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Cash, Short-term Investments and Accounts Receivable

Cash, Short-term Investments and Accounts Receivable. Chapter 4. Chapter 9. The Corporate Income Statement and Financial Statement Analysis. Chapter 9 Learning Objectives. Account for investments in stocks and bonds. Identify the key elements of the corporate income statement.

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Cash, Short-term Investments and Accounts Receivable

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  1. Cash, Short-term Investmentsand Accounts Receivable Chapter 4 Chapter 4

  2. Chapter 9 The Corporate Income Statement and Financial Statement Analysis

  3. Chapter 9Learning Objectives • Account for investments in stocks and bonds. • Identify the key elements of the corporate income statement. • Compute earnings per share. • Account for corporate income taxes. • Discuss the objectives of, and sources for, information for financial statement analysis for different types of decision makers. • Prepare trend analyses of financial statement data and common-sized financial statements. • Compute key financial ratios including liquidity, leverage, activity, profitability, and market strength ratios. • Assess earnings quality. Chapter 9 3

  4. The Income Statement Income From Operations = Revenue – COGS- General Expenses Other Items include: Interest Income/Expense Earnings (or losses) from stock or bond investments Discontinued operations Extraordinary items Cumulative effects of accounting changes Deferred income taxes Chapter 9

  5. Avon Consolidated Statement of Income Example Chapter 9

  6. Investments in Stocks • Cost Method • Equity Method Chapter 9

  7. Equity Terms • Parent • Subsidiary • Consolidation • Minority Interest Chapter 9

  8. Visual Recap 9.1 Accounting Methods for Long-term Stock Investments Method Cost Equity Ownership < 20% 20%–80% >80% Initial Investment Investment Cash Investment Cash Investment Cash Receipt of Dividends Cash Dividend Revenue Cash Investment Cash Investment Year-End Procedures Debit or credit the Investment account to adjust it to FMV. The other debit or credit will be to Stockholders’ Equity Investment Income from Unconsolidated Affiliates Consolidate the financial statements of both companies; remove the effects of transactions between the two companies. Subtract minority interest. Chapter 9

  9. Investments in Bonds EXHIBIT 9.2 Journal Entries for a Bond Investment Purchased at a Discount Date Description Debit Credit 2009 Apr.1 Investment in Bonds 93,641 Cash 93,641 Recorded purchase of $100,000, 10%, 5-year bonds at a market rate of 12%. Sept.30 Cash 5,000 Investment in Bonds 636 Interest Revenue 5,636 Received semiannual interest & amortized discount to the investment account. Chapter 9

  10. Investment in Bonds Continued Dec. 31 Interest Receivable 2,500 Investment in Bonds 318 Interest Revenue 2,818 Accrued semiannual interest & amortized discount to the investment account. 2010 Mar. 31 Cash 5,000 Investment in Bonds 318 Interest Revenue 2,818 Interest Receivable 2,500 Received semiannual interest & amortized discount to the investment account. Chapter 9

  11. Review Gilbert Company purchases $100,000 face value 10% bonds from Garbo Company for $95,300. To record the purchase of the bonds, Gilbert will debit • Bonds Payable for $95,300. • Investment in Bonds for $95,300. • Investment in Bonds for $100,000. • Bonds Payable for $100,000. Chapter 9 11

  12. Review Gilbert Company purchases $100,000 face value 10% bonds from Garbo Company for $95,300. To record the purchase of the bonds, Gilbert will debit • Bonds Payable for $95,300. • Investment in Bonds for $95,300. • Investment in Bonds for $100,000. • Bonds Payable for $100,000. Chapter 9 12

  13. Review Gilbert Company purchases $100,000 face value 10% bonds from Garbo Company for $103,900. As Gilbert amortizes the premium, the Investment in Bonds account will • increase one period and decrease the next period. • decrease each period. • increase each period. • impossible to determine with the given data. Chapter 9 13

  14. Review Gilbert Company purchases $100,000 face value 10% bonds from Garbo Company for $103,900. As Gilbert amortizes the premium, the Investment in Bonds account will • increase one period and decrease the next period. • decrease each period. • increase each period. • impossible to determine with the given data. Chapter 9 14

  15. Corporate Income Taxes Taxable income over Not over Tax rate $ 0 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,000,000 35% Chapter 9

  16. Two Sets of Books? • Temporary Differences • Permanent Differences • Deferred Tax Liability • Deferred Tax Asset Chapter 9

  17. Income From Noncontinuing Items • Discontinued Operations • Extraordinary Items • Cumulative Effect of a change in Accounting Principle Chapter 9

  18. Discontinued Operations Income Statement will contain: (1) the operating income (or loss) for that business segment (2) the gain (or loss) resulting from the disposal of the segment. Chapter 9

  19. Extraordinary Items Unusual in nature: The event should be highly abnormal, taking into account the environment in which the entity operates AND Infrequent in occurrence: The event should not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates. Chapter 9

  20. Corporate Income Statement Format Chapter 9

  21. Review An item that is both unusual in nature and infrequent in occurrence is shown on the income statement • as an extraordinary item before tax. • as an extraordinary item net of tax. • with discontinued operations net of tax. • with discontinued operations before tax. Chapter 9 21

  22. Review An item that is both unusual in nature and infrequent in occurrence is shown on the income statement • as an extraordinary item before tax. • as an extraordinary item net of tax. • with discontinued operations net of tax. • with discontinued operations before tax. Chapter 9 22

  23. Analytical Techniques • Trend Analysis • Common-sized Financial Statements • Ratio Analysis Trend Analysis: Shows percentage changes from year to year. Common Size Financials: each line item is expressed as a percentage of a major financial statement component within the year. Ratio Analysis: study of relationships between two financial statement items. Chapter 9

  24. Avon Trend Analysis of Income Statements Chapter 9

  25. Avon Common-Sized Income Statements Chapter 9

  26. Review Browning Company reports total assets of $1,200,000 on its December 31, 2010 balance sheet. Accounts receivable is reported at $120,000 and inventory is reported at $230,000. A common-sized balance sheet will report inventory at • 10%. • 29.17%. • 19.17%. • 52.17%. Chapter 9 26

  27. Review Browning Company reports total assets of $1,200,000 on its December 31, 2010 balance sheet. Accounts receivable is reported at $120,000 and inventory is reported at $230,000. A common-sized balance sheet will report inventory at • 10%. • 29.17%. • 19.17%. • 52.17%. Chapter 9 27

  28. Ratio Analysis Chapter 9

  29. Ratio Analysis Chapter 9

  30. Key Financial Liquidity Ratios for Avon Chapter 9

  31. Key Financial Leverage Ratios for Avon Chapter 9

  32. Key Financial Leverage Ratios for Avon Continued Chapter 9

  33. Key Activity Ratios for Avon Chapter 9

  34. Key Activity Ratios for Avon Continued Chapter 9

  35. Key Profitability Ratios for Avon Chapter 9

  36. Key Profitability Ratios for Avon Continued Chapter 9

  37. Key Market Strength Ratios for Avon Chapter 9

  38. Review Current assets and current liabilities for Strong Company are $400,000 and $250,000, respectively. Inventory and prepaid expenses amount to $150,000. The quick ratio is • .625. • .375. • 1.00. • 1.60. Chapter 9 38

  39. Review Current assets and current liabilities for Strong Company are $400,000 and $250,000, respectively. Inventory and prepaid expenses amount to $150,000. The quick ratio is • .625. • .375. • 1.00. • 1.60. Chapter 9 39

  40. Review Current assets and current liabilities for Strong Company are $400,000 and $250,000, respectively. Inventory and prepaid expenses amount to $150,000. The current ratio ratio is • .625. • .375. • 1.00. • 1.60. Chapter 9 40

  41. Review Current assets and current liabilities for Strong Company are $400,000 and $250,000, respectively. Inventory and prepaid expenses amount to $150,000. The current ratio ratio is • .625. • .375. • 1.00. • 1.60. Chapter 9 41

  42. Review Gray Company reports net sales of $500,000, gross profit of $350,000, income from operations of $100,000, and net income of $50,000. Gray’s profit margin percentage is • 30%. • 20%. • 70%. • 10%. Chapter 9 42

  43. Review Gray Company reports net sales of $500,000, gross profit of $350,000, income from operations of $100,000, and net income of $50,000. Gray’s profit margin percentage is • 30%. • 20%. • 70%. • 10%. Chapter 9 43

  44. Ways to Assess the Quality of a Firm’s Reported Earnings Chapter 9

  45. THE END! Chapter 9 45

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