1. Chapter 9 The Corporate Income Statement and
Financial Statement Analysis

2. 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.
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3. 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
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4. Investments in Stocks
Cost Method
Equity Method
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5. Equity Terms Parent Subsidiary Consolidation Minority Interest
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6. 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.
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7. 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 ,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.
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8. 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
Interest Revenue 2,688
Interest Receivable 2,500
To record receipt of semiannual
interest and amortization of
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9. Corporate Income Taxes
Taxable income over Not over Tax rate
$ $ 50, %
50, , %
75, , %
100, , %
335, ,000, %
10,000, ,000, %
15,000, ,333, %
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10. Two Sets of Books? Temporary Differences Permanent Differences
Deferred Tax Liability
Deferred Tax Asset
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11. Income From Noncontinuing Items
Discontinued Operations
Extraordinary Items
Cumulative Effect of a change in Accounting Principle
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12. 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.
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13. 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.
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14. 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.
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15. 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.
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16. Ratio Analysis
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17. Ratio Analysis
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