Chapter 41 Cash, Short-term Investments and Accounts Receivable Chapter 4

Chapter 9 The Corporate Income Statement and Financial Statement Analysis

Chapter 933 Chapter 9 Learning 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 94 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 95 Avon Consolidated Statement of Income Example

Chapter 96 Investments in Stocks Cost Method Equity Method

Chapter 97 Equity Terms Parent Subsidiary Consolidation Minority Interest

Chapter 98 Visual Recap 9.1 Accounting Methods for Long-term Stock Investments MethodCostEquity 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 99 Investments in Bonds EXHIBIT 9.2 Journal Entries for a Bond Investment Purchased at a Discount DateDescriptionDebitCredit 2009 Apr.1 Investment in Bonds 93,641 Cash93,641 Recorded purchase of $100,000, 10%, 5-year bonds at a market rate of 12%. Sept.30Cash 5,000 Investment in Bonds 636 Interest Revenue 5,636 Received semiannual interest & amortized discount to the investment account.

Chapter 910 Dec.31Interest Receivable2,500 Investment in Bonds 318 Interest Revenue2,818 Accrued semiannual interest & amortized discount to the investment account Mar.31Cash5,000 Investment in Bonds 318 Interest Revenue2,818 Interest Receivable2,500 Received semiannual interest & amortized discount to the investment account. Investment in Bonds Continued

Chapter 911 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 a. Bonds Payable for $95,300. b. Investment in Bonds for $95,300. c. Investment in Bonds for $100,000. d. Bonds Payable for $100,000.

Chapter 912 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 a. Bonds Payable for $95,300. b. Investment in Bonds for $95,300. c. Investment in Bonds for $100,000. d. Bonds Payable for $100,000.

Chapter 913 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 a.increase one period and decrease the next period. b.decrease each period. c.increase each period. d. impossible to determine with the given data.

Chapter 914 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 a. increase one period and decrease the next period. b. decrease each period. c. increase each period. d. impossible to determine with the given data.

Chapter 915 Corporate Income Taxes Taxable income over Not over Tax rate $ 0 50,000 15% 50,000 75,000 25% 75, ,000 34% 100, ,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 916 Two Sets of Books? Temporary Differences Permanent Differences Deferred Tax Liability Deferred Tax Asset

Chapter 917 Income From Noncontinuing Items Discontinued Operations Extraordinary Items Cumulative Effect of a change in Accounting Principle

Chapter 918 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 919 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 920 Corporate Income Statement Format

Chapter 921 An item that is both unusual in nature and infrequent in occurrence is shown on the income statement a. as an extraordinary item before tax. b. as an extraordinary item net of tax. c. with discontinued operations net of tax. d. with discontinued operations before tax.

Chapter 922 An item that is both unusual in nature and infrequent in occurrence is shown on the income statement a. as an extraordinary item before tax. b. as an extraordinary item net of tax. c. with discontinued operations net of tax. d. with discontinued operations before tax.

Chapter 923 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 924 Avon Trend Analysis of Income Statements

Chapter 925 Avon Common-Sized Income Statements

Chapter 926 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 a. 10%. b %. c %. d %.

Chapter 927 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 a. 10%. b %. c %. d %.

Chapter 928 Ratio Analysis

Chapter 929 Ratio Analysis

Chapter 930 Key Financial Liquidity Ratios for Avon

Chapter 931 Key Financial Leverage Ratios for Avon

Chapter 932 Key Financial Leverage Ratios for Avon Continued

Chapter 933 Key Activity Ratios for Avon

Chapter 934 Key Activity Ratios for Avon Continued

Chapter 935 Key Profitability Ratios for Avon

Chapter 936 Key Profitability Ratios for Avon Continued

Chapter 937 Key Market Strength Ratios for Avon

Chapter 938 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 a b c d

Chapter 939 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 a b c d

Chapter 940 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 a b c d

Chapter 941 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 a b c d

Chapter 942 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 a. 30%. b. 20%. c. 70%. d. 10%.

Chapter 943 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 a. 30%. b. 20%. c. 70%. d. 10%.

Chapter 944 Ways to Assess the Quality of a Firm’s Reported Earnings

Chapter 945 THE END!