1. Reporting Earnings and Financial Position
Chapter F4
Reporting Earnings and Financial Position
Electronic Presentation by Douglas Cloud Pepperdine University

2. Once you have completed this chapter, you should be able to:
Objectives
1. Identify the primary financial statements issued by businesses.
2. Explain information presented on a company’s income statement.
3. Explain information presented on a company’s balance sheet.
4. Explain information presented on a company’s statement of stockholders’ equity.
Once you have completed this chapter, you should be able to:
Continued

3. Objectives
5. Identify some of the primary limitations of financial statements.

4. Objective 1
Identify the primary financial statements issued by businesses.

5. The Purpose of Financial Statements
Most business organizations prepare three financial statements to report general-purpose accounting information:
1. An income statement
2. A balance sheet
3. A statement of cash flows

6. Sometimes called an earnings statement...
Income Statement
Sometimes called an earnings statement...
…or a profit and loss
(P & L) statement.
An income statement reports an organization’s revenues and expenses for a fiscal period.

7. Balance Sheet
The balance sheet reports the balances of the asset, liability, and owners’ equity accounts at a particular date.
…or as a statement of financial condition.
Sometimes referred to as a statement of financial position…

8. Statement of Cash Flows
This statement enables creditors, investors, and other users to assess a company’s ability to meet its cash requirements.

9. Statement of Stockholders’ Equity
This statement reports changes in a corporation’s stockholders’ equity for a fiscal period.

10. Objective 2
Explain information presented on a company’s income statement.

11. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net income $ 52,990
Earnings per share
Average number of common shares 4,000
Sales revenue is revenue from sales of goods and services. $

12. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000
Gross profit is a measure of how much a company earned directly from the sale of its products during the current fiscal period.
Gross profit is the difference between the selling price of goods or services sold during a period and the cost of the goods or services sold. $

13. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000
…and that are not directly associated with specific goods or services.
Operating expenses are costs of resources consumed as part of operating activities during a fiscal period… $

14. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Operating income is the excess of gross profit over operating expenses.
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

15. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Other revenues and expenses are not directly related to a company’s primary operating activities.
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

16. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
These are considered non-operating items and are reported following operating income. Here we see Interest Expense, which is a common non-operating item.
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

17. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Most corporations pay income taxes on their earnings. Mom’s Cookie Company paid 30 percent of taxable income ($75,700 x .30 = $22,710).
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

18. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000
Net income is not cash $

19. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000
Net income is the amount of profit earned by a company during a fiscal period. $

20. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Earnings per share is a measure of the earnings performance of each share of common stock during a fiscal period.
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

21. Average Number of Shares Outstanding
Mom’s Cookie Company issued 1,000 shares on January 1 and 9,000 shares on September 1.
1,000 x 8/12 = 667
10,000 x 4/12 = 3,333
Average 4,000

22. Earnings per Share EPS = EPS = $13.25 (rounded)
Earnings per share of $13.25 for Mom’s Cookie Company was calculated as follows:
$52,990 net income
4,000 average shares
EPS =
$13.25 (rounded)
EPS =

23. For the Month Ended December 31, 2004
Mom’s Cookie Company
Income Statement
For the Month Ended December 31, 2004
Exhibit 1
Sales revenue $686,400
Cost of goods sold (457,600)
Gross profit 228,800
Selling, general, and administrative
expenses (148,300)
Operating income 80,500
Interest expense (4,800)
Pretax income 75,700
Income taxes (22,710)
Net Income $ 52,990
Earnings per share
Average number of common shares 4,000 $

24. Income Statement for Krispy Kreme
Exhibit 2

25. There are a number of new items listed, such as Equity loss in joint venture and Minority interest. These accounts are analyzed in a more advanced accounting course.
Krispy Kreme’s income statement is a consolidated statement because it includes a number of companies owned by the corporation.
Also note that Krispy Kreme reported two sets of earnings per share numbers, basic and diluted earnings per share.

26. Objective 3
Explain information presented on a company’s balance sheet.

27. LEARNING NOTE
An organization’s operating cycle is the period from the time cash is used to acquire or produce goods until these goods are sold and cash is received.

28. Mom’s Cookie Company
Account Balances
At December 31, 2004
Exhibit 3
Assets
Current assets:
Cash $ 10,680
Accounts receivable 8,570
Merchandise inventory 23,600
Supplies 690
Prepaid rent ,000
Total current assets 45,540
Property and equipment, at cost 215,660
Accumulated depreciation (25,500)
Total assets $235,700
Continued

29. Exhibit 3
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 9,610
Unearned revenue 4,250
Interest payable 650
Notes payable, current portion ,000
Total current liabilities 19,510
Notes payable, long-term ,200
Total liabilities ,710
Stockholders’ equity:
Common stock, 10,000 shares issued 100,000
Retained earnings ,990
Total stockholders’ equity 142,990
Total liabilities and stockholders’ equity $235,700

30. Mom’s Cookie Company
Account Balances
At December 31, 2004
Exhibit 3
Assets
Current assets:
Cash $ 10,680
Accounts receivable 8,570
Merchandise inventory 23,600
Supplies 690
Prepaid rent ,000
Total current assets 45,540
Property and equipment, at cost 215,660
Accumulated depreciation (25,500)
Total assets $235,700

31. Balance Sheet
Current assets are cash or other resources that management expects to convert to cash or consume during the next fiscal year.
Liquid assets are resources that can be converted to cash in a relatively short period.

32. Mom’s Cookie Company
Account Balances
At December 31, 2004
Exhibit 3
Assets
Current assets:
Cash $ 10,680
Accounts receivable 8,570
Merchandise inventory 23,600
Supplies 690
Prepaid rent ,000
Total current assets 45,540
Property and equipment 215,660
Accumulated depreciation (25,500)
Total assets $235,700

33. Balance Sheet
Property and equipment (often called fixed assets or plant assets) are long-term tangible assets that are used in a company’s operations rather than being held for resale.
The process of allocating the cost of natural resources to expenses is known as depletion.
The process of allocating the cost of plant and equipment to expenses is known as depreciation.

34. Balance Sheet
Current liabilities are those obligations that management expects to fulfill during the next fiscal year.
Accounts, wages, interest, unearned revenues, and income taxes payable all fit in this category.

35. Exhibit 3
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 9,610
Unearned revenue 4,250
Interest payable 650
Notes payable, current portion ,000
Total current liabilities 19,510
Notes payable, long-term ,200
Total liabilities ,710
Stockholders’ equity:
Common stock, 10,000 shares issued 100,000
Retained earnings ,990
Total stockholders’ equity 142,990
Total liabilities and stockholders’ equity $235,700

36. Balance Sheet
Long-term liabilities are those obligations that are not classified as current liabilities.
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 9,610
Unearned revenue 4,250
Interest payable 650
Notes payable, current portion ,000
Total current liabilities 19,510
Notes payable, long-term ,200
Exhibit 3

37. Current Assets – Current Liabilities
Balance Sheet
The difference between current asset and current liabilities is known as working capital.
Current Assets – Current Liabilities
Current assets $45,540
Current liabilities 19,510
Working capital $26,030
Mom’s Cookie Company

38. Current Assets ÷ Current Liabilities
Balance Sheet
The ratio of current asset and current liabilities is known as working capital ratio.
Current Assets ÷ Current Liabilities
Current assets $45,540
Current liabilities $19,510
Mom’s Cookie Company
= 2.33

39. Balance Sheet
Stockholders’ equity includes (1) amounts paid by owners to a corporation for the purchase of shares of stock and (2) retained earnings, profits reinvested in the corporation.
Stockholders’ equity:
Common stock, 10,000 shares issued 100,000
Retained earnings ,990
Total stockholders’ equity 142,990
Total liabilities and stockholders’ equity $235,700

40. Balance Sheet for Krispy Kreme
Exhibit 4

41. Balance Sheet for Krispy Kreme
Exhibit 4

42. Other Balance Sheet Content
Other Current Assets
Short-term investments are stocks or debt of other companies that are expected to be sold in the near future.
Allowances for Doubtful Accounts is an account that is used to report the estimated losses resulting from selling on credit and customers being unable to pay.

43. Other Balance Sheet Content
Other Long-Term Assets
Intangible assets are long-term legal rights resulting from the ownership of patents, copyrights, trademarks, and similar items.
Long-term investments occur when a company lends money to or purchases stock issued by other organizations and does not intend to sell those investments in the coming fiscal year.

44. Other Balance Sheet Content
A careful review of notes to the financial statements sometimes is important for a proper understanding of the items reported by a company.

45. Other Balance Sheet Content
Other Long-Term Liabilities
Deferred taxes represent income tax expenses that have not been paid and will not be paid during the coming year.
Minority interest represents the portion of a corporation’s subsidiaries not owned by the parent corporation.

46. Other Balance Sheet Content
Stockholders’ Equity
The number of shares of common stock authorized is the maximum number of shares the company can issue under the current charter.

47. Other Balance Sheet Content
Comprehensive Income
Comprehensive income is the change in a company’s owners’ equity during a period that is the result of all non-owner transactions and activities.

48. Objective 4
Explain information presented on a company’s statement of stockholders’ equity.

49. The Statement of Stockholders’ Equity
The statement of stockholders’ equity provides information about changes in owners’ equity for a corporation during a fiscal period.

50. Changes in Corporate Equity
Exhibit 5

51. The Statement of Stockholders’ Equity
Dividends are a reduction in Retained Earnings and are reported on the statement of stockholders’ equity.

52. The Statement of Stockholders’ Equity
Income Statement
Net income
Statement of Stockholders’ Equity
Beginning stockholders’ Equity
+ Net income
– Dividends
+ Stock issued
– Stock repurchased
Ending stockholders’ equity
Balance Sheet
Stockholders’ equity

53. Interrelationships Among Financial Statements
Amounts on the Balance Sheet
Beginning of Fiscal Period
Changes Reported on the Income Statement and Statement of Cash Flows + –
Amounts on the Balance Sheet
End of Fiscal Period =

54. Interrelationships Among Financial Statements
The relationship among financial statements in which the numbers on one statement explain numbers on other statements is called articulation.

55. Objective 5
Identify some of the primary limitations of financial statements.

56. Limitations of Financial Statements
1. Many of the numbers reported in financial statements result from estimates and allocations.

57. Limitations of Financial Statements
2. Use of historical costs reports assets and liabilities at the purchase or exchange price at the time acquired or incurred.

58. Limitations of Financial Statements
3. There is no guarantee that all important transactions are fully reported in a company’s financial statements.

59. Limitations of Financial Statements
4. Certain types of resources and costs, such as well-trained workers and skilled managers, are not reported in the financial statements.

60. Limitations of Financial Statements
5. Financial statement information is not always timely.

61. CHAPTER F4
THE END