Transcript 4-1 Chapter F4 Reporting Earnings and Financial Position Electronic Presentation by Douglas Cloud Pepperdine University 4-2 Objectives 1.

4-1
Chapter F4
Reporting Earnings
and Financial Position
Electronic Presentation
by Douglas Cloud
Pepperdine University
4-2
Objectives
1. Identify the primary
financial
Once you
have statements
issued bycompleted
businesses.
this chapter,
2. Explain information
presented
you should be
able to: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.
Continued
4-3
Objectives
5. Identify some of the primary limitations of
financial statements.
3-59
Mom’s Cookie Company
Balance Sheet
January 31, 2004
Assets
Cash
Merchandise inventory
Equipment
Accumulated depreciation
Total assets
Liabilities and Owners’ Equity
Interest payable
Notes payable
Total liabilities
Contribution by owners
Retained earnings
Total liabilities and owners’ equity
$ 8,800
1,400
31,000
(520)
$40,680
$ 200
30,000
30,200
10,000
480
$40,680
4-4
Objective
1
Identify the
primary financial
statements issued
by businesses.
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The Purpose of Financial Statements
Most business organizations prepare three
financial statements to report generalpurpose accounting information:
1. An income statement
2. A balance sheet
3. A statement of cash flows
4-6
Income Statement
An income statement
reports an organization’s
revenues and expenses
for a fiscal period.
Sometimes
…or
a profit
called
an
and loss
earnings
(P & L)
statement...
statement.
4-7
Balance Sheet
The balance sheet
…or as
statement
reports
thea balances
Sometimes
referredof
the
liability, and
to asset,
asofa financial
statement
of
condition.
owners’
equity
accounts
financial
position…
at a particular date.
4-8
Statement of Cash Flows
This statement enables
creditors, investors, and
other users to assess a
company’s ability to
meet its cash
requirements.
4-9
Statement of
Stockholders’ Equity
This statement
reports changes in a
corporation’s
stockholders’ equity
for a fiscal period.
4-10
Objective
2
Explain
information
presented on a
company’s income
statement.
4-11
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Cost of goods sold
Gross Sales
profit revenue is
Selling, revenue
general, andfrom
administrative
expenses
sales of goods and
Operating income
services.
Interest expense
Pretax income
Income taxes
Net income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-12
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
$686,400
Cost of goods sold
(457,600)
Gross profit
228,800
Selling, general, and administrative
Gross profit
profitisisthe
a measure
of
difference
expenses Gross
(148,300)
Operating income
80,500
how
muchthe
a company
earned
between
selling price
of
Interest expense
(4,800)
directly
from
the
sale
of
its
goods or services sold during
a
Pretax income
75,700
products
during
current
period
and the
costthe
of the
goods
Income taxes
(22,710)
Net Income
period.
orfiscal
services
sold. $ 52,990
Earnings per share
$ 13.25
Average number of common shares
4,000
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Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Cost of goods sold
Gross profit
Selling, general, and administrative
expenses
Operating income
Interest expense
Operating
expenses
are
costs
…and
that
are
not
directly
Pretax
income consumed as part
of
resources
associated
Income taxes with specific goods
ofNet
operating
during
a
Income or activities
services.
Earningsfiscal
per share
period…
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
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Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Operating income is
Salesexcess
revenue of gross
the
Cost of goods sold
profit
over operating
Gross profit
expenses.
Selling,
general, and administrative
$686,400
(457,600)
228,800
expenses
Operating income
Interest expense
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
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Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Other
revenues and expenses
Cost of goods sold
are not directly related to a
Gross profit
company’s
operating
Selling, general,primary
and administrative
expenses activities.
Operating income
Interest expense
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-16
Mom’s Cookie Company
Exhibit 1
Income Statement
are For
considered
the Month non-operating
Ended December 31, 2004
These
items and are reported following
Sales revenue
operating
income. Here we see
Cost of goods sold
InterestGross
Expense,
profit which is a common
non-operating
item.
Selling,
general, and administrative
expenses
Operating income
Interest expense
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-17
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
$686,400
Most corporations
pay income taxes on (457,600)
Cost of goods sold
their
earnings.
Mom’s Cookie
Gross
profit
228,800
Selling,
general,
and administrative
Company
paid
30 percent
of taxable
expenses
(148,300)
income
($75,700
x .30 = $22,710).
Operating
income
80,500
Interest expense
(4,800)
Pretax income
75,700
Income taxes
(22,710)
Net Income
$ 52,990
Earnings per share
$ 13.25
Average number of common shares
4,000
4-18
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
$686,400
Cost of goods sold
(457,600)
Gross profit
228,800
Selling, general, and administrative
expenses
Net income(148,300)
is
Operating income
not cash 80,500
Interest expense
(4,800)
Pretax income
75,700
Income taxes
(22,710)
Net Income
$ 52,990
Earnings per share
$ 13.25
Average number of common shares
4,000
4-19
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Cost of goods
sold
Net income
is the
profit earned
amountGross
of profit
Selling, general, and administrative
by a company
expensesduring a
Operating
income
fiscal
period.
Interest expense
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-20
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Earnings
per
share
is
a
Cost of goods sold
measure
the earnings
Grossof
profit
Selling, general,
andshare
administrative
performance
of each
expenses
of common
stock
during
a
Operating income
fiscal expense
period.
Interest
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-21
Average Number of
Shares Outstanding
Mom’s Cookie Company issued
1,000 shares on January 1 and
9,000 shares on September 1.
1,000 x 8/12 =
667
10,000 x 4/12 = 3,333
Average
4,000
4-22
Earnings per Share
Earnings per share of $13.25 for
Mom’s Cookie Company was
calculated as follows:
EPS =
$52,990 net income
4,000 average shares
EPS = $13.25 (rounded)
4-23
Mom’s Cookie Company
Exhibit 1
Income Statement
For the Month Ended December 31, 2004
Sales revenue
Cost of goods sold
Gross profit
Selling, general, and administrative
expenses
Operating income
Interest expense
Pretax income
Income taxes
Net Income
Earnings per share
Average number of common shares
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$ 13.25
4,000
4-24
Exhibit 2
Income Statement
for Krispy Kreme
4-25
There
are Kreme’s
a numberincome
of new items
Krispy
Also note
that
Krispyloss
Kreme
listed,
such
as
Equity
in joint
statement is a consolidated
reported
two
sets
of earnings
venture
and
Minority
interest.
statement because it includes
a
per share
numbers,
basic
andin a
These
accounts
are
analyzed
number of companies owned
diluted
earnings
per share.
more
advanced
accounting
by the corporation. course.
4-26
Objective
3
Explain information
presented on a
company’s balance
sheet.
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.
4-28
Mom’s Cookie Company
Account Balances
At December 31, 2004
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Supplies
Prepaid rent
Total current assets
Property and equipment, at cost
Accumulated depreciation
Total assets
Continued
Exhibit 3
$ 10,680
8,570
23,600
690
2,000
45,540
215,660
(25,500)
$235,700
4-29
Exhibit 3
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Unearned revenue
Interest payable
Notes payable, current portion
Total current liabilities
Notes payable, long-term
Total liabilities
Stockholders’ equity:
Common stock, 10,000 shares issued
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 9,610
4,250
650
5,000
19,510
73,200
92,710
100,000
42,990
142,990
$235,700
4-30
Mom’s Cookie Company
Account Balances
At December 31, 2004
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Supplies
Prepaid rent
Total current assets
Property and equipment, at cost
Accumulated depreciation
Total assets
Exhibit 3
$ 10,680
8,570
23,600
690
2,000
45,540
215,660
(25,500)
$235,700
4-31
Balance Sheet
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.
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Mom’s Cookie Company
Account Balances
At December 31, 2004
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Supplies
Prepaid rent
Total current assets
Property and equipment
Accumulated depreciation
Total assets
Exhibit 3
$ 10,680
8,570
23,600
690
2,000
45,540
215,660
(25,500)
$235,700
4-33
Balance Sheet
Property and equipment (often called
fixed assets or plant assets) are longterm tangible assets that are used in a
company’s operations rather than being
held for resale.
The process of allocating the cost of
plant
natural
and resources
equipmenttotoexpenses
expensesisis
known
known
asas
depreciation.
depletion.
4-34
Balance Sheet
Current liabilities are those obligations
that management expects to fulfill
during the next fiscal year.
Accounts, wages, interest, unearned
revenues, and income taxes payable
all fit in this category.
4-35
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Unearned revenue
Interest payable
Notes payable, current portion
Total current liabilities
Notes payable, long-term
Total liabilities
Stockholders’ equity:
Common stock, 10,000 shares issued
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
Exhibit 3
$
9,610
4,250
650
5,000
19,510
73,200
92,710
100,000
42,990
142,990
$235,700
4-36
Balance Sheet
Long-term liabilities are those
obligations that are not classified
as current liabilities.
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Unearned revenue
Interest payable
Notes payable, current portion
Total current liabilities
Notes payable, long-term
Exhibit 3
$
9,610
4,250
650
5,000
19,510
73,200
4-37
Balance Sheet
The difference between current
asset and current liabilities is
known as working capital.
Current Assets – Current Liabilities
Mom’s Cookie
Company
Current assets
Current liabilities
Working capital
$45,540
19,510
$26,030
4-38
Balance Sheet
The ratio of current asset and
current liabilities is known as
working capital ratio.
Current Assets ÷ Current Liabilities
Mom’s Cookie
Company
Current assets
Current liabilities
$45,540
=
2.33
$19,510
4-39
Balance 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:
Common stock, 10,000 shares issued
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
100,000
42,990
142,990
$235,700
4-40
Exhibit 4
Balance Sheet for Krispy Kreme
4-41
Exhibit 4
Balance Sheet for Krispy Kreme
4-42
Other Balance Sheet Content
Other Current Assets
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.
4-43
Other Balance Sheet Content
Other Long-Term Assets
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.
4-44
Other 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.
4-45
Other Balance Sheet Content
Other Long-Term Liabilities
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.
4-46
Other Balance Sheet Content
Stockholders’ Equity
The number of shares of common stock
authorized is the maximum number of
shares the company can issue under the
current charter.
4-47
Other Balance Sheet Content
Comprehensive Income
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.
4-48
Objective
4
Explain information
presented on a
company’s statement of
stockholders’ equity.
4-49
The Statement of Stockholders’ Equity
The statement of stockholders’
equity provides information about
changes in owners’ equity for a
corporation during a fiscal period.
4-50
Exhibit 5
Changes in Corporate Equity
4-51
The Statement of Stockholders’ Equity
Dividends are a reduction in
Retained Earnings and are
reported on the statement of
stockholders’ equity.
4-52
The Statement of Stockholders’ Equity
Income
Statement
Net income
Statement of
Stockholders’ Equity
Beginning stockholders’
Equity
+ Net income
– Dividends
+ Stock issued
– Stock repurchased
Ending stockholders’
equity
Balance Sheet
Stockholders’
equity
4-53
Interrelationships Among
Financial Statements
Amounts on the
Balance Sheet
Beginning of
Fiscal Period
+
–
Changes
Reported on the
Income
Statement and
Statement of
Cash Flows
Amounts on the
Balance Sheet
=
End of Fiscal
Period
4-54
Interrelationships Among
Financial Statements
The relationship among financial
statements in which the numbers on one
statement explain numbers on other
statements is called articulation.
4-55
Objective
5
Identify some of
the primary
limitations of
financial
statements.
4-56
Limitations of Financial
Statements
1. Many of the
numbers reported
in financial
statements result
from estimates
and allocations.
4-57
Limitations of Financial
Statements
2. Use of historical costs
reports assets and
liabilities at the
purchase or exchange
price at the time
acquired or incurred.
4-58
Limitations of Financial
Statements
3. There is no guarantee
that all important
transactions are fully
reported in a
company’s financial
statements.
4-59
Limitations of Financial
Statements
4. Certain types of
resources and costs,
such as well-trained
workers and skilled
managers, are not
reported in the
financial statements.
4-60
Limitations of Financial
Statements
5. Financial
statement
information is
not always
timely.
4-61
CHAPTER F4
THE END
4-62