Lecture 7 Income Statement Rw

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Lecture 7 Income Statement Rw

  1. 1. Reporting Performance<br />Income Statement and Statement of Cash Flow<br />
  2. 2. Balance Sheet shows where I am now<br />Balance Sheet shows where I was<br />Cash Flow explains how cash changed<br />Assets<br />Liabilities<br />&<br />Equity<br />Cash<br />Cash Flow Statement<br />Assets<br />Liabilities<br />&<br />Equity<br />Cash<br />Income Statement shows how I got there<br />Income Statement<br />
  3. 3. Income Statement<br />Income Statement: measures performance over a certain period of time<br />Compares inflows (“Revenue” or “Sales”) with outflows (“Costs” or “Expenses”)<br />Revenue – Expenses = Net Income<br />
  4. 4. Financial Statements<br />
  5. 5. Personal Income Statement<br />
  6. 6. Business Income Statement<br />A business income statement reports on operating and non-operating activities. <br />It lists amounts for revenues less expenses over a period of time. <br />Sales less expenses yield the “bottom-line” net income amount.<br />
  7. 7. Income Statement Components<br />Revenues: value received from the exchange of goods or services to customers<br />Expenses: cost of doing business; assets and resources used to provide those revenues<br />Net income: revenues less the expenses associated with getting those revenues<br />
  8. 8. 80<br />
  9. 9. Income Statement is on Accrual Basis<br /><ul><li>The Accrual Income Statement reflects the economics of the tradewith the customer
  10. 10. Revenue is the value of what the company gives to the customer, regardless of when it gets paid. Customer gives back </li></ul>Cash<br /> or <br />Accounts Receivable (cash later)<br /><ul><li>Expenses are the value of the resources used to produce whatever it is that was traded
  11. 11. Might be paid for before used, when used or paid later</li></li></ul><li>The Income Statement<br />Every company is different but follows same general format…<br />Sales / Revenue (“top-line”)<br /> -Cost of Sales <br /> = Gross Profit<br /> -SGA, R&D, Marketing Expenses<br /> = Income From Operations<br /> +/- Interest Expense / Income<br /> = Income before Taxes<br /> - Tax<br /> = Net Income (“bottom line”)<br />Direct cost of goods <br />provided to customers<br />
  12. 12. 80<br />
  13. 13. 80<br />EBITDA<br />Earnings before Interest, Taxes, Depreciation & Amortization<br />Measures operating results before <br />costs of capital structure and taxes<br />
  14. 14. EBITDA Example<br />Two Companies exactly the same:<br />Revenue<br />Products<br />Customers<br />Industry<br />Employees<br />Net Income:<br />Company A $200<br />Company B $ 20<br />
  15. 15. EBITDA Example<br />AB<br />Revenue 1000 1000<br />Expenses 980 780<br />Net Income 20 220<br />Interest 120 10<br />Tax 60 10<br />Depreciation /<br />Amortization 50 10<br />EBITDA 250 250<br />14<br />
  16. 16.
  17. 17. Accrual Accounting<br />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.<br />Cash may be paid or received at same time, but this has NOTHING to do with when the info goes on the financial statements<br />Required by GAAP.<br />
  18. 18. Accrual Basis <br />Revenues are earned and recorded when goods or services are provided to customers<br />Expenses are incurred and recorded when the resources are used to create the goods and services provided to the customer<br />The matching principle requires that expenses be recorded in the same period as the associated revenue, NOT the period in which they are paid<br />
  19. 19. ExerciseBig and Rich Hats LLC - 2008<br />Buys hats from suppliers: value of $175k<br />$25k paid in 2008, balance on credit<br />Sells goods to customers: invoice value of $200k<br />Received $150k in cash<br />Remainder to be paid in 2009<br />
  20. 20. Big and Rich Performance<br />19<br />
  21. 21. Big and Rich Performance<br />20<br />
  22. 22. Revenue Recognition Rules in GAAP<br />…often lots of judgment in determining revenue<br />Revenue is recognized when all conditions are met:<br />Persuasive evidence of an arrangement exists<br />Delivery of products or services has occurred<br />Price is fixed and determinable<br />Collection is reasonably assured<br />
  23. 23. Revenue Recognition Rules in GAAP<br />…often lots of judgment in determining revenue<br />Revenue is recognized when all conditions are met:<br />Persuasive evidence of an arrangement exists<br />Delivery of products or services has occurred<br />Price is fixed and determinable<br />Collection is reasonably assured<br />
  24. 24.
  25. 25. 24<br />85 – 88<br />
  26. 26. 25<br />87<br />
  27. 27. Revenue Games ExerciseBlue Train Computer Corp.<br />List Price: Hardware $20<br /> Software License $1 / month<br /> Full Maintenance $2 / month<br />Mingus Inc. purchases system for $20; includes 3 months of software license and 1 month warranty<br />“Irrevocable” contract signed Nov 24. 2009: <br />$5 non refundable deposit with contract<br />$5 per month Jan 2010 – Mar 2010<br />If no pay, only recourse is take back hardware<br />Dec 31, 2009: ½ hardware delivered<br />Jan 31, 2010: ½ hardware delivered<br />Feb 28, 2010: software delivered<br />Mar 31, 2010: system up and running<br />26<br />
  28. 28. Percentage-of-Completion<br />For certain industries requiring long-term contacts, revenue is by determining the costs incurred to date compared with the project’s total expected costs. <br />Percentage-of-completion method requires an estimate of total anticipated costs. <br />This estimate is made at the beginning of the contract and is used to initially bid the contract. <br />
  29. 29. Percentage-of-Completion<br />2005 10-K report footnotes of Raytheon Company:<br />
  30. 30. Unearned Revenue<br />Deposits from customers are liability until service obligation is fulfilled<br />
  31. 31. Expense Rules in GAAP<br /> Once revenue is determined, then expenses are recorded<br /> The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue<br />
  32. 32. Expense Rules in GAAP<br /> Once revenue is determined, then expenses are recorded<br /> The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue<br />…even more judgment in expenses<br />
  33. 33. Accrual-Based Measurement of Expenses<br />If benefit is for current period, report the cost as… <br />Expense<br />As the benefits are used up, reduce the asset and report this cost as…<br />If benefit extends to future periods, initially report the cost as…<br />Asset<br />A capitalized cost is the cost that is reported as an asset on the balance sheet.<br />Company incurs a cost.<br />
  34. 34. 80<br />
  35. 35. 34<br />95<br />
  36. 36. Earnings Per Share<br />
  37. 37. 36<br />102 – 103<br />

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