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4-1
Reporting Earnings Reporting Earnings and Financial Positionand Financial PositionReporting Earnings Reporting Earnings
and Financial Positionand Financial Position
Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
Chapter Chapter F4F4
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1. Identify the primary financial statements issued by businesses.
2. Explain information presented on a company’s income statement.
3. Explain information presented on a company’s balance sheet.
4. Explain information presented on a company’s statement of stockholders’ equity.
ObjectivesObjectivesObjectivesObjectives
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
ContinuedContinuedContinuedContinued
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5. Identify some of the primary limitations of financial statements.
ObjectivesObjectivesObjectivesObjectives
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Mom’s Cookie CompanyBalance Sheet
January 31, 2004
AssetsCash $ 8,800Merchandise inventory 1,400Equipment 31,000Accumulated depreciation (520)
Total assets $40,680Liabilities and Owners’ Equity
Interest payable $ 200Notes payable 30,000Total liabilities 30,200Contribution by owners 10,000Retained earnings 480
Total liabilities and owners’ equity $40,680
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Mom’s Cookie CompanyBalance Sheet
January 31, 2004
AssetsCash $ 8,800Merchandise inventory 1,400Equipment 31,000Accumulated depreciation (520)
Total assets $40,680Liabilities and Owners’ Equity
Interest payable $ 200Notes payable 30,000Total liabilities 30,200Contribution by owners 10,000Retained earnings 480
Total liabilities and owners’ equity $40,680
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11ObjectiveObjectiveObjectiveObjective
Identify the primary financial statements issued by businesses.
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The Purpose of Financial StatementsThe Purpose of Financial StatementsThe Purpose of Financial StatementsThe Purpose of Financial Statements
Most business organizations prepare three financial statements to report general-purpose accounting information:
1. An income statement
2. A balance sheet
3. A statement of cash flows
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Income StatementIncome StatementIncome StatementIncome Statement
An income statement reports an organization’s revenues and expenses
for a fiscal period.
An income statement reports an organization’s revenues and expenses
for a fiscal period.
Sometimes called an earnings
statement...
Sometimes called an earnings
statement...
…or a profit and loss (P & L)
statement.
4-7
Balance SheetBalance SheetBalance SheetBalance Sheet
The balance sheet reports the balances of the asset, liability, and
owners’ equity accounts at a particular date.
The balance sheet reports the balances of the asset, liability, and
owners’ equity accounts at a particular date.
Sometimes referred Sometimes referred to as a statement of to as a statement of financial position…financial position…
Sometimes referred Sometimes referred to as a statement of to as a statement of financial position…financial position…
……or as a statement or as a statement of financial of financial condition.condition.
……or as a statement or as a statement of financial of financial condition.condition.
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Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
This statement enables creditors, investors, and other users to assess a company’s ability to
meet its cash requirements.
This statement enables creditors, investors, and other users to assess a company’s ability to
meet its cash requirements.
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Statement of Statement of Stockholders’ EquityStockholders’ Equity
Statement of Statement of Stockholders’ EquityStockholders’ Equity
This statement reports changes in a
corporation’s stockholders’ equity for a fiscal period.
This statement reports changes in a
corporation’s stockholders’ equity for a fiscal period.
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22Explain information presented on a company’s income statement.
ObjectiveObjectiveObjectiveObjective
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Sales revenue is revenue from sales of goods and services.
Sales revenue is revenue from sales of goods and services.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Gross profit is the difference between the selling price of
goods or services sold during a period and the cost of the
goods or services sold.
Gross profit is the difference between the selling price of
goods or services sold during a period and the cost of the
goods or services sold.
Gross profit is a measure of how much a company earned directly from the sale of its products during the current
fiscal period.
Gross profit is a measure of how much a company earned directly from the sale of its products during the current
fiscal period.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Exhibit 1Exhibit 1Exhibit 1Exhibit 1Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Operating expenses are costs of resources consumed as part of operating activities
during a fiscal period…
Operating expenses are costs of resources consumed as part of operating activities
during a fiscal period…
…and that are not directly associated with specific
goods or services.
…and that are not directly associated with specific
goods or services.
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Operating income is the excess of
gross profit over operating expenses.
Operating income is the excess of
gross profit over operating expenses.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Other revenues and expenses are not directly related to a company’s
primary operating activities.
Other revenues and expenses are not directly related to a company’s
primary operating activities.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Exhibit 1Exhibit 1Exhibit 1Exhibit 1Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
These are considered non-operating items and are reported following operating income. Here we see
Interest Expense, which is a common non-operating item.
These are considered non-operating items and are reported following operating income. Here we see
Interest Expense, which is a common non-operating item.
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Most corporations pay income taxes on their earnings. Mom’s Cookie
Company paid 30 percent of taxable income ($75,700 x .30 = $22,710).
Most corporations pay income taxes on their earnings. Mom’s Cookie
Company paid 30 percent of taxable income ($75,700 x .30 = $22,710).
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Net income is not cash
Net income is not cash
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Net income is the amount of profit
earned by a company during a fiscal period.
Net income is the amount of profit
earned by a company during a fiscal period.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
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Exhibit 1Exhibit 1Exhibit 1Exhibit 1Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Earnings per share is a measure of the earnings
performance of each share of common stock during a
fiscal period.
Earnings per share is a measure of the earnings
performance of each share of common stock during a
fiscal period.
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Average Number of Average Number of Shares OutstandingShares OutstandingAverage Number of Average Number of Shares OutstandingShares Outstanding
Mom’s Cookie Company issued 1,000 shares on January 1 and 9,000 shares on September 1.
Mom’s Cookie Company issued 1,000 shares on January 1 and 9,000 shares on September 1.
1,000 x 8/12 = 66710,000 x 4/12 = 3,333Average 4,000
1,000 x 8/12 = 66710,000 x 4/12 = 3,333Average 4,000
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Earnings per ShareEarnings per ShareEarnings per ShareEarnings per Share
Earnings per share of $13.25 for Mom’s Cookie Company was
calculated as follows:
Earnings per share of $13.25 for Mom’s Cookie Company was
calculated as follows:
$52,990 net income
4,000 average shares
$52,990 net income
4,000 average sharesEPS =
$13.25 (rounded) EPS =
4-23
Mom’s Cookie CompanyIncome Statement
For the Month Ended December 31, 2004
Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000
$ 13.25
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
4-24
Income Statement for Krispy Kreme
Exhibit 2Exhibit 2Exhibit 2Exhibit 2
4-25
Krispy Kreme’s income statement is a consolidated
statement because it includes a number of companies
owned by the corporation.
Krispy Kreme’s income statement is a consolidated
statement because it includes a number of companies
owned by the corporation.
There are a number of new items listed, such as Equity loss in joint
venture and Minority interest. These accounts are analyzed in a
more advanced accounting course.
There are a number of new items listed, such as Equity loss in joint
venture and Minority interest. These accounts are analyzed in a
more advanced accounting course.
Also note that Krispy Kreme reported two sets of earnings per share numbers, basic and
diluted earnings per share.
Also note that Krispy Kreme reported two sets of earnings per share numbers, basic and
diluted earnings per share.
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33Explain information presented on a company’s balance sheet.
ObjectiveObjectiveObjectiveObjective
4-27
LEARNING NOTE
An organization’s operating cycle is the period from the time cash is used to
acquire or produce goods until these goods are sold and cash is received.
An organization’s operating cycle is the period from the time cash is used to
acquire or produce goods until these goods are sold and cash is received.
4-28
Mom’s Cookie CompanyAccount Balances
At December 31, 2004
AssetsCurrent assets:
Cash $ 10,680Accounts receivable 8,570Merchandise inventory 23,600Supplies 690Prepaid rent 2,000
Total current assets 45,540Property and equipment, at cost 215,660Accumulated depreciation (25,500)Total assets $235,700
ContinuedContinuedContinuedContinued
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 9,610Unearned revenue 4,250Interest payable 650Notes payable, current portion 5,000
Total current liabilities 19,510Notes payable, long-term 73,200Total liabilities 92,710Stockholders’ equity:
Common stock, 10,000 shares issued 100,000Retained earnings 42,990
Total stockholders’ equity 142,990Total liabilities and stockholders’ equity $235,700
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
4-30
Mom’s Cookie CompanyAccount Balances
At December 31, 2004
AssetsCurrent assets:
Cash $ 10,680Accounts receivable 8,570Merchandise inventory 23,600Supplies 690Prepaid rent 2,000
Total current assets 45,540Property and equipment, at cost 215,660Accumulated depreciation (25,500)Total assets $235,700
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
4-31
Balance SheetBalance SheetBalance SheetBalance Sheet
Current assets are cash or other resources that management expects
to convert to cash or consume during the next fiscal year.
Current assets are cash or other resources that management expects
to convert to cash or consume during the next fiscal year.
Liquid assets are resources that can be converted to cash in a
relatively short period.
Liquid assets are resources that can be converted to cash in a
relatively short period.
4-32
Mom’s Cookie CompanyAccount Balances
At December 31, 2004
AssetsCurrent assets:
Cash $ 10,680Accounts receivable 8,570Merchandise inventory 23,600Supplies 690Prepaid rent 2,000
Total current assets 45,540Property and equipment 215,660Accumulated depreciation (25,500)Total assets $235,700
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
4-33
The process of allocating the cost of plant and equipment to expenses is
known as depreciation.
The process of allocating the cost of plant and equipment to expenses is
known as depreciation.
Balance SheetBalance SheetBalance SheetBalance Sheet
Property and equipment (often called fixed assets or plant assets) are long-term tangible assets that are used in a
company’s operations rather than being held for resale.
Property and equipment (often called fixed assets or plant assets) are long-term tangible assets that are used in a
company’s operations rather than being held for resale.
The process of allocating the cost of natural resources to expenses is
known as depletion.
The process of allocating the cost of natural resources to expenses is
known as depletion.
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Current liabilities are those obligations that management expects to fulfill during the next fiscal year.
Current liabilities are those obligations that management expects to fulfill during the next fiscal year.
Balance SheetBalance SheetBalance SheetBalance Sheet
Accounts, wages, interest, unearned revenues, and income taxes payable
all fit in this category.
Accounts, wages, interest, unearned revenues, and income taxes payable
all fit in this category.
4-35
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 9,610Unearned revenue 4,250Interest payable 650Notes payable, current portion 5,000
Total current liabilities 19,510Notes payable, long-term 73,200Total liabilities 92,710Stockholders’ equity:
Common stock, 10,000 shares issued 100,000Retained earnings 42,990
Total stockholders’ equity 142,990Total liabilities and stockholders’ equity $235,700
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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Long-term liabilities are those obligations that are not classified
as current liabilities.
Long-term liabilities are those obligations that are not classified
as current liabilities.
Balance SheetBalance SheetBalance SheetBalance Sheet
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 9,610Unearned revenue 4,250Interest payable 650Notes payable, current portion 5,000
Total current liabilities 19,510Notes payable, long-term 73,200
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
4-37
Current Assets – Current Liabilities
Balance SheetBalance SheetBalance SheetBalance Sheet
The difference between current asset and current liabilities is known as working capital.
The difference between current asset and current liabilities is known as working capital.
Current assets $45,540Current liabilities 19,510Working capital $26,030
Mom’s Cookie Mom’s Cookie CompanyCompany
Mom’s Cookie Mom’s Cookie CompanyCompany
4-38
Current Assets ÷ Current LiabilitiesCurrent Assets ÷ Current Liabilities
Balance SheetBalance SheetBalance SheetBalance Sheet
The ratio of current asset and current liabilities is known as
working capital ratio.
The ratio of current asset and current liabilities is known as
working capital ratio.
= 2.33 Current assets $45,540Current liabilities $19,510
Mom’s Cookie Mom’s Cookie CompanyCompany
Mom’s Cookie Mom’s Cookie CompanyCompany
4-39
Balance SheetBalance SheetBalance SheetBalance Sheet
Stockholders’ equity includes (1) amounts paid by owners to a corporation for the purchase of
shares of stock and (2) retained earnings, profits reinvested in the corporation.
Stockholders’ equity includes (1) amounts paid by owners to a corporation for the purchase of
shares of stock and (2) retained earnings, profits reinvested in the corporation.
Stockholders’ equity:Common stock, 10,000 shares issued 100,000Retained earnings 42,990
Total stockholders’ equity 142,990Total liabilities and stockholders’ equity $235,700
4-40
Balance Sheet for Krispy KremeExhibit 4Exhibit 4Exhibit 4Exhibit 4
4-41
Balance Sheet for Krispy KremeExhibit 4Exhibit 4Exhibit 4Exhibit 4
4-42
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
Short-term investments are stocks or debt of other companies that are expected to be sold in the near future.
Allowances for Doubtful Accounts is an account that is used to report the estimated losses resulting from selling on credit and customers being unable to pay.
Other Current AssetsOther Current Assets
4-43
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
Intangible assets are long-term legal rights resulting from the ownership of patents, copyrights, trademarks, and similar items.
Long-term investments occur when a company lends money to or purchases stock issued by other organizations and does not intend to sell those investments in the coming fiscal year.
Other Long-Term AssetsOther Long-Term Assets
4-44
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
A careful review of notes to the financial statements sometimes is
important for a proper understanding of the items reported by a company.
A careful review of notes to the financial statements sometimes is
important for a proper understanding of the items reported by a company.
4-45
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
Deferred taxes represent income tax expenses that have not been paid and will not be paid during the coming year.
Minority interest represents the portion of a corporation’s subsidiaries not owned by the parent corporation.
Other Long-Term LiabilitiesOther Long-Term Liabilities
4-46
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
The number of shares of common stock authorized is the maximum number of shares the company can issue under the current charter.
Stockholders’ EquityStockholders’ Equity
4-47
Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content
Comprehensive income is the change in a company’s owners’ equity during a period that is the result of all non-owner transactions and activities.
Comprehensive IncomeComprehensive Income
4-48
44Explain information presented on a company’s statement of stockholders’ equity.
ObjectiveObjectiveObjectiveObjective
4-49
The statement of stockholders’ equity provides information about
changes in owners’ equity for a corporation during a fiscal period.
The statement of stockholders’ equity provides information about
changes in owners’ equity for a corporation during a fiscal period.
The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity
4-50
Changes in Corporate EquityExhibit 5Exhibit 5Exhibit 5Exhibit 5
4-51
Dividends are a reduction in Retained Earnings and
are reported on the statement of stockholders’
equity.
Dividends are a reduction in Retained Earnings and
are reported on the statement of stockholders’
equity.
The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity
4-52
The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity
Income Statement
Net income
Income Statement
Net income
Statement of Stockholders’ Equity
Beginning stockholders’Equity
+ Net income– Dividends+ Stock issued– Stock repurchased
Ending stockholders’ equity
Statement of Stockholders’ Equity
Beginning stockholders’Equity
+ Net income– Dividends+ Stock issued– Stock repurchased
Ending stockholders’ equity
Balance Sheet
Stockholders’ equity
Balance Sheet
Stockholders’ equity
4-53
Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements
Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements
Amounts on the Balance Sheet
Beginning of Fiscal Period
Amounts on the Balance Sheet
Beginning of Fiscal Period
Changes Reported on the Income Statement and Statement of Cash Flows
Changes Reported on the Income Statement and Statement of Cash Flows
+–
Amounts on the Balance Sheet
End of Fiscal Period
Amounts on the Balance Sheet
End of Fiscal Period
=
4-54
Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements
Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements
The relationship among financial statements in which the numbers on one statement explain numbers on
other statements is called articulation.
The relationship among financial statements in which the numbers on one statement explain numbers on
other statements is called articulation.
4-55
55Identify some of the primary limitations of financial statements.
ObjectiveObjectiveObjectiveObjective
4-56
1. Many of the numbers reported in financial statements result from estimates and allocations.
Limitations of Financial Limitations of Financial StatementsStatements
Limitations of Financial Limitations of Financial StatementsStatements
4-57
Limitations of Financial Limitations of Financial StatementsStatements
Limitations of Financial Limitations of Financial StatementsStatements
2. Use of historical costs reports assets and liabilities at the purchase or exchange price at the time acquired or incurred.
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Limitations of Financial Limitations of Financial StatementsStatements
Limitations of Financial Limitations of Financial StatementsStatements
3. There is no guarantee that all important transactions are fully reported in a company’s financial statements.
4-59
Limitations of Financial Limitations of Financial StatementsStatements
Limitations of Financial Limitations of Financial StatementsStatements
4. Certain types of resources and costs, such as well-trained workers and skilled managers, are not reported in the financial statements.
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Limitations of Financial Limitations of Financial StatementsStatements
Limitations of Financial Limitations of Financial StatementsStatements
5. Financial statement information is not always timely.
4-61
THE ENDTHE END
CCHAPTERHAPTER F4 F4
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