Presentation on theme: "Income Statement and Balance Sheet"— Presentation transcript:
1 Income Statement and Balance Sheet Instructor : Ryan Williams
2 Learning Objectives1. 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 StatementOther 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. Think of it like a history book.
4 Basic Income Statement – 2.1 Company NameFor the time period ending dateNet 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 Three Months EndedApril 3, 2009NET OPERATING REVENUES$ ,169Cost of goods sold2,590GROSS PROFIT4,579Selling, general and administrative expenses2,624Other operating charges92OPERATING INCOME1,863Interest income60Interest expense85Equity income — net17Other income (loss) — net(40)INCOME BEFORE INCOME TAXES1,815Income taxes456CONSOLIDATED NET INCOME1,359
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 productCOGS = 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 expensesINTEREST EXPENSE: cost of borrowing moneyTAXES: Federal, state and/or local levelsNET 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 StatementEarnings per share (EPS) : it indicates the profit earned by each share of stock.P/E ratioNet Profit Margin: Net income divided by Net Sales
10 Total Assets = Total Liabilities + Shareholders’ Equity Balance SheetCompany’s resources are identified as:AssetsLiabilitiesOwner’s equityBalance 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.
13 Current assetsCURRENT ASSETS: assets that can be converted into cash within a year (arbitrary)CashMost liquid asset.It includes highly liquid marketable securitiesNet 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 accountsNet A/R = Gross A/R – allowance for doubtful accounts
14 Current assets – cont. Inventory Raw materials, work in process, finished goodsFIFO, LIFO, average costEnd of year inventory= Beginning of year inventory + purchases - COGSTotal current assets= Cash + Net A/R + Inventory
15 = original historical cost – allowable depreciation Long-term assetsFIXED ASSETSEquipment, buildings, vehicles, computers etcPermanent nature; needed for business operationsReported at book value= original historical cost – allowable depreciationGross fixed assets: original cost of assetsAccumulated depreciationStraight-lineAccelerated cost recoveryNet fixed assets= gross fixed assets – accumulated depreciation
16 Total assets (final left hand side) Total assets = Current assets + long-term assetsAssets (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 + L.T. debt CURRENT LIABILITIES Notes payableAccounts payable (A/P)Accrued expenses (accruals)Current portion of long-term debt→ SUM = TOTAL CURRENT LIABILITIESLONG-TERM DEBTLiabilities with maturities in excess of 1 yearTotal liabilities= current liabilities + L.T. debt
18 Equity RETAINED EARNINGS COMMON STOCKCommon stock at parAdditional paid-in capital (capital surplus): additional money generated when company sold stocksRETAINED EARNINGSCumulative total 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 earningsShareholders’ 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 & EquityDebt 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) preferred stock (if any) +shareholders’ equityIn 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 Net Sales- Cost of Goods Sold (COGS)= Gross Profit- Operating Expenses=Operating Profit (EBIT)Interest Expense=Profit Before Taxes (=EBT)Taxes=Net Income