Presentation on theme: "1 The Income Statement Chapter 5. 2 Objectives for the day After reviewing homework… 1. Examine Key Issues relating to Income Statement. 2. Examine the."— Presentation transcript:
24 Key Income Statement Issues 1.Expensing versus Capitalizing? 2.Operating vs. Non- operating? 3. Ordinary vs. Unusual vs. Extraordinary? Death of an Ox?
25 Key Income Statement Issues 4. Pro Forma Income 5. Comprehensive Income --- how to recognize changes in value without causing extreme volatility in income?
26 1. Expensing vs. Capitalizing… Impact on I/S? and on Balance Sheet? World.Com became famous for being aggressive in this area.
27 2. Operating Income 4 Income statement format: –Sales or Revenues. –Deduct Cost of Sales = Gross Profit or Margin –various categories of expenses but not INTEREST. = OPERATING INCOME
28 3. Reporting the Results of Ordinary Operations 4 Income statement format: 4 Operating Income 4 + - Interest 4 + - Investments 4 + - Other 4 = Ordinary Income
29 What do we mean by NON Ordinary? 4 Some companies use the term “unusual” to highlight events that are not typical but do not quality for separate disclosure.
30 Must Report these three below Ordinary Income 4 Discontinued Operations –Shows income related to major segments of the business that have been discontinued. 4 Extraordinary Items –Both unusual in nature and infrequent in occurrence.
31 One more NON-ordinary item…... 4 Changes in Accounting Policies –GAAP requires consistent application of principles from one period to the next. –When a change in principle occurs, special accounting and reporting of the effect of the change is required.
32 4. What is the Fuss about Pro- Forma Income? “Pro forma” is a weasel phrase and can be used to mean too many different things…. E.g. EBITDA Amazon.com
33 5. Valuation to avoid volatility? Available for trading portfolio 4 Foreign currency. 4 Some Pension liabilities 4 Some hedge gains (losses)
34 Do F/S of all industries look the same? Why or why not?
35 Ratios -- Now we can look at Income (often called Return) as a measure against ASSETS, EQUITY, Liabilities, Sales, or any combination thereof….. These are the Profitability ratios.
36 Analyzing the Income Statement, using BALANCE SHEET 4 Return on total assets 4 Return on equity = Net income Average total assets = Net income Average owners’ equity
37 Analyzing the Income Statement -Using SALES Gross Profit Margin = Sales - Cost of goods sold Sales
38 Analyzing the Income Statement - Using SALES 4 Gross Margin % 4 Return on Sales = Sales - Cost of goods sold Sales = Net income Sales
39 Creative Accounting 101 The B/S and I/S are linked, so being “creative” affects both... The two statements FIT together (they articulate)….
40 To do for next time……. 1.Read Puzzle of Cash Flow and chapter 6 2. Do homework 3. Be ready to do a simple Statement of cash flows