Financial_Reprting_and_ANalysis_Presentation.pptx

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.
Chapter
4
Income Statement

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
• Summarizes revenues and expenses, and gains
and losses
• Ends with the net income for a specific period
• Multiple-step format—presents separately
– Gross profit
– Operating income
– Income before taxes
– Net income
The Income Statement

• Single-step format
– Totals all revenues and gains
– Deducts total expenses and losses
The Income Statement—Continued

Multiple-Step Single-Step
Net revenue $37,586
Cost of sales 16,742
Gross margin 20,844
Operating Expenses:
General & administrative 5,458
$
Research & development 5,722
Restructuring charges 710 11,890
Operating income 8,954
Interest income (expense) 488
Other gains (losses) (net) (1,756) (1,268)
Income before taxes 7,686
Provision for taxes 2,394
Net Income 5,292
$
Multiple-step Income Statement
For the Year Ended December 31, 2013
Net revenue 37,586
$
Interest income 488
Other income -
38,074
Costs and Expenses:
Cost of sales 16,742
$
General & administrative 5,458
Research & development 5,722
Other losses 1,756
Restructuring charges 710 30,388
Income before taxes 7,686
Provision for taxes 2,394
Net income 5,292
$
Single-step Income Statement

• Net Sales (Revenues)
• Cost of Goods Sold (Cost of Sales)
• Other Operating Revenue
• Operating Expenses
• Other Income or Expense
Basic Elements of the Income
Statement

• Represents revenue from the sale of principal
goods or services sold to customers
• Shown net of
– Discounts
– Returns
– Allowances
Net Sales (Revenues)

• The cost of goods that were sold to produce
revenue
Cost of Goods Sold (Cost of Sales)
Retailer
Beginning Inventory
+ Purchases
− Ending Inventory
Cost of Goods Sold
Manufacturer
Beginning Inventory
+ Cost of Goods Manufactured
− Ending Inventory
Cost of Goods Sold
• A service firm will not have cost of goods sold,
but it will often have cost of services

• Depends on the operations of the business
• Examples
– Lease revenue
– Royalties
Other Operating Revenue

• Consist of two types
– Selling expenses
• Result from a company’s effort to create sales
• Advertising. Sales commissions, and Sales supplies used
– Administrative expenses
• Relate to the general administration of a company’s
operation
• Salaries, Insurance, and Bad debt expense
Operating Expenses

• Secondary activities not directly related to
operations
• Dividend income. Interest income, Gains
(losses) from sale of assets, and Interest
expense
Other Income or Expense

• Unusual or Infrequent Item Disclosed Separately
– Shown with normal recurring revenues and expenses
– If material, disclosed separately, before tax
– Treatment for analysis
• Included in primary analysis as they relate to operations
• In supplementary analysis, it should be removed net after tax
Special Income Statement Items

• Equity Earnings of Nonconsolidated Subsidiaries
– The investor’s proportionate share of the investee’s
net income
– Does not represent cash flow to the investor
• Cash dividends received represent cash flow
– Analysis issues
• Investor’s net income includes revenue of other entity
• May distort ratios
• Presented before tax; tax consequences typically immaterial
Special Income Statement Items—
Continued

• Income Taxes Related to Operations
– Federal, state, and local taxes
– Includes both paid and deferred taxes
• Discontinued Operations
– Reported net of income tax
– Profitability analysis issues
• Inadequate disclosure of associated assets
• Lack of historical profit and loss information on the
discontinued operations
Continued

• Extraordinary Items
– Unusual and infrequent
– Reported net of income tax
– Analysis issues
• Exclude from primary analysis; it is not expected to recur
• Include for supplementary analysis; this approach avoids
disregarding extraordinary items
Special Income Statement Items —
Continued

• Change in Accounting Principles
– Current GAAP requires retrospective approach,
unless it is impracticable
• Cumulative effect on prior years reported is reflected in
beginning retained earnings in the year of change
– If impracticable
• Determine the difference to the opening balances in the
accounts
– Prior to current GAAP, changes were presented using
the prospective method
Continued

• Net Income—Noncontrolling Interest (prior to
Dec. 31, 2009 it was called minority share of
earnings)
– Earnings of a partially-owned consolidated subsidiary
that would accrue to the minority owners
– Presented net-of-tax
Continued

• Earnings divided by the number of shares of
outstanding common stock
Earnings per Share
EPS =
Net income
Outstanding shares of common stock

• The accumulated undistributed earnings of the
corporation reported on the balance sheet
• Appropriated
– Restricted by law, contract, or management decision
– Not available for dividends
– Does not represent cash or any other asset
• Unappropriated
– Available for dividends
Retained Earnings

• Reported as part of the statement of
stockholders’ equity or combined with the
income statement
Reconciliation of Retained
Earnings
Beginning balance of retained earnings
+ Prior period adjustments (net of tax)
±
Cumulative effect of a change in accounting principle
(net of tax)
= Beginning balance as adjusted
+ Net income
– Dividends
= End-of-year balance of retained earnings

• Dividends return profits to the owners of a
corporation
• Date of declaration
– Creates liability and reduces retained earnings
• Date of payment
– Eliminates liability and reduces cash
Dividends

• Issuing a percentage of outstanding stock as
new shares to existing shareholders
– Assuming a small distribution (less then 25%)
• Removing the fair market value of the stock from retained
earnings and transferring it to paid-in capital
– If the stock dividend is material
• The amount transferred to paid-in capital is determined by
multiplying the par value by the number of additional shares
• Total equity is unaffected by a stock dividend
– Restate share quantities to reflect stock dividend
activity
Stock Dividends

• 100,000 shares outstanding; $1 par; $5 market
• 10% stock dividend on 100,000 shares, issue
10,000 additional shares recorded at $5 per
share
Stock Dividend—Example
Before Effect of dividend After
Common stock par value $1.00 $1.00
Shares outstanding 100,000 issue 10,000 shares 110,000
Total par value $100,000 10,000 $110,000
Additional paid-in capital 750,000 40,000 790,000
Total paid-in capital 850,000 900,000
Retained earnings 1,000,000 (50,000) 950,000
Total stockholders' equity $1,850,000 $1,850,000
10% stock dividend

• 100,000 shares outstanding; $1 par; $5 market
• 40% stock dividend on 100,000 shares, issue
40,000 additional shares recorded at $1 per
share
Stock Dividend Example
Before Effect of dividend After
Common stock par value $1.00 $1.00
Shares outstanding 100,000 issue 40,000 shares 140,000
Total par value $100,000 40,000 $140,000
Additional paid-in capital 750,000 750,000
Total paid-in capital 850,000 890,000
Retained earnings 1,000,000 (40,000) 960,000
Total stockholders' equity $1,850,000 $1,850,000
40% stock dividend

• 2-for-1 split
– Doubles the quantity of stock
– Par or stated value is halved
• No effect on retained earnings, additional paid-in
capital, or capital stock accounts
• Analysis issues
– Restate share quantities to reflect split activity
Stock Splits

• As per various state laws
– Distributions to stockholders are acceptable as long
as the firm has the ability to pay debts as they come
due in the normal course of business
– Distributions to stockholders are acceptable as long
as the firm is solvent and the distributions do not
exceed the fair value of the assets
– Distributions consist of solvency and balance sheet
test of liquidity and risk
Legality of Distributions to
Shareholders

• Foreign currency translation adjustments
• Unrealized holding gains and losses on
available-for-sale marketable securities
• Changes to stockholders’ equity resulting from
additional minimum pension liability adjustments
• Unrealized gains and losses from derivative
instruments
Comprehensive Income
Net income
+ The period’s change in accumulated other comprehensive income
= Comprehensive income

• Required disclosures
– Comprehensive income
– Each category of other comprehensive income
– Reclassification adjustments for each category of
other comprehensive income
– Tax effects for each category of other comprehensive
income
– Balances for each category of accumulated other
comprehensive income
Comprehensive Income—
Continued

• Presentation
– A single income statement reporting net income and
comprehensive income, or
– Report comprehensive income in a separate
statement immediately following the statement of
income
• Analysis issues
– Typically more volatile than net income
• A better indication of long-run profitability
Continued

Combined with Income Statement
Sales 230,000
$
Cost of goods sold 140,000
Gross profit 90,000
Operating expenses 40,000
Operating income 50,000
Other income 4,000
Income before income taxes 54,000
Income taxes 20,000
Net income 34,000
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Other comprehensive income 4,000
Comprehensive income 38,000
$
Earnings per share (for net income only) 2.80
$
XYZ Corporation
Statement of Income and Comprehensive Income

Comprehensive Income—Separate
Statement
Net income 34,000
$
Other comprehensive income
Available-for-sale security adjustment, net of tax 5,500
Minimum pension liability adjustment, net of tax 3,500
Foreign currency transaction adjustment, net of tax (5,000)
Total other comprehensive income 4,000
Comprehensive income 38,000
$
XYZ Corporation
Statement of Comprehensive Income

• IFRS and U.S. GAAP for income statements are
similar, with some presentation differences
– IFRS has no required format of the income statement
– IFRS classifies expenses based on their nature or
function
– IFRS equipment may be revalued which result in the
adjustment of depreciation expenses
– IFRS allows for alternative performance measures to
be presented in income statement
Income Statement IFRS vs. GAAP

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