1. Chapter 4-1 Evaluate past performance. Chapter 2 - Income Statement LO 1 Understand the uses and limitations of an income statement. Help assess the risk or uncertainty of achieving future cash flows. Predicting future performance. Usefulness

2. Chapter 4-2 Companies omit items that cannot be measured reliably. Income Statement Limitations LO 1 Understand the uses and limitations of an income statement. Income measurement involves judgment. Income is affected by the accounting methods employed.

3. Chapter 4-3 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Revenues – Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Sales Fee revenue Interest revenue Dividend revenue Rent revenue Examples of Revenue Accounts Elements of the Income Statement

4. Chapter 4-4 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Cost of goods sold Depreciation expense Interest expense Rent expense Salary expense Examples of Expense Accounts Elements of the Income Statement

5. Chapter 4-5 Format of the Income Statement LO 1 Understand the uses and limitations of an income statement. – Increases in equity (net assets) from peripheral or incidental transactions. Gains – Increases in equity (net assets) from peripheral or incidental transactions. - Decreases in equity (net assets) from peripheral or incidental transactions. Losses - Decreases in equity (net assets) from peripheral or incidental transactions. Gains and losses can result from Gains and losses can result from sale of investments or plant assets, settlement of liabilities, write-offs of assets. Elements of the Income Statement

6. Chapter 4-6 Single-Step Format LO 2 Prepare a single-step income statement. The single-step statement consists of just two groupings: RevenuesExpenses Net Income Single- Step No distinction between Operating and Non-operating categories.

7. Chapter 4-7 Single-Step Format LO 2 Prepare a single-step income statement. E4-4: Prepare an income statement from the data below. Solution on notes page

8. Chapter 4-8 The single-step income statement emphasizes a. the gross profit figure. a. the gross profit figure. b. total revenues and total expenses. b. total revenues and total expenses. c. extraordinary items more than it is emphasized in the multiple-step income statement. c. extraordinary items more than it is emphasized in the multiple-step income statement. d. the various components of income from continuing operations. d. the various components of income from continuing operations. Review Single-Step Format LO 2 Prepare a single-step income statement.

9. Chapter 4-9 1.Operating section 2.Nonoperating section 3.Income tax 4.Discontinued operations 5.Extraordinary items 6.Earnings per share LO 3 Prepare a multiple-step income statement. Multiple-Step Format Income Statement Sections

10. Chapter 4-10 Separates operating transactions from nonoperating transactions. Matches costs and expenses with related revenues. Highlights certain intermediate components of income that analysts use. LO 3 Prepare a multiple-step income statement. Multiple-Step Format Background

11. Chapter 4-11 Multiple-Step Format LO 3 Prepare a multiple-step income statement. The presentation divides information into major sections. 1. Operating Section 2. Nonoperating Section 3. Income tax

12. Chapter 4-12 Multiple-Step Format Illustration (E4-4): Prepare an income statement from the data below. Solution on notes page

13. Chapter 4-13 Review A separation of operating and non operating activities of a company exists in a. both a multiple-step and single-step income statement. a. both a multiple-step and single-step income statement. b. a multiple-step but not a single-step income statement. b. a multiple-step but not a single-step income statement. c. a single-step but not a multiple-step income statement. c. a single-step but not a multiple-step income statement. d. neither a single-step nor a multiple-step income statement. d. neither a single-step nor a multiple-step income statement. Multiple-Step Format LO 3 Prepare a multiple-step income statement.

14. Chapter 4-14

15. Chapter 4-15 An Income Statement  Sales  Minus Cost of Goods Sold  = Gross Profit  Minus Operating Expenses  Selling expenses  General and Administrative expenses  Depreciation and Amortization Expense  = Operating income (EBIT)  Minus Interest Expense  = Earnings before taxes (EBT)  Minus Income taxes  = Net income (EAT) FIN3000, Liuren Wu15

16. Chapter 4-16 An Income Statement  Sales  Minus Cost of Goods Sold  = Gross Profit  Minus Operating Expenses  Selling expenses  General and Administrative expenses  Depreciation and Amortization Expense  = Operating income (EBIT)  Minus Interest Expense  = Earnings before taxes (EBT)  Minus Income taxes  = Net income (EAT) FIN3000, Liuren Wu16

17. Chapter 4-17 Sample Income Statement FIN3000, Liuren Wu17

18. Chapter 4-18 Evaluating a Firm’s EPS  We can use the income statement to determine the earnings per share (EPS) and dividends.  EPS = Net income/Number of shares outstanding  Example 1: A firm reports a net income $90 million and has 35 million shares outstanding, what will be the earnings per share (EPS)?  EPS = Net income ÷ Number of shares  = $90 million ÷ $35 million  = $2.57 FIN3000, Liuren Wu18

19. Chapter 4-19 Evaluating a Firm’s Dividends per share  Dividends per share = Dividends paid ÷ Number of shares  Example 2: A firm reports dividend payment of $20 million on its income statement and has 35 million shares outstanding. What will be the dividends per share?  Dividends per share = dividend payment ÷ Number of shares = $20 million ÷ $35 million = $20 million ÷ $35 million = $0.57 = $0.57 FIN3000, Liuren Wu19

20. Chapter 4-20 Connecting the Income Statement and the Balance Sheet What can the firm do with the net income?: What can the firm do with the net income?: 1. Pay dividends to shareholders, and/or 2. Reinvest in the firm Example 3: Review examples 1 & 2. How much was retained or reinvested by the firm? Example 3: Review examples 1 & 2. How much was retained or reinvested by the firm? Amount retained = Net Income – Dividends Amount retained = Net Income – Dividends = $90m - $20m = $70m The firm’s balance on retained earnings will increase by $70 million on the balance sheet. The firm’s balance on retained earnings will increase by $70 million on the balance sheet. FIN3000, Liuren Wu20

21. Chapter 4-21 Interpreting Firm Profitability using the Income Statement  What can we learn from Boswell Inc.’s income statement? 1. The firm has been profitable as its revenues exceeded its expenses. 2. The gross profit margin (GPM) = gross profits ÷ sales = $675 million ÷ $2,700 million = 25%  GPM indicates the firm’s “mark-up” on its cost of goods sold per dollar of sales. FIN3000, Liuren Wu21

22. Chapter 4-22 Interpreting Firm Profitability using the Income Statement (cont.) 3. The operating profit margin = net operating income (EBIT)÷ sales = $382.5 million ÷ $2,700 million = 14.17% 4. Net profit margin: = net profits (Net income) ÷ sales = $204.75 million ÷ $2,700 million = 7.58% These profit margins (gross profit margin, operating profit margin, and net profit margin) should be closely monitored and compared to previous years and those of competing firms. FIN3000, Liuren Wu22