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Making Informed Judgments

Part 7

Income Measures

Navigating Accounting, G. Peter & Carolyn R. Wilson, © NavAcc LLC, 1991-2009. Modified by [Your Name].

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Income definition

Connecting income statements to balance sheets

Intel

Evolution of balance sheet

Dissecting changes in owners’ equity

Connecting owners’ equity changes to income statement

Navigating statement of owners’ equity

Exercises

Perez 1

Perez 2

True- False

Income measurement

Closing thoughts

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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

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Income Definition

Measurement aside, what events or circumstances will likely have the biggest impact on a representative student’s income for the reporting period that starts today and ends with this course?

What events and circumstances will likely have the biggest impact on the student’s assets, without having an offsetting affect on his or her liabilities?

What events and circumstances will likely have the biggest impact on the student’s liabilities, without having an offsetting affect on his or her assets?

What actions can the student take to increase his or her income over this period?

Questions

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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

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Income Definition

Measurement aside, the best way students can generate income is to increase the financial value of their human capital (earnings power) by studying and learning as much as possible.

Students’ 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

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Connecting Income Statements to Balance Sheets

Evolution of Intel’s Balance Sheet

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Connecting Income Statements to Balance Sheets

INTEL CORPORATIONCONSOLIDATED BALANCE SHEETS

December 27, 2008 and December 29, 2007(In Millions--Except Par Value) 2008 2007AssetsCurrent assets:

Cash and cash equivalents 3,350$ 7,307$ Short-term investments 5,331 5,490 Trading assets 3,162 2,566 Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007) 1,712 2,576 Inventories 3,744 3,370 Deferred tax assets 1,390 1,186 Other current assets 1,182 1,390

Total current assets 19,871 23,885 Property, plant and equipment, net 17,544 16,918 Marketable equity securities 352 987 Other long-term investments 2,924 4,398 Goodwill 3,932 3,916 Other long-term assets 6,092 5,547

Total assets 50,715$ 55,651$ Liabilities and stockholders' equityCurrent liabilities:

Short-term debt 102$ 142$ Accounts payable 2,390 2,361 Accrued compensation and benefits 2,015 2,417 Accrued advertising 807 749 Deferred income on shipments to distributors 463 625 Other accrued liabilities 2,041 2,277

Total current liabilities 7,818 8,571 Long-term income taxes payable 736 785 Deferred tax liabilities 46 411 Long-term debt 1,886 1,980 Other long-term liabilities 1,141 1,142 Commitments and contingencies (Notes 18 and 24)Stockholders' equity:

Preferred stock, $0.001 par value, 50 shares authorized; none issued - - Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued

and outstanding (5,818 in 2007) and capital in excess of par value 12,944 11,653 Accumulated other comprehensive income (loss) (393) 261 Retained earnings 26,537 30,848

Total stockholders' equity 39,088 42,762 Total liabilities and stockholders' equity 50,715$ 55,651$

Intel's 2008 Form 10-K, page 57. www.sec.gov

See accompanying notes in the 10-K.

Things You Need to Know

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Things You Need to Know

Connecting Income Statements to Balance Sheets

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Dissecting Changes in Intel’s Owners’ Equity

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

INTEL CORPORATIONCONSOLIDATED BALANCE SHEETS

December 27, 2008 and December 29, 2007(In Millions--Except Par Value) 2008 2007AssetsCurrent assets:

Cash and cash equivalents 3,350$ 7,307$ Short-term investments 5,331 5,490 Trading assets 3,162 2,566 Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007) 1,712 2,576 Inventories 3,744 3,370 Deferred tax assets 1,390 1,186 Other current assets 1,182 1,390

Total current assets 19,871 23,885 Property, plant and equipment, net 17,544 16,918 Marketable equity securities 352 987 Other long-term investments 2,924 4,398 Goodwill 3,932 3,916 Other long-term assets 6,092 5,547

Total assets 50,715$ 55,651$ Liabilities and stockholders' equityCurrent liabilities:

Short-term debt 102$ 142$ Accounts payable 2,390 2,361 Accrued compensation and benefits 2,015 2,417 Accrued advertising 807 749 Deferred income on shipments to distributors 463 625 Other accrued liabilities 2,041 2,277

Total current liabilities 7,818 8,571 Long-term income taxes payable 736 785 Deferred tax liabilities 46 411 Long-term debt 1,886 1,980 Other long-term liabilities 1,141 1,142 Commitments and contingencies (Notes 18 and 24)Stockholders' equity:

Preferred stock, $0.001 par value, 50 shares authorized; none issued - - Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued

and outstanding (5,818 in 2007) and capital in excess of par value 12,944 11,653 Accumulated other comprehensive income (loss) (393) 261 Retained earnings 26,537 30,848

Total stockholders' equity 39,088 42,762 Total liabilities and stockholders' equity 50,715$ 55,651$

Intel's 2008 Form 10-K, page 57. www.sec.gov

See accompanying notes in the 10-K.

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Things You Need to Know

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Connecting Income Statements to Balance Sheets

Connecting Intel’s Owners’ Equity Changes

to the

Income Statement

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Connecting Income Statements to Balance Sheets

Things You Need to Know

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three Years Ended December 27, 2008(In Millions--Except Per Share Amounts) 2008Net revenue 37,586$ Cost of sales 16,742Gross margin 20,844Research and development 5,722Marketing, general and administrative 5,458Restructuring and asset impairment charges 710Operating expenses 11,890Operating income 8,954Gains (losses) on equity method investments, net (1,380)Gains (losses) on other equity investments, net (376)Interest and other, net 488Income before taxes 7,686Provision for taxes 2,394Net income 5,292$

Basic earnings per common share $0.93Diluted earnings per common share $0.92Weighted average shares outstanding

Basic $5,663.00Diluted $5,748.00

Intel's 2008 Form 10-K, page 56. www.sec.gov

See accompanying notes in the 10-K.

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Connecting Income Statements to Balance Sheets

Navigating Intel’s Statement of Owners’ Equity

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INTEL CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AccumulatedThree Years Ended December 27, 2008 Other(In Millions--Except Per Share Amounts) Number of Comprehensive Retained

Shares Amount Income (Loss) Earnings TotalBalance as of December 29, 2007 5,818 11,653 261 30,848 42,762Components of comprehensive income, net of tax:

Net income - - - 5,292 5,292Other comprehensive income - - (654) - (654)

Total comprehensive income 4,638Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 72 1,132 - - 1,132

Share-based compensation - 851 - - 851Repurchase and retirement of common stock (328) (692) - (6,503) (7,195)Cash dividends declared ($0.5475 per share) - - - (3,100) (3,100)

Balance as of December 27, 2008 5,562 12,944$ (393)$ 26,537$ 39,088$

1 For further discussion of the adjustments recorded at the beginning of f iscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."

Intel's 2008 Form 10-K, page 59. www.sec.gov

See accompanying notes in the 10-K.

Common Stockand Capital

in Excess of Par Value

INTEL CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AccumulatedThree Years Ended December 27, 2008 Other(In Millions--Except Per Share Amounts) Number of Comprehensive Retained

Shares Amount Income (Loss) Earnings TotalBalance as of December 31, 2005 5,919 6,245$ 127$ 29,810$ 36,182$

Components of comprehensive income, net of tax:Net income - - - 5,044 5,044Other comprehensive income - - 26 - 26

Total comprehensive income 5,070

Adjustment for initially applying SFAS No. 158, net of tax1 - - (210) - (210)Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 73 1,248 - - 1,248

Share-based compensation - 1,375 - - 1,375Repurchase and retirement of common stock (226) (1,043) - (3,550) (4,593)Cash dividends declared ($0.40 per share) - - - (2,320) (2,320)

Balance as of December 30, 2006 5,766 7,825 (57) 28,984 36,752

Cumulative-effect adjustments, net of tax1:Adoption of EITF 06-02 - - - (181) (181)Adoption of FIN 48 - - - 181 181

Components of comprehensive income, net of tax:Net income - - - 6,976 6,976Other comprehensive income - - 318 - 318

Total comprehensive income 7,294Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 165 3,170 - - 3,170

Share-based compensation - 952 - - 952Repurchase and retirement of common stock (113) (294) - (2,494) (2,788)Cash dividends declared ($0.45 per share) - - - (2,618) (2,618)

Balance as of December 29, 2007 5,818 11,653 261 30,848 42,762Components of comprehensive income, net of tax:

Net income - - - 5,292 5,292Other comprehensive income - - (654) - (654)

Total comprehensive income 4,638Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 72 1,132 - - 1,132

Share-based compensation - 851 - - 851Repurchase and retirement of common stock (328) (692) - (6,503) (7,195)Cash dividends declared ($0.5475 per share) - - - (3,100) (3,100)

Balance as of December 27, 2008 5,562 12,944$ (393)$ 26,537$ 39,088$

1 For further discussion of the adjustments recorded at the beginning of f iscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."

Intel's 2008 Form 10-K, page 59. www.sec.gov

See accompanying notes in the 10-K.

Common Stockand Capital

in Excess of Par Value

Connecting Income Statements to Balance Sheets

Things You Need to Know

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INTEL CORPORATIONCONSOLIDATED BALANCE SHEETS

December 27, 2008 and December 29, 2007(In Millions--Except Par Value) 2008 2007AssetsCurrent assets:

Cash and cash equivalents 3,350$ 7,307$ Short-term investments 5,331 5,490 Trading assets 3,162 2,566 Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007) 1,712 2,576 Inventories 3,744 3,370 Deferred tax assets 1,390 1,186 Other current assets 1,182 1,390

Total current assets 19,871 23,885 Property, plant and equipment, net 17,544 16,918 Marketable equity securities 352 987 Other long-term investments 2,924 4,398 Goodwill 3,932 3,916 Other long-term assets 6,092 5,547

Total assets 50,715$ 55,651$ Liabilities and stockholders' equityCurrent liabilities:

Short-term debt 102$ 142$ Accounts payable 2,390 2,361 Accrued compensation and benefits 2,015 2,417 Accrued advertising 807 749 Deferred income on shipments to distributors 463 625 Other accrued liabilities 2,041 2,277

Total current liabilities 7,818 8,571 Long-term income taxes payable 736 785 Deferred tax liabilities 46 411 Long-term debt 1,886 1,980 Other long-term liabilities 1,141 1,142 Commitments and contingencies (Notes 18 and 24)Stockholders' equity:

Preferred stock, $0.001 par value, 50 shares authorized; none issued - - Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued

and outstanding (5,818 in 2007) and capital in excess of par value 12,944 11,653 Accumulated other comprehensive income (loss) (393) 261 Retained earnings 26,537 30,848

Total stockholders' equity 39,088 42,762 Total liabilities and stockholders' equity 50,715$ 55,651$

Intel's 2008 Form 10-K, page 57. www.sec.gov

See accompanying notes in the 10-K.

Connecting Income Statements to Balance Sheets

Things You Need to Know

INTEL CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AccumulatedThree Years Ended December 27, 2008 Other(In Millions--Except Per Share Amounts) Number of Comprehensive Retained

Shares Amount Income (Loss) Earnings TotalBalance as of December 29, 2007 5,818 11,653 261 30,848 42,762Components of comprehensive income, net of tax:

Net income - - - 5,292 5,292Other comprehensive income - - (654) - (654)

Total comprehensive income 4,638Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 72 1,132 - - 1,132

Share-based compensation - 851 - - 851Repurchase and retirement of common stock (328) (692) - (6,503) (7,195)Cash dividends declared ($0.5475 per share) - - - (3,100) (3,100)

Balance as of December 27, 2008 5,562 12,944$ (393)$ 26,537$ 39,088$

1 For further discussion of the adjustments recorded at the beginning of f iscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."

Intel's 2008 Form 10-K, page 59. www.sec.gov

See accompanying notes in the 10-K.

Common Stockand Capital

in Excess of Par Value

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Connecting Income Statements to Balance Sheets

Things You Need to Know

INTEL CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AccumulatedThree Years Ended December 27, 2008 Other(In Millions--Except Per Share Amounts) Number of Comprehensive Retained

Shares Amount Income (Loss) Earnings TotalBalance as of December 29, 2007 5,818 11,653 261 30,848 42,762Components of comprehensive income, net of tax:

Net income - - - 5,292 5,292Other comprehensive income - - (654) - (654)

Total comprehensive income 4,638Proceeds from sales of shares through

employee equity incentive plans, net excesstax benefit, and other 72 1,132 - - 1,132

Share-based compensation - 851 - - 851Repurchase and retirement of common stock (328) (692) - (6,503) (7,195)Cash dividends declared ($0.5475 per share) - - - (3,100) (3,100)

Balance as of December 27, 2008 5,562 12,944$ (393)$ 26,537$ 39,088$

1 For further discussion of the adjustments recorded at the beginning of f iscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."

Intel's 2008 Form 10-K, page 59. www.sec.gov

See accompanying notes in the 10-K.

Common Stockand Capital

in Excess of Par Value

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Connecting Income Statements to Balance Sheets

ExercisesPerez 1

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Connecting Income Statements to Balance Sheets

ExercisesPerez 2

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Connecting Income Statements to Balance Sheets

ExercisesTrue-False

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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

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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

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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

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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

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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

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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.

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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

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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.

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