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