1 Making Informed Judgments Part 7 Income Measures Navigating Accounting, ® G. Peter & Carolyn R. Wilson, © NavAcc LLC. Modified by [Your Name].

2Menu  Income definition Income definition  Connecting income statements to balance sheets  Intel  Evolution of balance sheet Evolution of balance sheet  Dissecting changes in owners’ equity Dissecting changes in owners’ equity  Connecting owners’ equity changes to income statement Connecting owners’ equity changes to income statement  Navigating statement of owners’ equity Navigating statement of owners’ equity  Exercises  Perez 1 Perez 1  Perez 2 Perez 2  True- False True- False  Income measurement Income measurement  Closing thoughts Closing thoughts

3 Income Definition  Income measures performance during a reporting period (such as a month or year).  Income is the increase in owners’ equity during the period, excluding the effects of transactions with owners, accounting policy changes, and restatements.  You have an income statement, and measurement aside, your income during a period is based on the increase in your owners’ equity during the period, excluding gifts.  Thus, income is based on the increase in your net worth or equivalently, your net assets (assets – liabilities). Things You Need to Know Return to menu

4 Income Definition Answer the following questions from the perspective of a representative student in your group:  Measurement aside, what events or circumstances will likely have the biggest impact on your income for the period that starts today and ends with this course?  What events and circumstances will likely have the biggest impact on your assets, without having an offsetting affect on your liabilities?  What events and circumstances will likely have the biggest impact on your liabilities, without having an offsetting affect on your assets?  What actions can you take to increase your income over this period? Questions Return to menu

5 Income Definition  Income is the increase in owners’ equity during a reporting period, excluding the effects of transactions with owners, accounting policy changes, and restatements.  The definition of income depends on the definition of owners’ equity, which depends on the definitions of assets and liabilities.  Income statements and balance sheets are connected. Take Aways Return to menu

6 Income Definition  Measurement aside, the best way you can generate income is to increase the financial value of your human capital (earnings power) by studying and learning as much as possible.  Your income is mostly captured by the increase in earnings power during the period plus compensation earned from part-time jobs, less operating costs associated with housing, food, entertainment, tuition, telecommunications, and transportation. Take Aways Return to menu

7 Connecting Income Statements to Balance Sheets Evolution of Intel’s Balance Sheet Return to menu

8 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

9 Things You Need to Know Connecting Income Statements to Balance Sheets (In millions) Return to menu

10 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

11 Connecting Income Statements to Balance Sheets Dissecting Changes in Intel’s Owners’ Equity Return to menu

12 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

13 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

14 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

15 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

16 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

17 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

18 Connecting Income Statements to Balance Sheets Connecting Intel’s Owners’ Equity Changes to the Income Statement Return to menu

19 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

20 Connecting Income Statements to Balance Sheets Navigating Intel’s Statement of Owners’ Equity Return to menu

21 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

22 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

23 Connecting Income Statements to Balance Sheets Things You Need to Know Return to menu

24 Connecting Income Statements to Balance Sheets Exercises Perez 1 Return to menu

25 Connecting Income Statements to Balance Sheets Question Perez 1(a) Return to menu

26 Connecting Income Statements to Balance Sheets Solution Perez 1(a) Return to menu

27 Connecting Income Statements to Balance Sheets Question Perez 1(b) Return to menu

28 Connecting Income Statements to Balance Sheets Solution Perez 1(b) Return to menu

29 Connecting Income Statements to Balance Sheets Question Perez 1(c) Return to menu

30 Connecting Income Statements to Balance Sheets Solution Perez 1(c) Return to menu

31 Connecting Income Statements to Balance Sheets Exercises Perez 2 Return to menu

32 Connecting Income Statements to Balance Sheets Question Perez 2(a) Return to menu

33 Connecting Income Statements to Balance Sheets Solution Perez 2(a) Return to menu

34 Connecting Income Statements to Balance Sheets Question Perez 2(b) Return to menu

35 Connecting Income Statements to Balance Sheets Solution Perez 2(b) Return to menu

36 Connecting Income Statements to Balance Sheets Question Perez 2(c) Return to menu

37 Connecting Income Statements to Balance Sheets Solution Perez 2(c) Return to menu

38 Connecting Income Statements to Balance Sheets Exercises True-False Return to menu

39 Connecting Income Statements to Balance Sheets 1. True or False: Net income for a reporting period is the increase in owners’ equity during the period, excluding the effects of transactions with owners, changes in accounting policies, and restatements. 2. True or False: For revenue to be recognized, net assets must increase. 3. True or False: For expenses to be recognized, net assets must decrease. 4. True or False: The statement of owners’ equity explains how comprehensive income effects balance sheets. Questions Return to menu

40 Connecting Income Statements to Balance Sheets 1. True or False: Net income for a reporting period is the increase in owners’ equity during the period, excluding the effects of transactions with owners, changes in accounting policies, and restatements. This is the definition for comprehensive income. 2. True or False: For revenue to be recognized, net assets must increase. 3. True or False: For expenses to be recognized, net assets must decrease. 4. True or False: The statement of owners’ equity explains how comprehensive income effects balance sheets. Answers Return to menu

41 Connecting Income Statements to Balance Sheets  Balance sheets, income, statements, and statements of owners’ equity are tightly connected.  The statement of owners’ equity helps outsiders distinguish changes in owners’ equity associated with:  Transactions with owners  Distributions to shareholders: dividends or share repurchases  Contributions from shareholders: stock issuances including stock based compensation  Comprehensive income  Net income  Other comprehensive income  Accounting policy changes and restatements Take Aways Return to menu

42 Income Measurement  At the end of this course, a thousand objective measurement experts will measure the income earned by a representative student for the period that starts today and ends with the course.  The representative student’s income is expected to be similar to that earned by you and your classmates over this reporting period.  The experts will interview your group to acquire information needed to complete this task. Things You Need to Know Return to menu

43 Income Measurement  What questions will the experts need to ask the representative student to measure this income?  How reliable is this measure: to what extent would experts agree on the measurement?  How does the reliability of income measures relate to the reliability of balance sheet measures? Questions Return to menu

44 Income Measurement  To determine income measures for a period, you need to first determine the changes in asset and liability measures during the period.  Thus, income measures depend on asset and liability measures.  The dispersion of experts’ estimates of the value of income for a period depends on the entity’s assets and obligations and how changes in experts’ estimates over the period are dispersed. Take Aways Return to menu

45 Closing Thoughts  Balance sheets report the net effects of all entries recorded from the time the entity was founded until the reporting date.  Balance sheets are useful:  Help insiders and outsiders assess companies’ financial health at reporting dates, meaning their ability to:  Meet obligations  Support operations  Weather economic downturns  Finance growth  Balance sheets are imperfect:  Some assets and liabilities are not recognized.  Others are measured with varying degrees of reliability. Return to menu

46 Closing Thoughts  Income statements measure performance over reporting periods.  Income statements are useful:  Help insiders and outsiders assess past performance and predict future performance.  Can significantly affect insiders’ compensation.  Can significantly affect outsiders’ investment decisions.  Income statements are imperfect:  Some revenues, expenses, gains, and losses are not recognized.  Others are measured with varying degrees of reliability. Return to menu