>Used to facilitate structural analysis of a firm, to evaluate trends and make industrial comparisons. </li></ul><ul><li>Expresses each income statement category as a percentage of net sales. </li></ul><ul><li>See Exhibit 3-3 </li></ul>
  6. 6. Income Statement <ul><li>Focus on Multi-step format </li></ul><ul><li> (it has more detail and is more useful) </li></ul><ul><li>NET SALES: A firm’s sales are usually reported as Sales less Sales Returns less Sales Allowances </li></ul><ul><ul><li>the major source of revenue for most companies </li></ul></ul><ul><ul><li>trends are important </li></ul></ul>
  7. 7. Income Statement (continued) <ul><li>Net Sales </li></ul><ul><li>Less: Cost of Goods Sold (COGS) </li></ul><ul><ul><li>Cost to seller of products sold to customers. </li></ul></ul><ul><ul><ul><li>If purchased, then price plus freight-in. </li></ul></ul></ul><ul><ul><ul><li>If manufactured, then DM, DL, Manf. Ovhd. </li></ul></ul></ul><ul><ul><ul><li>The relationship between COGS and sales is an important one. </li></ul></ul></ul><ul><li>= Gross Profit </li></ul><ul><ul><ul><li>Key analytical tool in analyzing firm’s operating performance. </li></ul></ul></ul><ul><ul><ul><li>Gross profit percentage equals </li></ul></ul></ul><ul><ul><ul><li>Gross profit/Sales </li></ul></ul></ul>
  8. 8. Income Statement (continued) <ul><li>Gross Profit </li></ul><ul><li>Less: Operating Expenses </li></ul><ul><ul><li>Selling Expenses: </li></ul></ul><ul><ul><li>Advertising expenses </li></ul></ul><ul><ul><li>Salesmen’ salaries </li></ul></ul><ul><ul><li>General and Administrative Expenses: </li></ul></ul><ul><ul><li>Office and officer salaries Payroll taxes </li></ul></ul><ul><ul><li>Depreciation expense Repairs & maint. </li></ul></ul><ul><ul><li>Insurance expense Rent expense </li></ul></ul><ul><ul><li>Lease expense Bad debt expense </li></ul></ul><ul><ul><li>Research and Development Supplies </li></ul></ul><ul><li>= Operating Income (or Operating Profit or Income from Operations) </li></ul><ul><li>Measures overall performance of company’s operations </li></ul><ul><li>Operating Income Percentage=Operating Income/Sales </li></ul>
  9. 9. Income Statement (continued) <ul><li>Operating Income </li></ul><ul><li>+/- Other Income/Expense </li></ul><ul><ul><li>Interest income </li></ul></ul><ul><ul><li>Gain from sale of equipment </li></ul></ul><ul><ul><li>Gain from sale of investments </li></ul></ul><ul><ul><li>Interest expense </li></ul></ul><ul><ul><li>Loss from sale of equipment </li></ul></ul><ul><ul><li>Loss from sale of investments </li></ul></ul><ul><ul><li>Loss from write-down of inventory </li></ul></ul><ul><li>Earnings before income taxes </li></ul><ul><li>Less: Income taxes </li></ul><ul><li>Net Earnings or Net Income </li></ul><ul><li>(or Income from Continuing Operations) </li></ul>FOR SALE
  10. 10. Income Statement (continued) <ul><li>Income from Continuing Operations </li></ul><ul><li>+/- Income from Discontinued Operations (net of tax) </li></ul><ul><li>+/- Extraordinary Gains and Losses (net of tax) </li></ul><ul><li>+/- Cumulative Effect of a Change in Accounting Principle (net of tax) </li></ul><ul><li>Net Earnings or Net Income </li></ul><ul><ul><li> </li></ul></ul><ul><ul><li>Net Earnings Percentage =Net Earnings/Sales </li></ul></ul>
  11. 11. Income from Discontinued Operations <ul><li>A significant segment of a business that has been discontinued. </li></ul><ul><li>A segment is a unit that is clearly distinguishable physically, operationally, and for financial reporting purposes. </li></ul><ul><li>It represents either a separate, </li></ul><ul><li>(1) major line of business, or </li></ul><ul><li>(2) line of customers. </li></ul><ul><li>Income from discontinued operations is segregated from income from continuing operations to assist financial statement users in assessing future cash flows of the company. </li></ul>
  12. 12. Income from Discontinued Operations <ul><li>Income (loss) from operations of discontinued operations ( from 1/1 to measurement date ) </li></ul><ul><li>Less: Income tax </li></ul><ul><li>Gain (loss) from sale of discontinued operations </li></ul><ul><li> (a)Income (loss) from operations ( after measurement date ) </li></ul><ul><li> (b)Gain (loss) on disposition of segment of assets </li></ul><ul><li>Less: Income tax </li></ul><ul><li>Net Income from Discontinued Operations </li></ul>
  13. 13. Extraordinary Gains and Losses <ul><li>gains and losses that are both unusual in nature and infrequent in occurrence. </li></ul><ul><li>gains and losses from most natural disasters (unless frequent occurrences, then “other income/losses) </li></ul><ul><li>gains and losses on extinguishment of a company’s own debt (even if frequent). </li></ul><ul><li>does not include losses from strikes (even if infrequent). </li></ul>
  14. 14. Cumulative Effect of a Change in Accounting Principle <ul><li>Accounting principle changes may be required by FASB or may be made at management’s discretion. </li></ul><ul><li>The cumulative effect—the difference between the revenue/expense under the old and the revenue/expense under the new method up to the beginning of the year of the change. It is reported net of the tax effect. </li></ul><ul><li>Use the new method for the current year. </li></ul>
  15. 15. Cumulative Effect of a Change in Accounting Principle <ul><li>The cumulative effect may be reflected either of two ways: </li></ul><ul><ul><li>(1) Ordinarily, in the income statement as “Cumulative Effect of Change in Accounting Principle” </li></ul></ul><ul><ul><li>(2) In special cases, in the opening balance of retained earnings, with restatement of prior-years’ statements presented on a comparative basis (on Stmt. of RE) </li></ul></ul><ul><ul><ul><li>(a)changing from LIFO to FIFO </li></ul></ul></ul><ul><ul><ul><li>(b)changing from one type of long-term contracting principle to another </li></ul></ul></ul><ul><li>(c) changing from an unacceptable accounting principle to a GAAP (correction of an error) </li></ul>
  16. 16. Changes in estimates <ul><li>Estimates are made using the BEST available information at the statement date. </li></ul><ul><li>Changes in estimates should be reflected in the current period (date of the revision) and in future periods, if any, that are affected. </li></ul><ul><li>No “cumulative effect” of the change </li></ul>
  17. 17. Earnings per share (EPS) <ul><li>Earnings available to common shareholders divided by average number of common shares outstanding </li></ul><ul><li>If firm has “complex” capital structure, it will report basic and diluted EPS </li></ul><ul><li>EPS ( both basic EPS and diluted EPS ) must be shown for each of the following (see Exhibit 3-4): </li></ul><ul><ul><ul><li>Income from continuing operations </li></ul></ul></ul><ul><ul><ul><li>Discontinued segment income/loss </li></ul></ul></ul><ul><ul><ul><li>Extraordinary income/loss </li></ul></ul></ul><ul><ul><ul><li>Cumulative effect of change of accounting principle </li></ul></ul></ul><ul><ul><ul><li>Net Income </li></ul></ul></ul>
  18. 18. Earnings per share <ul><li>Basic Earnings per share = </li></ul><ul><li>Net Income </li></ul><ul><li>number of average shares of common stock outstanding </li></ul><ul><li>Diluted Earnings per share = </li></ul><ul><li>Net Income </li></ul><ul><li>number of average shares of common stock o/s plus number of dilutable shares </li></ul><ul><li>(dilutable shares are shares from future conversion of convertible bonds and shares from future exercise of stock options) </li></ul>
  19. 19. Comprehensive Income <ul><li>Beginning in 1998, companies required to report COMPREHENSIVE INCOME </li></ul><ul><li>Comprehensive income includes ALL changes in stockholders’equity during a period except those resulting from investments by owners and distributions to owners </li></ul><ul><li>Does not include: </li></ul><ul><li>Dividends to stockholders </li></ul><ul><li>Issuance of stock </li></ul><ul><li>Treasury stock transactions </li></ul>
  20. 20. Comprehensive Income <ul><li>Net Income (from Income Statement) </li></ul><ul><li>+/- Foreign currency translation adjustments </li></ul><ul><li>+/- Unrealized gains/losses on available-for-sale securities </li></ul><ul><li>+/- Additional pension liabilities </li></ul><ul><li>+/- Changes in fair market value of cash flow hedges </li></ul><ul><li>= Comprehensive Income/Loss </li></ul>
  21. 21. Comprehensive Income <ul><li>Comprehensive Income may be reported in one of three ways: </li></ul><ul><ul><li>on the face of the income statement </li></ul></ul><ul><ul><li>in a separate statement of comprehensive income </li></ul></ul><ul><ul><li>in a statement of stockholders’ equity </li></ul></ul>

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