1 / 27

Understanding Financial Reports and the Income Statement

Understanding Financial Reports and the Income Statement. Chapter 2. Learning Objectives. Income statements Operating and non-operating results Quality and conservatism of earnings. A complete set of financial statements includes:. Balance sheet Income statement

Download Presentation

Understanding Financial Reports and the Income Statement

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Understanding Financial Reports and the Income Statement Chapter 2

  2. Learning Objectives • Income statements • Operating and non-operating results • Quality and conservatism of earnings Chap 2

  3. A complete set of financial statements includes: • Balance sheet • Income statement • Statement of changes in equity • Cash flow statement • Explanatory notes Chap 2

  4. Generally Accepted Accounting Principals (GAAP) A complete set of financial statements shows: • Financial position at the end of the period • Earnings for the period • Comprehensive income • Cash flows • Investments by and distributions to owners Chap 2

  5. US Securities Regulations • Annual report to shareholders • Schedule 14A Proxy solicitation materials • Form 10K Annual report • Form 10Q Quarterly filing • Form 8K Current report Chap 2

  6. Proxy Statement Table of Contents (edited)  •  Voting Procedures •  Proposals 1—8 •  Ownership of Securities •  Executive Compensation •  Report of Compensation Committee on Executive Compensation •  Report of Audit and Legal Committee •  Performance Graph •  Other Matters APPENDIX •  Management's Discussion and Analysis of Financial Condition and Results of Operations •  Financial Highlights •  Financial Statements and Notes Chap 2

  7. Form 10K includes • Annual report • Items included by reference to another report • Financial statements included in Proxy statement • Discussion of the nature of business operations • Geographic locations • Stock trading information • Auditor information • Information on management • Other information Chap 2

  8. Auditor’s Report • Unqualified opinion • Statements fairly present the the company’s position or results • Qualified opinion • Everything is fine except for… • Adverse opinion • Statements do not fairly present the the company’s position or results • Disclaimer of opinion • Auditor is unable to state an opinion Chap 2

  9. Of the 4 statements, • the income statement receives the greatest scrutiny by analysts. Chap 2

  10. Chap 2

  11. Nokia Consolidated profit and loss (IAS) Chap 2

  12. Sales revenue • Proceeds from customers in exchange for the delivery of goods or services • Also use the terms revenue and turnover (U.K.) • Generally recognized when earned and realized or realizable • When goods/services are exchanged for cash or claims to cash • Substantially accomplished what must be done • Service revenue is recognized with reference to the percentage of completion Chap 2

  13. Net sales • Sales revenue less returns and allowances • Returns: • Customer returns goods for a refund • Allowance: • Customer retains goods but receive a partial refund if unhappy with quality of merchandise Chap 2

  14. Cost of Sales and Gross Profit • Net sales – Cost of sales = Gross profit • Cost of sales • Direct cost of purchasing or producing the goods or services to be delivered to customers • Also Cost of good sold or Cost of services provided • Retail: purchase cost of goods sold to customers • Manufacturing: material, labor and overhead used in the production of goods • Service: cost required to provide service (labor and supplies) Chap 2

  15. Gross Margin • Gross profit ÷ Sales • Motorola • Margin = (30,004-21,445) ÷30,004 = 28.6% • Nokia • Margin = (31,191-19,787) ÷31,191 = 36.6% Chap 2

  16. Selling, General and Administrative (SG&A) Expenses • Operating expenses including • Salaries • Pension costs • Marketing costs • Insurance • Rent • Depreciation • Other • Generally reported as a single line item Chap 2

  17. Depreciation • Can be a component of Cost of sales or SG&A • Straight-line depreciation • Most common method • Annual expense = (Cost – salvage value) ÷ Life • Accelerated depreciation • Greater expense in early years of assets life Chap 2

  18. Research and Development • Searching for new knowledge and translating this knowledge into a plan or design for a new process or product. • Expensed immediately on the income statement • Purchased in-process R&D appears when one company purchases another Chap 2

  19. Restructuring and Other Charges • Appears when a business reorganizes • Includes charges associated with asset write downs and employee separations • Be aware whether these charges will continue Chap 2

  20. Operating income • Results of primary operations, independent of investment, financing and tax expenses Chap 2

  21. Income statement, continued • Operating Income • Nonoperating income • Peripheral activities: interest income/expense, dividend income, gain/losses on asset sales • Income before income taxes • Provision for income taxes • Expected amount of taxes to be paid • Net income or loss Chap 2

  22. Income statement - Special items • Minority share of income • Subsidiaries owned less than 100% • Discontinued operations • Disposition (actual or planned) of a large component of business • Extraordinary items • Unusual and infrequent • Cumulative effect of change in accounting principles Chap 2

  23. SFAS 154 • Retrospective application: a change in accounting principle is treated by restating comparative financial statements to reflect the new method as though it had been applied all along. • For fiscal year beginning after Dec 15, 2005. • To be consistent with IAS Chap 2

  24. Earnings per share • Basic • Net income/Weighted average number of shares outstanding • Diluted • EPS equation includes securities that can be converted into common stock (options) • As if dilutive securities were exercised • Discontinued operations, extraordinary items and changes in accounting principles are shown in total and on a per share basis Chap 2

  25. Special revenue recognition methods • Long-term contract • Completed contract • Percentage of completion • Warranty contracts Chap 2

  26. Comprehensive income • All income statement items • Other comprehensive income • Change in the value of some securities held for investment • Gain/losses on foreign currency translation Chap 2

  27. Earnings Quality • Earnings that reflect underlying economic effects • Earnings that are better estimates of cash flows • Earnings that are more conservative • Earnings that are more predictable Accounting methods that could affect earnings quality: • depreciation, inventory valuation, revenue recognition, assumptions regarding retirement benefits, reserves (sales returns, bad debts, etc. Chap 2

More Related