Chapter 9 The Corporate Income Statement and Financial Statement Analysis

Chapter 9: 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. Prepare common-sized financial statements. Compute key financial ratios including liquidity, leverage, activity, profitability, and market strength ratios. Assess earnings quality. Chapter 9

Income From Operations = Revenue – COGS- General Expenses 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

Investments in Stocks Cost Method Equity Method Chapter 9

Equity Terms Parent Subsidiary Consolidation Minority Interest Chapter 9

Method Cost Equity Visual Recap 9.1 Accounting Methods for Long-term Investment in Other Companies   Method Cost Equity Ownership < 20% 20%–80% >80% Initial Investment Investment Cash Receipt of Dividends Dividend Revenue Year-End Procedures Debit or credit the Investment account to adjust it to FMV. The other debit or credit will be to Stockholders’ Equity 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

Investments in Bonds EXHIBIT 9.2 Journal Entries for a Bond Investment Purchased at a Discount   Date Description Debit Credit 2003 Apr. 1Investment in Bonds Payable 96,231 Cash 96,231 To record purchase of $100,000, 10%, 5-year bonds at a market rate of 11%. Sept. 30 Cash 5,000 Investment in Bonds Payable 377 Interest Revenue 5,377 To record receipt of semiannual interest and amortization of discount to the investment account. Chapter 9

Dec. 31 Interest Receivable 2,500 Investment in Bonds Payable 189 Interest Payable 2,689 To record accrual of 3 month's of interest and amortization of discount to the investment account. 2004 Mar. 31 Cash 5,000 Investment in Bonds Payable 188 Interest Revenue 2,688 Interest Receivable 2,500 To record receipt of semiannual interest and amortization of Chapter 9

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% Chapter 9

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

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

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

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

Cumulative Effect of a Change in Accounting Principle Defined as: the impact on the company's prior years' net incomes had the newly adopted accounting principle been used during those years. Cumulative effect components of an income statement are shown "net of tax" after extraordinary items. Chapter 9

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

Ratio Analysis Chapter 9

Ratio Analysis Chapter 9