1. Financial Statement Analysis MGT-537 Dr. Hafiz Muhammad Ishaq 32
Course Title:
Financial Statement Analysis
Course Code:
MGT-537
Course Instructor:
Dr. Hafiz Muhammad Ishaq
Total Lectures: 32

2. Previous Lecture Summary
Quasi Reorganization,
Foreign Currency Translation,
Unrealized holding gains and losses,
Equity-Oriented Deferred Compensation,
Employee Stock ownership Plans,
Treasury Stock , Practical Exercise

3. Today's Lecture Topics Single – step income statement
Basic Elements of the Income Statement: Net Sales, Cost of goods sold Other operating revenue, Operating expenses, other income and expenses.
Income Statement, Multiple-step income statement

4. The Income Statement Dated for a period of time Multiple-step format
For the Year Ended...
Multiple-step format
Gross profit
Operating income
Income before taxes
Net income
Single-step format
Total of all revenues and gains
Less the total of all expenses and losses

5. Multiple-Step Single Step

6. Basic Elements of the Income Statement
Net Sales (Revenues) (Sales-Sales Return-Sales Allowance-Sales Discount)
Discount (Trade Discount and Cash Discount-2/10, N/30)
Cost of Goods Sold
Other Operating Revenue
Operating Expenses
Other Income or Expense

7. Net Sales
Revenue from the sale of principal goods or services sold to customers
Shown net of
Discounts
Returns
Allowances

8. Cost of Goods Sold The cost of goods that were sold to produce revenue
Manufacturer
Beginning Inventory
+ Cost of Goods Manufactured
– Ending Inventory
= Cost of Goods Sold
Retailer
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold

9. Other Operating Revenue
Reflects the nature of the business
Examples
Lease revenue
Royalty revenue
Finance charges
Commission revenue

10. Operating Expenses Selling expenses Administrative expenses
Result from the company’s effort to create sales
Examples
Advertising
Sales commissions
Sales supplies used
Administrative expenses
Relate to the general administration of the company’s operation
Salaries
Insurance
Bad debt expense

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

12. Special Income Statement Items
Unusual or Infrequent Items Disclosed Separately
Included with normal recurring revenues and expenses
If material, disclosed separately, before income taxes
Relate to operations
Treatment for analysis
Primary analysis: include
Supplementary analysis: exclude

13. Special Income Statement Items (cont’d)
Equity in Earnings of Nonconsolidated Subsidiaries
If the investor owns 20% of the stock of the investee, and investee reports income of $100,000 then investor report $20,000 on its income statement and term will be used equity earnings
The investor’s proportional 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 misrepresent ratios
Presented before tax; tax consequences typically immaterial

14. Special Income Statement Items (cont’d)
Income Taxes Related to Operations
Federal, state, and local
Includes both paid and deferred taxes
Discontinued Operations
Reported net of income tax
Analysis issues:
Inadequate disclosure of associated assets
Lack of historical profit and loss information on the discontinued operations

15. Special Income Statement Items (cont’d)
Extraordinary Items
Unusual and infrequent
Reported net of income tax
Analysis issues:
Exclude from primary analysis
Include for supplementary analysis

16. Chapter End Problem
Uranium Mining Company founded in 1990 to mine and market uranium purchased a mine in 1991 for $900 million. It estimated that the uranium had a market value of $150 per ounce. By 1997 the market value had increased to $300 per ounce. Record for 1997 indicates the following:
Production 200,000 ounces
Sales ,000 ounces
Deliveries ,000 ounces
Cash collection 210,000 ounces
Cost of production including depletion $50,000,000
Selling expense $2,000,000
Administrative expenses 1,250,000
Tax rate %
Production cost per ounce has remained constant over the last few years, and the company
has maintained the same production level.
Required: Compute the income for 1997, using each of the following bases:
Receipt of cash (2) Point of sale (3) End of production (3) Based on delivery

23. Chapter End Problem
At the end of 2000, vandals destroyed your financial records. Fortunately, the controller had kept certain statistical data related to the income statement, as follows:
a. Cost of goods sold was $2,000,000.
b. Administrative expenses were 20% of the cost of sales but only 10% of sales.
c. Selling expenses were 150% of administrative expenses.
d. Bonds payable were $1,000,000, with an average interest rate of 11%.
e. The tax rate was 48%.
f.50, 000 shares of common stock were outstanding for the entire year.
Required: From the information given, reconstruct a multiple-step income statement for the year. Include earnings per share.

26. Chapter End Problem
The following information for Decher Automotives covers the year ended 2003
Administrative expenses 62,000
Dividend income 10,000
Income taxes ,000
Interest expense 20,000
Merchandise inventory, 1/1 650,000
Merchandise inventory, 12/ ,000
Flood loss (net of tax) 30,000
Purchases ,000
Sales 1,000,000
Selling expenses 43,000
Required: a. Prepare a single step income statement
b. Prepare a multiple- step income statement
C. Assuming that 100,000 shares of common stock are outstanding, calculate the earnings per share before extraordinary items and the net earnings per share.

31. Lecture Summary Basic Elements of the Income Statement: Net Sales
Cost of goods sold
Operating revenue,
Operating expenses,
Income and expenses.
Single – step income statement
Income Statement, Multiple-step income statement