1. Income Statement and Balance Sheet
Instructor : Ryan Williams

2. Learning Objectives
1. Recognize items that belong on an Income Statement.
2. Prepare an Income Statement.
3. Calculate COGS given information about changes in inventory.
4. Calculate net profit margin.
5. Recognize items that belong on a Balance Sheet.
6. Prepare a Balance Sheet.
7. Calculate accumulated depreciation, net fixed assets and gross fixed assets.
8. Discuss the purpose and potential shortcomings of the Income Statement and Balance Sheet.
9. Calculate dividends paid, number of shares outstanding, earnings per share, and the P/E ratio using the current Income Statement and two most recent Balance Sheets.

3. Income Statement
Other names: Statement of income, statement of earnings, “P&L” (profit and loss).
This matches revenues & expenses for the same period, it is a SUMMARY of FLOWS, or a recording of cumulative historical activity. Think of it like a history book.

4. Basic Income Statement – 2.1
Company Name
For the time period ending date
Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
- Operating Expenses
=Operating Profit (EBIT)
Interest Expense
=Profit Before Taxes (=EBT)
Taxes
=Net Income

5. Coca-Cola’s Income Statement
Three Months Ended
April 3, 2009
NET OPERATING REVENUES
$ ,169
Cost of goods sold
2,590
GROSS PROFIT
4,579
Selling, general and administrative expenses
2,624
Other operating charges 92
OPERATING INCOME
1,863
Interest income 60
Interest expense 85
Equity income — net 17
Other income (loss) — net
(40)
INCOME BEFORE INCOME TAXES
1,815
Income taxes
456
CONSOLIDATED NET INCOME
1,359

6. Basic Income Statement Items
NET SALES: sale revenue is recorded when the ownership is transferred from the seller to the buyer. Consider, though, that some revenue is never collected (bad creditors, trial periods, money-back guarantee…)
Net sales= Gross sales – (returns & allowances)
COST OF GOODS SOLD (COGS): direct costs of manufacturing/selling a product
COGS = Beginning Inventory
+ Materials purchases
– Ending inventory

7. Basic Income Statement Items
OPERATING EXPENSES: Include management salaries, advertising expenditures, lease payments, repairs & maintenance, R&D, general & administrative expenses
INTEREST EXPENSE: cost of borrowing money
TAXES: Federal, state and/or local levels
NET INCOME: it is the ‘bottom line’ of income statement, and it represents the base profit earned during accounting period

8. We will go through Assignment 2.1
Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
- Operating Expenses
=Operating Profit (EBIT)
Interest Expense
=Profit Before Taxes (=EBT)
Taxes
=Net Income

9. Income Statement
Earnings per share (EPS) : it indicates the profit earned by each share of stock.
P/E ratio
Net Profit Margin: Net income divided by Net Sales

10. Total Assets = Total Liabilities + Shareholders’ Equity
Balance Sheet
Company’s resources are identified as:
Assets
Liabilities
Owner’s equity
Balance sheet identity:
“Stock” measure statement: each value is the value of the account at the specific date associated with the balance sheet.
Assets and Liabilities ordered by liquidity (from the most liquid to the less liquid)
Total Assets = Total Liabilities + Shareholders’ Equity

11. Another way to think about it
Balance sheet:
Assets: The stuff a company owns.
Liabilities & Equity: How a company paid for their stuff.
Income Statement: How much money the company’s stuff is making for them.

12. Balance Sheet – Table 2.2

13. Current assets
CURRENT ASSETS: assets that can be converted into cash within a year (arbitrary)
Cash
Most liquid asset.
It includes highly liquid marketable securities
Net accounts receivable (Net A/R)
Companies sell products/services on credit, they do not always ask for cash.
Some customers don’t pay up: Allowance for doubtful accounts
Net A/R = Gross A/R – allowance for doubtful accounts

14. Current assets – cont. Inventory
Raw materials, work in process, finished goods
FIFO, LIFO, average cost
End of year inventory
= Beginning of year inventory + purchases - COGS
Total current assets
= Cash + Net A/R + Inventory

15. = original historical cost – allowable depreciation
Long-term assets
FIXED ASSETS
Equipment, buildings, vehicles, computers etc
Permanent nature; needed for business operations
Reported at book value
= original historical cost – allowable depreciation
Gross fixed assets: original cost of assets
Accumulated depreciation
Straight-line
Accelerated cost recovery
Net fixed assets
= gross fixed assets – accumulated depreciation

16. Total assets (final left hand side)
Total assets = Current assets + long-term assets
Assets (LHS of balance sheet) must be financed by a combination of liabilities and owner’s equity (RHS of balance sheet)
In other words, the balance sheet has to balance.
If you have constructed a balance sheet and it does not balance, you have done something wrong.

17. Liabilities = current liabilities + L.T. debt CURRENT LIABILITIES
Notes payable
Accounts payable (A/P)
Accrued expenses (accruals)
Current portion of long-term debt
→ SUM = TOTAL CURRENT LIABILITIES
LONG-TERM DEBT
Liabilities with maturities in excess of 1 year
Total liabilities
= current liabilities + L.T. debt

18. Equity RETAINED EARNINGS
COMMON STOCK
Common stock at par
Additional paid-in capital (capital surplus): additional money generated when company sold stocks
RETAINED EARNINGS
Cumulative total of all net income reinvested into the company: this income is NOT available o shareholders!
Annual addition to retained earnings = net income – dividends paid

19. Total Equity Shareholders’ equity = common stock at par +
additional paid-in capital +
retained earnings
Shareholders’ equity also known as Net worth, owners’ equity or book value of firm’s equity

20. Preferred Stock PREFERRED STOCK
Hybrid security – Mixture of Debt & Equity
Debt component: pays fixed periodic amount (like the interest on debt).
Equity component: if payment is not made, company is not in default (in the case of debt there is default).
Preferred dividends usually cumulative; no voting rights.

21. Total Liabilities and equity (right hand side)
preferred stock (if any) +
shareholders’ equity
In other words, the balance sheet has to balance.
If you have constructed a balance sheet and it does not balance, you have done something wrong.

22. Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
- Operating Expenses
=Operating Profit (EBIT)
Interest Expense
=Profit Before Taxes (=EBT)
Taxes
=Net Income

23. Next Class
Quiz 1