income statement copyright ©2007 thomson south-western, a part of the thomson corporation. thomson,...

24
Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 4

Post on 15-Jan-2016

223 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Income Statement

COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Chapter 4

Page 2: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #2

The Income Statement

• Covers a period of time– For the Year/Quarter/Month Ended...

• Multiple-step format– Gross profit (sales – cost of goods sold)– Operating income (income before taxes, interest, and other

revenues and expenses)– Income before taxes– Net income

• Single-step format– Total of all revenues and gains– Less the total of all expenses and losses– No operating Income in this analysis

Page 3: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #3

Multiple-Step Single Step

Sales 496,120$

Cost of Goods Sold 234,972

Gross Profit 261,148 Operating Expenses:

General & Administrative 131,409$ Advertising 128,325 Uncollectible Accounts 22,664 282,398

Operating Income (21,250) Interest Income 122,757 Other Revenue 44,715 167,472

Income Before Taxes 146,222 Income Taxes 8,498

Net Income 137,724$

Multiple-Step CompanyIncome Statement

For the Year Ended December 31, 20XX

Sales 496,120$ Interest Income 122,757 Other Income 44,715

663,592 Costs and Expenses:

Cost of Goods Sold 234,972$ General & Administrative 131,409 Advertising 128,325 Uncollectible Accounts 22,664 517,370

Income Before Taxes 146,222 Income Taxes 8,498

Net Income 137,724$

Single-Step CompanyIncome Statement

For the Year Ended December 31, 20XX

Page 4: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #4

Net Sales

• Revenue from the sale of principal goods or services sold to customers

• Shown net of– Discounts– Returns– Allowances

Page 5: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #5

Cost of Goods Sold

• The cost of goods that were sold to produce revenue

Retailer

Beginning Inventory

+ Purchases

– Ending Inventory

= Cost of Goods Sold

Manufacturer

Beginning Inventory

+ Cost of Goods Manufactured

– Ending Inventory

= Cost of Goods Sold

Page 6: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #6

Other Operating Revenue

• Reflects the nature of the business• Examples

– Lease revenue– Royalty revenue– Finance charges– Commission revenue

Page 7: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #7

Operating Expenses

• Selling 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– Examples

• Salaries• Insurance• Bad debt expense

Page 8: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #8

Other Income or Expense

• Secondary activities not directly related to operations– Dividend income– Interest income– Gains (losses) from sale of assets– Interest expense

Page 9: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #9

Special Income Statement Items

• Unusual or Infrequent Items Disclosed Separately– If material, disclosed separately, before income

taxes– Relate to operations

Page 10: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #10

Special Income Statement Items (cont’d)

• Equity in Earnings of Nonconsolidated Subsidiaries– 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 distort ratios• Presented before tax; tax consequences typically

immaterial

Page 11: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #11

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

Page 12: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #12

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

Page 13: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #13

Special Income Statement Items (cont’d)

• Cumulative Effect of a Change in Accounting Principle– For fiscal years beginning before 12/15/05

• Cumulative effect of the change shown net of tax on the income statement of the period in which change was made

• Earlier statements not restated to reflect application of the new principle

– Effective for fiscal years beginning after 12/15/05• All comparative statements are retrospectively restated to reflect

application of the new accounting principle• The cumulative effect on income of earlier years is shown as a

net-of-tax adjustment to the beginning Retained Earnings balance of the earliest period presented

Page 14: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #14

Special Income Statement Items (cont’d)

• Minority Share of Earnings– Earnings of a partially-owned consolidated

subsidiary that would accrue to the minority owners– Presentation may be either pre-tax or net-of-tax

• Earnings per ShareNet income ÷ Number of shares outstanding

Page 15: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #15

Reconciliation of Retained Earnings

Beginning of year balance of retained earnings

+ Prior period adjustments

± Cumulative effect of a change in accounting principle

= Beginning balance as adjusted

+ Net income

– Dividends

= End-of-year balance of retained earnings

Reported as part of the Statement of Owners' Equity or combined with the Income Statement

Page 16: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #16

Retained Earnings

• The accumulated undistributed earnings of the corporation reported on the balance sheet

• Appropriated– Restricted by law, contract, or management

decision– Not available for dividends

• Unappropriated– Available for dividends– Does not represent cash or any other asset

Page 17: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #17

Dividends

• Cash dividends– Date of declaration: create liability and reduce

retained earnings– Date of payment: reduce liability and cash

Page 18: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #18

Stock Splits

• 2-for-1 split– Doubles the quantity of stock– Par or stated value is halved

• No effect on retained earnings, additional paid-in capital, or capital stock accounts

• Analysis issues:– Restate share quantities to reflect split activity

Page 19: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #19

Legality of Distributions to Shareholders

• Per various state laws– Distributions are acceptable as long as the firm has

the ability to pay debts as they come due in the normal course of business

– Distributions to stockholders are acceptable as long as the firm is solvent and the distributions do not exceed the fair value of the assets

– Distributions consist of solvency and balance sheet test of liquidity and risk

Page 20: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #20

Comprehensive Income

Net income

+ The period’s change in accumulated other comprehensive income

= Comprehensive income

• Foreign currency translation adjustments• Unrealized holding gains and losses on

available-for-sale marketable securities• Changes to owners' equity resulting from

additional minimum pension liability adjustments

• Unrealized gains and losses from derivative instruments

Page 21: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #21

Comprehensive Income – Separate Statement

Net income 34,000$ Other comprehensive income

Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000)

Total other comprehensive income 4,000

Comprehensive income 38,000$

XYZ CorporationStatement of Comprehensive Income

For the Year Ended December 31, 20XX

Page 22: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #22

Comprehensive Income –Combined with Income Statement

Sales 230,000$ Cost of goods sold 140,000

Gross profit 370,000

Operating expenses 40,000

Operating income 330,000

Other income 4,000

Income before income taxes 326,000

Income taxes 20,000

Net income 306,000 Other comprehensive income

Available-for-sale security adjustment, net of tax 5,500 Minimum pension liability adjustment, net of tax 3,500 Foreign currency transaction adjustment, net of tax (5,000)

Other comprehensive income 4,000

Comprehensive income 310,000$

Earnings per share (for net income only) 2.80$

XYZ CorporationStatement of Income and Comprehensive Income

For the Year Ended December 31, 20XX

Page 23: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #23

Comprehensive Income – As Part of the Statement of Owners' Equity

Retained

Accumulated Other

Comprehensive

Total Earnings Income Amount Shares

Beginning Balance $180,000 $60,000 $10,000 $110,000 55,000

Net Income 34,000 34,000Available-for-sale security adjustment, net of tax 5,500 5,500Minimum pension liability adjustment, net of tax 3,500 3,500Foreign currency transaction adjustment, net of tax (5,000) (5,000)

Comprehensive income 38,000

Ending Balance $218,000 $94,000 $14,000 $110,000 55,000

XYZ CorporationStatement of Changes in Stockholders' Equity

For the Year Ended December 31, 20XX

Common Stock

Page 24: Income Statement COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #24

Comprehensive Income (cont’d)

• Analysis issues:– Typically more volatile than net income– A better indication of long-run profitability