4-1 Reporting Earnings and Financial Position Electronic Presentation by Douglas Cloud Pepperdine University Chapter F4

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Reporting Earnings Reporting Earnings and Financial Positionand Financial PositionReporting Earnings Reporting Earnings

and Financial Positionand Financial Position

Electronic Presentation by Douglas Cloud

Pepperdine University

Electronic Presentation by Douglas Cloud

Pepperdine University

Chapter Chapter F4F4

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1. Identify the primary financial statements issued by businesses.

2. Explain information presented on a company’s income statement.

3. Explain information presented on a company’s balance sheet.

4. Explain information presented on a company’s statement of stockholders’ equity.

ObjectivesObjectivesObjectivesObjectives

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

ContinuedContinuedContinuedContinued

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5. Identify some of the primary limitations of financial statements.

ObjectivesObjectivesObjectivesObjectives

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Mom’s Cookie CompanyBalance Sheet

January 31, 2004

AssetsCash $ 8,800Merchandise inventory 1,400Equipment 31,000Accumulated depreciation (520)

Total assets $40,680Liabilities and Owners’ Equity

Interest payable $ 200Notes payable 30,000Total liabilities 30,200Contribution by owners 10,000Retained earnings 480

Total liabilities and owners’ equity $40,680

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Mom’s Cookie CompanyBalance Sheet

January 31, 2004

AssetsCash $ 8,800Merchandise inventory 1,400Equipment 31,000Accumulated depreciation (520)

Total assets $40,680Liabilities and Owners’ Equity

Interest payable $ 200Notes payable 30,000Total liabilities 30,200Contribution by owners 10,000Retained earnings 480

Total liabilities and owners’ equity $40,680

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11ObjectiveObjectiveObjectiveObjective

Identify the primary financial statements issued by businesses.

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The Purpose of Financial StatementsThe Purpose of Financial StatementsThe Purpose of Financial StatementsThe Purpose of Financial Statements

Most business organizations prepare three financial statements to report general-purpose accounting information:

1. An income statement

2. A balance sheet

3. A statement of cash flows

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Income StatementIncome StatementIncome StatementIncome Statement

An income statement reports an organization’s revenues and expenses

for a fiscal period.

An income statement reports an organization’s revenues and expenses

for a fiscal period.

Sometimes called an earnings

statement...

Sometimes called an earnings

statement...

…or a profit and loss (P & L)

statement.

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Balance SheetBalance SheetBalance SheetBalance Sheet

The balance sheet reports the balances of the asset, liability, and

owners’ equity accounts at a particular date.

The balance sheet reports the balances of the asset, liability, and

owners’ equity accounts at a particular date.

Sometimes referred Sometimes referred to as a statement of to as a statement of financial position…financial position…

Sometimes referred Sometimes referred to as a statement of to as a statement of financial position…financial position…

……or as a statement or as a statement of financial of financial condition.condition.

……or as a statement or as a statement of financial of financial condition.condition.

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Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

This statement enables creditors, investors, and other users to assess a company’s ability to

meet its cash requirements.

This statement enables creditors, investors, and other users to assess a company’s ability to

meet its cash requirements.

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Statement of Statement of Stockholders’ EquityStockholders’ Equity

Statement of Statement of Stockholders’ EquityStockholders’ Equity

This statement reports changes in a

corporation’s stockholders’ equity for a fiscal period.

This statement reports changes in a

corporation’s stockholders’ equity for a fiscal period.

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22Explain information presented on a company’s income statement.

ObjectiveObjectiveObjectiveObjective

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Mom’s Cookie CompanyIncome Statement

For the Month Ended December 31, 2004

Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net income $ 52,990Earnings per shareAverage number of common shares 4,000

$ 13.25

Sales revenue is revenue from sales of goods and services.

Sales revenue is revenue from sales of goods and services.

Exhibit 1Exhibit 1Exhibit 1Exhibit 1

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Sales revenue $686,400Cost of goods sold (457,600)Gross profit 228,800Selling, general, and administrative expenses (148,300)Operating income 80,500Interest expense (4,800)Pretax income 75,700Income taxes (22,710)Net Income $ 52,990Earnings per shareAverage number of common shares 4,000

$ 13.25

Gross profit is the difference between the selling price of

goods or services sold during a period and the cost of the

goods or services sold.

Gross profit is the difference between the selling price of

goods or services sold during a period and the cost of the

goods or services sold.

Gross profit is a measure of how much a company earned directly from the sale of its products during the current

fiscal period.

Gross profit is a measure of how much a company earned directly from the sale of its products during the current

fiscal period.


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Exhibit 1Exhibit 1Exhibit 1Exhibit 1Mom’s Cookie CompanyIncome Statement



$ 13.25

Operating expenses are costs of resources consumed as part of operating activities

during a fiscal period…

Operating expenses are costs of resources consumed as part of operating activities

during a fiscal period…

…and that are not directly associated with specific

goods or services.

…and that are not directly associated with specific

goods or services.

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$ 13.25

Operating income is the excess of

gross profit over operating expenses.

Operating income is the excess of

gross profit over operating expenses.


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$ 13.25

Other revenues and expenses are not directly related to a company’s

primary operating activities.

Other revenues and expenses are not directly related to a company’s

primary operating activities.


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$ 13.25

These are considered non-operating items and are reported following operating income. Here we see

Interest Expense, which is a common non-operating item.

These are considered non-operating items and are reported following operating income. Here we see

Interest Expense, which is a common non-operating item.

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$ 13.25

Most corporations pay income taxes on their earnings. Mom’s Cookie

Company paid 30 percent of taxable income ($75,700 x .30 = $22,710).

Most corporations pay income taxes on their earnings. Mom’s Cookie

Company paid 30 percent of taxable income ($75,700 x .30 = $22,710).


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$ 13.25

Net income is not cash

Net income is not cash


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$ 13.25

Net income is the amount of profit

earned by a company during a fiscal period.

Net income is the amount of profit

earned by a company during a fiscal period.


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$ 13.25

Earnings per share is a measure of the earnings

performance of each share of common stock during a

fiscal period.

Earnings per share is a measure of the earnings

performance of each share of common stock during a

fiscal period.

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Average Number of Average Number of Shares OutstandingShares OutstandingAverage Number of Average Number of Shares OutstandingShares Outstanding

Mom’s Cookie Company issued 1,000 shares on January 1 and 9,000 shares on September 1.

Mom’s Cookie Company issued 1,000 shares on January 1 and 9,000 shares on September 1.

1,000 x 8/12 = 66710,000 x 4/12 = 3,333Average 4,000

1,000 x 8/12 = 66710,000 x 4/12 = 3,333Average 4,000

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Earnings per ShareEarnings per ShareEarnings per ShareEarnings per Share

Earnings per share of $13.25 for Mom’s Cookie Company was

calculated as follows:

Earnings per share of $13.25 for Mom’s Cookie Company was

calculated as follows:

$52,990 net income

4,000 average shares

$52,990 net income

4,000 average sharesEPS =

$13.25 (rounded) EPS =

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$ 13.25


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Income Statement for Krispy Kreme


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Krispy Kreme’s income statement is a consolidated

statement because it includes a number of companies

owned by the corporation.

Krispy Kreme’s income statement is a consolidated

statement because it includes a number of companies

owned by the corporation.

There are a number of new items listed, such as Equity loss in joint

venture and Minority interest. These accounts are analyzed in a

more advanced accounting course.

There are a number of new items listed, such as Equity loss in joint

venture and Minority interest. These accounts are analyzed in a

more advanced accounting course.

Also note that Krispy Kreme reported two sets of earnings per share numbers, basic and

diluted earnings per share.

Also note that Krispy Kreme reported two sets of earnings per share numbers, basic and

diluted earnings per share.

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33Explain information presented on a company’s balance sheet.


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LEARNING NOTE

An organization’s operating cycle is the period from the time cash is used to

acquire or produce goods until these goods are sold and cash is received.

An organization’s operating cycle is the period from the time cash is used to

acquire or produce goods until these goods are sold and cash is received.

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Mom’s Cookie CompanyAccount Balances

At December 31, 2004

AssetsCurrent assets:

Cash $ 10,680Accounts receivable 8,570Merchandise inventory 23,600Supplies 690Prepaid rent 2,000

Total current assets 45,540Property and equipment, at cost 215,660Accumulated depreciation (25,500)Total assets $235,700

ContinuedContinuedContinuedContinued


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Liabilities and Stockholders’ EquityCurrent liabilities:

Accounts payable $ 9,610Unearned revenue 4,250Interest payable 650Notes payable, current portion 5,000

Total current liabilities 19,510Notes payable, long-term 73,200Total liabilities 92,710Stockholders’ equity:

Common stock, 10,000 shares issued 100,000Retained earnings 42,990

Total stockholders’ equity 142,990Total liabilities and stockholders’ equity $235,700


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Total current assets 45,540Property and equipment, at cost 215,660Accumulated depreciation (25,500)Total assets $235,700


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Current assets are cash or other resources that management expects

to convert to cash or consume during the next fiscal year.

Current assets are cash or other resources that management expects

to convert to cash or consume during the next fiscal year.

Liquid assets are resources that can be converted to cash in a

relatively short period.

Liquid assets are resources that can be converted to cash in a

relatively short period.

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Total current assets 45,540Property and equipment 215,660Accumulated depreciation (25,500)Total assets $235,700


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The process of allocating the cost of plant and equipment to expenses is

known as depreciation.

The process of allocating the cost of plant and equipment to expenses is

known as depreciation.


Property and equipment (often called fixed assets or plant assets) are long-term tangible assets that are used in a

company’s operations rather than being held for resale.

Property and equipment (often called fixed assets or plant assets) are long-term tangible assets that are used in a

company’s operations rather than being held for resale.

The process of allocating the cost of natural resources to expenses is

known as depletion.

The process of allocating the cost of natural resources to expenses is

known as depletion.

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Current liabilities are those obligations that management expects to fulfill during the next fiscal year.

Current liabilities are those obligations that management expects to fulfill during the next fiscal year.


Accounts, wages, interest, unearned revenues, and income taxes payable

all fit in this category.

Accounts, wages, interest, unearned revenues, and income taxes payable

all fit in this category.

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Total current liabilities 19,510Notes payable, long-term 73,200Total liabilities 92,710Stockholders’ equity:

Common stock, 10,000 shares issued 100,000Retained earnings 42,990



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Long-term liabilities are those obligations that are not classified

as current liabilities.

Long-term liabilities are those obligations that are not classified

as current liabilities.




Total current liabilities 19,510Notes payable, long-term 73,200


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Current Assets – Current Liabilities


The difference between current asset and current liabilities is known as working capital.

The difference between current asset and current liabilities is known as working capital.

Current assets $45,540Current liabilities 19,510Working capital $26,030

Mom’s Cookie Mom’s Cookie CompanyCompany


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Current Assets ÷ Current LiabilitiesCurrent Assets ÷ Current Liabilities


The ratio of current asset and current liabilities is known as

working capital ratio.

The ratio of current asset and current liabilities is known as

working capital ratio.

= 2.33 Current assets $45,540Current liabilities $19,510



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Stockholders’ equity includes (1) amounts paid by owners to a corporation for the purchase of

shares of stock and (2) retained earnings, profits reinvested in the corporation.

Stockholders’ equity includes (1) amounts paid by owners to a corporation for the purchase of

shares of stock and (2) retained earnings, profits reinvested in the corporation.

Stockholders’ equity:Common stock, 10,000 shares issued 100,000Retained earnings 42,990


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Balance Sheet for Krispy KremeExhibit 4Exhibit 4Exhibit 4Exhibit 4

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Balance Sheet for Krispy KremeExhibit 4Exhibit 4Exhibit 4Exhibit 4

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Other Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet ContentOther Balance Sheet Content

Short-term investments are stocks or debt of other companies that are expected to be sold in the near future.

Allowances for Doubtful Accounts is an account that is used to report the estimated losses resulting from selling on credit and customers being unable to pay.

Other Current AssetsOther Current Assets

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Intangible assets are long-term legal rights resulting from the ownership of patents, copyrights, trademarks, and similar items.

Long-term investments occur when a company lends money to or purchases stock issued by other organizations and does not intend to sell those investments in the coming fiscal year.

Other Long-Term AssetsOther Long-Term Assets

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A careful review of notes to the financial statements sometimes is

important for a proper understanding of the items reported by a company.

A careful review of notes to the financial statements sometimes is

important for a proper understanding of the items reported by a company.

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Deferred taxes represent income tax expenses that have not been paid and will not be paid during the coming year.

Minority interest represents the portion of a corporation’s subsidiaries not owned by the parent corporation.

Other Long-Term LiabilitiesOther Long-Term Liabilities

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The number of shares of common stock authorized is the maximum number of shares the company can issue under the current charter.

Stockholders’ EquityStockholders’ Equity

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Comprehensive income is the change in a company’s owners’ equity during a period that is the result of all non-owner transactions and activities.

Comprehensive IncomeComprehensive Income

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44Explain information presented on a company’s statement of stockholders’ equity.


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The statement of stockholders’ equity provides information about

changes in owners’ equity for a corporation during a fiscal period.

The statement of stockholders’ equity provides information about

changes in owners’ equity for a corporation during a fiscal period.

The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity

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Changes in Corporate EquityExhibit 5Exhibit 5Exhibit 5Exhibit 5

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Dividends are a reduction in Retained Earnings and

are reported on the statement of stockholders’

equity.

Dividends are a reduction in Retained Earnings and

are reported on the statement of stockholders’

equity.


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Income Statement

Net income

Income Statement

Net income

Statement of Stockholders’ Equity

Beginning stockholders’Equity

+ Net income– Dividends+ Stock issued– Stock repurchased

Ending stockholders’ equity

Statement of Stockholders’ Equity

Beginning stockholders’Equity

+ Net income– Dividends+ Stock issued– Stock repurchased

Ending stockholders’ equity

Balance Sheet

Stockholders’ equity

Balance Sheet

Stockholders’ equity

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Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements


Amounts on the Balance Sheet

Beginning of Fiscal Period


Beginning of Fiscal Period

Changes Reported on the Income Statement and Statement of Cash Flows

Changes Reported on the Income Statement and Statement of Cash Flows

+–


End of Fiscal Period


End of Fiscal Period

=

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The relationship among financial statements in which the numbers on one statement explain numbers on

other statements is called articulation.

The relationship among financial statements in which the numbers on one statement explain numbers on

other statements is called articulation.

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55Identify some of the primary limitations of financial statements.


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1. Many of the numbers reported in financial statements result from estimates and allocations.

Limitations of Financial Limitations of Financial StatementsStatements


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2. Use of historical costs reports assets and liabilities at the purchase or exchange price at the time acquired or incurred.

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3. There is no guarantee that all important transactions are fully reported in a company’s financial statements.

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4. Certain types of resources and costs, such as well-trained workers and skilled managers, are not reported in the financial statements.

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5. Financial statement information is not always timely.

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THE ENDTHE END

CCHAPTERHAPTER F4 F4

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Documents

4-1 Reporting Earnings and Financial Position Electronic Presentation by Douglas Cloud Pepperdine University Chapter F4