Summary of Financial Reporting Income Statement

1
Summary of Financial Reporting Income Statement
2
Income Statement

• Income Statement
• Statement is also known as results of
  operations PL
• Accrual based
• Used to evaluate companys financial performance
  (EPS)
• Used to predict amount, time certainty of
  future cash flows.
• Used to assess likelihood of debt repayment to
  creditors

3
3
3
3
Income Statement

• Income statement
• Limitations
• Historically based information.
• Only quantifiable information included.
• Quality of earnings must be assessed.
• Manipulation of income is possible (GAAP,
  intentions).
• Use of liberal (aggressive) accounting policies
• Previously a large problem of integrity of
  financial reporting (see Sarbanes Oxley Act)
• Multiple-step format
• Single-step format

4
4
4
Elements of Income Statements

• Revenues
• Inflows of assets from sales of good and
  services investments, income, etc.
• Expenses
• Outflows of assets or incurring of liabilities
  related to purchases of goods and services, etc,
  related to the operations of the business.
• Gains
• Increases in equity from non-operating aspects of
  the business
• Losses
• Decreases in equity from non-operating aspects of
  the business

5
Income Statement Sections

• Operating section related to basic
  purpose/mission of the organization
• Sales or revenue section
• Costs of goods sold section
• Selling/expenses section
• General and administrative section
• Non-operating section
• Gains, other revenues
• Losses, other expenses
• Income tax
• Discontinued operations
• Extraordinary items
• Cumulative change in accounting principle
• Earnings per share

6
Multiple Step Income Statement
7
Single Step Income Statement
8
Income Statement Special Items
9
Reporting Irregular Items

• Other irregular Items include (Unusual OR
  infrequent BUT NOT BOTH

Foreign currency transactions. Write-down of
inventories, receivables. Asset
exchanges. Labor strikes.
Report on Other section of revenues or expenses
15
15
10
Earnings Per Share

• Earnings per share (EPS)
• Very wide-spread financial calculation
• Only required financial ratio calculation.
• To Put it SIMPLY
• Net income to common stockholders
  
• Weighted average number of shares

28
28
11
Statement of Retained Earnings

• Statement of Retained Earnings
• May be separately presented or appended to I/S.
• Reconciles change in RE for the year
• Will include in prior period adjustments

29
29
12
Summary of Financial Reporting Balance Sheet
3
3
3
13
Balance Sheet

• Basic definitions
• F/S reporting Assets, Liabilities Stockholders
  Equity at a point in time
• Predicts amounts, timing uncertainty of future
  C/F
• Uses of B/S information
• Compute rates of return
• Evaluate capital structure
• Assess Liquidity
• Assess financial flexibility

3
3
3
14
Balance Sheet

• Limits on B/S information
• Historical..
• Market values not used (not inflation adjusted
  either).
• Off-B/S assets not reflected
• Human assets
• Customer base
• Research abilities

4
4
4
15
(No Transcript)
16
Summary of Financial Reporting Statement of
Cash Flows

• .

2
2
2
2
2
2
17
Statement of Cash Flows Background

• Reporting for financial purposes
• Accrual basis
• Acctg cylcle converts C/R C/D with accruals and
  adjustments to accrual basis
• Cash basis has been ignored and lost in the
  numbers
• But
• C/F is important
• Was not reported at all in the F/S
• NI may be not realistic--overstated A/R, etc.
• Ultimate purpose of fin reports is to assess
  potential CASH
• Warren Buffet criticized acctg profession for
  lack of CF information

3
3
18
Statement of Cash Flows Background

• Therefore in 1987 FASB issues FASB Stmt 95
• Requires SCF
• Direct method
• Indirect method
• Requires reporting of activities of an entity
• (1) Operating
• (2) Investing
• (3) Financing

19
Cash Flows

• Simplified Format of the SCF

Beginning cash Sources of Cash - Uses of
Cash Ending Cash
10
10
20
(No Transcript)
21
(No Transcript)
22
(No Transcript)
23
Supplemental Disclosures

• Significant non-cash investing and financing
  activities.
• Supplemental disclosures. Examples
• Purchase of building for shares of stock.
• Sale of land in exchange for forgiveness
• of debt.
• Stock splits, dividends.
• Appropriations of retained earnings.

Stock for Debt
27
27