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Income Statement and Balance Sheet

Income Statement and Balance Sheet . Instructor : Ryan Williams. Learning Objectives. 1. Recognize items that belong on an Income Statement. 2. Prepare an Income Statement. 3. Calculate COGS given information about changes in inventory. 4. Calculate net profit margin.

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Income Statement and Balance Sheet

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  1. Income Statement and Balance Sheet Instructor : Ryan Williams

  2. Learning Objectives • 1. Recognize items that belong on an Income Statement. • 2. Prepare an Income Statement. • 3. Calculate COGS given information about changes in inventory. • 4. Calculate net profit margin. • 5. Recognize items that belong on a Balance Sheet. • 6. Prepare a Balance Sheet. • 7. Calculate accumulated depreciation, net fixed assets and gross fixed assets. • 8. Discuss the purpose and potential shortcomings of the Income Statement and Balance Sheet. • 9. Calculate dividends paid, number of shares outstanding, earnings per share, and the P/E ratio using the current Income Statement and two most recent Balance Sheets.

  3. Income Statement • Other names: Statement of income, statement of earnings, “P&L” (profit and loss). • This matches revenues & expenses for the same period, it is a SUMMARY of FLOWS, or a recording of cumulative historical activity.

  4. Basic Income Statement – 2.1 Income Statement Company Name For the time period ending date • Net Sales • - Cost of Goods Sold (COGS) • = Gross Profit • - Operating Expenses • =Operating Profit (EBIT) • Interest Expense • =Profit Before Taxes (=EBT) • Taxes • =Net Income

  5. Coca-Cola’s Income Statement

  6. Basic Income Statement Items • NET SALES: sale revenue is recorded when the ownership is transferred from the seller to the buyer. Consider, though, that some revenue is never collected (bad creditors, trial periods, money-back guarantee…) Net sales= Gross sales – (returns & allowances) • COST OF GOODS SOLD (COGS): direct costs of manufacturing/selling a product COGS = Beginning Inventory + Materials purchases – Ending inventory

  7. Basic Income Statement Items • OPERATING EXPENSES: Include management salaries, advertising expenditures, lease payments, repairs & maintenance, R&D, general & administrative expenses • INTEREST EXPENSE: cost of borrowing money • TAXES: Federal, state and/or local levels • NET INCOME: it is the ‘bottom line’ of income statement, and it represents the base profit earned during accounting period

  8. We will go through Assignment 2.1 • Net Sales • - Cost of Goods Sold (COGS) • = Gross Profit • - Operating Expenses • =Operating Profit (EBIT) • Interest Expense • =Profit Before Taxes (=EBT) • Taxes • =Net Income

  9. Income Statement • Earnings per share (EPS) : it indicates the profit earned by each share of stock. • P/E ratio • Net Profit Margin: Net income divided by Net Sales

  10. Balance Sheet • Company’s resources are identified as: • Assets • Liabilities • Owner’s equity • Balance sheet identity: • “Stock” measure statement: each value is the value of the account at the specific date associated with the balance sheet. • Assets and Liabilities ordered by liquidity (from the most liquid to the less liquid) Total Assets = Total Liabilities + Shareholders’ Equity

  11. Another way to think about it • Balance sheet: Assets: The stuff a company owns. Liabilities & Equity: How a company paid for their stuff. • Income Statement: How much money the company’s stuff is making for them.

  12. Balance Sheet – Table 2.2

  13. Current assets CURRENT ASSETS: assets that can be converted into cash within a year (arbitrary) • Cash • Most liquid asset. • It includes highly liquid marketable securities • Net accounts receivable (Net A/R) • Companies sell products/services on credit, they do not always ask for cash. • Some customers don’t pay up: Allowance for doubtful accounts Net A/R = Gross A/R – allowance for doubtful accounts

  14. Current assets – cont. • Inventory • Raw materials, work in process, finished goods • FIFO, LIFO, average cost End of year inventory = Beginning of year inventory + purchases - COGS Total current assets = Cash + Net A/R + Inventory

  15. Long-term assets FIXED ASSETS • Equipment, buildings, vehicles, computers etc • Permanent nature; needed for business operations • Reported at book value = original historical cost – allowable depreciation • Gross fixed assets: original cost of assets • Accumulated depreciation • Straight-line • Accelerated cost recovery Net fixed assets = gross fixed assets – accumulated depreciation

  16. Total assets (final left hand side) Total assets = Current assets + long-term assets Assets (LHS of balance sheet) must be financed by a combination of liabilities and owner’s equity (RHS of balance sheet) • In other words, the balance sheet has to balance. • If you have constructed a balance sheet and it does not balance, you have done something wrong.

  17. Liabilities • CURRENT LIABILITIES • Notes payable • Accounts payable (A/P) • Accrued expenses (accruals) • Current portion of long-term debt → SUM = TOTAL CURRENT LIABILITIES • LONG-TERM DEBT • Liabilities with maturities in excess of 1 year Total liabilities = current liabilities + L.T. debt

  18. Equity • COMMON STOCK • Common stock at par • Additional paid-in capital (capital surplus): additional money generated when company sold stocks • RETAINED EARNINGS • Cumulativetotal of all net income reinvested into the company: this income is NOT available o shareholders! Annual addition to retained earnings = net income – dividends paid

  19. Total Equity Shareholders’ equity = common stock at par + additional paid-in capital + retained earnings • Shareholders’ equity also known as Net worth, owners’ equity or book value of firm’s equity

  20. Preferred Stock • PREFERRED STOCK • Hybrid security – Mixture of Debt & Equity • Debt component: pays fixed periodic amount (like the interest on debt). • Equity component: if payment is not made, company is not in default (in the case of debt there is default). • Preferred dividends usually cumulative; no voting rights.

  21. Total Liabilities and equity (right hand side) Total liabilities and equity = total liabilities + preferred stock (if any) + shareholders’ equity • In other words, the balance sheet has to balance. • If you have constructed a balance sheet and it does not balance, you have done something wrong.

  22. Next Monday: • You owe me: • Resume, upload picture to MyRobinson • Prepare for Quiz 1: Introduction, Income Statement and Balance Sheet

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