1. 3 Days of Accounting :D..
Wednesday AM Introduction Wednesday PM Income Statement Thursday AM Balance Sheet Thursday PM Cash Flow Statement Friday AM Practical Exam & Conclusion

2. The Income Statement Also called the statement of earnings
Presents a firm’s:
revenues
expenses
net income
earnings per share
Annual reports include three years of income statements.

3. The Income Statement Comes in two basic formats
Single-step format
Multiple-step format
Multiple-step format should be used for analysis purposes.

4. The Income Statement Single-step format
Groups all items of revenue together, then deducts all categories of expense

5. The Income Statement

6. Single-Step Income Statement
Relevant Information
Advertising = 2,000
Commissions = 5,000
Cost Of Goods Sold = 75,000
Gain on Sale of Investment = 3,000
Interest Expense = 500
Interest Revenues = 5,000
Loss from Lawsuit = 1,500
Office Equipment = 2,500
Office Supplies = 3,500

7. The Income Statement Multiple-step format
Provides several intermediate profit measures prior to the amount of net earnings for the period
Gross profit
Operating profit
Earnings before income tax

8. The Income Statement

9. The Income Statement
Regardless of format, certain items must be disclosed separately on an income statement:
Discontinued operations
Extraordinary transactions

10. The Income Statement Comprehensive Income
Change in equity of a company during a period from transactions, other events, and circumstances related to nonowner sources.
Companies are required to report comprehensive income in one of three ways:
on the face of its income statement
in a separate statement of comprehensive income, or
in its statement of stockholders’ equity.

11. The Income Statement Common-Size Income Statement
Useful analytical tool to:
compare firms with different levels of sales or total assets,
facilitate internal or structural analysis,
evaluate trends, and
make industry comparisons.

12. The Income Statement Common-Size Income Statement
Expresses each income statement item as a percentage of net sales
Shows the relative magnitude of various expenses relative to sales, the profit percentages, and the relative importance of “other” revenues and expenses

13. The Income Statement

14. The Income Statement Net Sales
Total sales revenue is shown net of returns and allowances.
A sales return is a cancellation of a sale.
A sales allowance is a deduction from the original sales invoice price.
Sales are the major revenue source for most companies.

15. The Income Statement Net Sales
If a company’s sales are increasing (or decreasing), it is important to determine whether the change is a result of price, volume, or a combination of both.
The reasons for sales growth (or decline) are covered in the Management Discussion and Analysis section of the annual or 10-K report.

16. The Income Statement Net Sales
“Real” (inflation adjusted) sales growth
“Nominal” (as reported) sales growth
An adjustment of the reported sales figure with the Consumer Price Index (or some other measure of general inflation) will enable the analyst to compare changes in real and nominal terms.

17. The Income Statement Cost of Goods Sold Also called cost of sales
Cost to seller of products or services sold to customers
Affected by cost flow assumption used to value inventory
Largest expense for many firms

18. The Income Statement Cost of Goods Sold Percentage
Ratio of cost of goods sold and net sales
Important for profit determination

19. The Income Statement

20. The Income Statement Gross Profit Also called gross margin
Difference between net sales and cost of goods sold
First step of profit measurement on the multi-step income statement
Key analytical tool in assessing operating performance

21. The Income Statement Gross Profit Margin
Ratio of gross profit to net sales (expressed as a percentage)
Complement of the cost of goods sold percentage
Firms want to maintain or increase gross profit margin.
Remains relatively constant in stable industries
May change significantly in volatile industries

22. The Income Statement Gross Profit Margin – Multiple Revenue Sources
Each revenue is shown separately.
Each revenue line will show the corresponding cost of goods sold for each revenue source.

23. The Income Statement

24. The Income Statement Operating Expense
Includes areas in which management discretion is exercised
Has considerable impact on current and future profitability
Important to track trends, absolute amounts, relationship to sales, and relationship to industry competitors

25. The Income Statement Operating Expenses
Selling and administrative expenses
Advertising costs
Depreciation and amortization
Repairs and maintenance
Impairment charges

26. The Income Statement
Operating Expenses – Selling and Administrative Expenses
Relate to the sale of products or services
Salaries, rent, insurance, utilities, supplies, etc.

27. The Income Statement Operating Expenses – Advertising Costs
Are or should be a major expense when marketing is an important element of success

28. The Income Statement Operating Expenses – Lease Payments
Costs associated with operating rentals of leased facilities for retail outlets
Note 3 to the financial statements explains the agreements that apply to the rental arrangements and presents a schedule of minimum annual rental commitments.

29. The Income Statement
Operating Expenses – Depreciation and Amortization
Cost of assets other than land that will benefit a business enterprise for more than a year is allocated over the asset’s service life.
Cost allocation procedure is determined by the nature of the long-lived asset.

30. The Income Statement
Operating Expenses – Depreciation and Amortization
Depreciation is used to allocate the cost of tangible fixed assets, such as:
buildings
machinery
equipment
furniture and fixtures
motor vehicles

31. The Income Statement
Operating Expenses – Depreciation and Amortization
Amortization is an allocation process applied to:
capital leases
leasehold improvements
cost expiration of intangible assets, such as patents, copyrights, trademarks, and franchises

32. The Income Statement
Operating Expenses – Depreciation and Amortization
Depletion is an allocation process applied to acquisition and development of natural resources, such as:
oil and gas
other minerals
standing timber

33. The Income Statement Operating Expenses – Repairs and Maintenance
Annual costs of repairing and maintaining PP&E
Should correspond to the level of investment in capital equipment and to the age and condition of fixed assets
Inadequate allowance can impair success.
Should be evaluated in relation to the firm’s investments in fixed assets

34. The Income Statement Operating Expenses – Impairment Charges
Recognized to record a decline in value of a long-term asset
May occur in connection with goodwill
Can also be recognized when asset values of PP&E decrease below book value

35. The Income Statement Operating Profit
Also called earnings before interest and taxes (EBIT)
Second step of profit determination on the multi-step income statement
Measures overall performance of operations
Provides a basis for assessing success of a firm apart from financing and investing activities and separate from tax considerations
Sales revenue less the expenses associated with generating sales

36. The Income Statement Operating Profit Margin
Ratio of operating profit to net sales

37. The Income Statement Other Income (Expense)
Revenues and costs other than from operations, such as:
dividend and interest income
interest expense
investment gains (losses)
equity earnings (loss)
gains (losses) from sale of fixed assets

38. The Income Statement Other Income (Expense)
Firms that carry debt and equity securities classified as “trading securities” report these investments on the balance sheet at market value with any unrealized gains and losses included in earnings.

39. The Income Statement Other Income (Expense)
In assessment of earning quality, the analyst should consider the materiality and the variability of the nonoperating items of income:
Gains and losses on the sale of major capital assets
Accounting changes
Extraordinary items
Investment income from temporary investments in cash equivalents
Investment income recognized under the equity method

40. The Income Statement Earnings Before Income Taxes / Effective Tax Rate
Earnings before income taxes is the profit recognized before the deduction of income tax expense.
Income taxes paid may differ from income tax expense.
Effective tax rate is the ratio of income taxes to earnings before income taxes.

41. The Income Statement Earnings Before Income Taxes / Effective Tax Rate
Noteworthy items that may affect the effective tax rate are net operating losses (NOLs) and foreign taxes.
Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions.

42. The Income Statement Special Items
Often one-time items that will not recur in the future
Discontinued operations
Occur when a firm sells or discontinues a clearly distinguishable portion of its business
Extraordinary gains and losses
Unusual in nature
Not expected to recur in the future

43. The Income Statement Net Earnings Also called the “bottom line”
Represents profit after consideration of all revenue and expense

44. The Income Statement Net Profit Margin
Ratio of net earnings to net sales (expressed as a percentage)
Shows the percentage of profit earned on every sales dollar

45. Multi-Step Income Statement
Relevant Information
Advertising = 2,000
Commissions = 5,000
Cost Of Goods Sold = 75,000
Gain on Sale of Investment = 3,000
Interest Expense = 500
Interest Revenues = 5,000
Loss from Lawsuit = 1,500
Office Equipment = 2,500
Office Supplies = 3,500

46. The Income Statement Earnings per Common Share
Net earnings available to common stockholders for the period divided by the average number of common stock shares outstanding
Firms with complex capital structure report basic and diluted earnings per common share.

47. The Income Statement Earnings per Common Share
Analysts should consider material changes in the number of common stock shares outstanding, such as:
treasury stock purchases
purchase and retirement of a firm’s own common stock
stock splits
reverse stock splits

48. Statement of Stockholders’ Equity
Important link between the balance sheet and the income statement
Documents changes in the balance sheet equity accounts
Annual reports include three years of stockholders’ equity information

49. Statement of Stockholders’ Equity

50. Statement of Stockholders’ Equity
Stock dividends
Issuance of additional shares of stock in proportion to current ownership
Reduce retained earnings account
Stock splits
Used to lower the market price of shares to make common stock more affordable
Reverse stock splits
Occurs when outstanding shares are decreased

51. Earnings Quality, Cash Flow, and Segmental Accounting
Assessment of the quality of reported earnings is an essential element of income statement analysis.
Cash flow from operations is a key ingredient in analyzing operating performance.

52. Earnings Quality, Cash Flow, and Segmental Accounting
Segmental data include revenue, operating profit or loss, assets, depreciation and amortization, and capital expenditures by industry components.
These disclosures facilitate analysis of operating performance and contribution by each segment.

53. Statement of Retained Earnings
Prepared to reconcile the beginning and ending retained earnings balances
Beginning RE + Net Income – Dividends = Ending RE
Statement has standard heading as shown below