Financial Statements. M. En C. Eduardo Bustos Farías

Transcription

1 Understanding 1 Financial Statements M. En C. Eduardo Bustos Farías

2 2 Objectives 1. Define the elements of financial statements.

3 3 Balance Sheet It It also is is called a statement of of financial position. A balance sheet is is a financial statement that summarizes the financial position of of a company on a particular date.

4 4 Balance Sheet Elements of a balance sheet: Assets are the probable future economic benefits obtained and controlled by a company as a result of past transactions or events. Liabilities are the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events. Equity is the owners residual interest in the net assets of a company.

5 5 Income Statement An income statement is is a financial statement that summarizes the results of of a company s operations.

6 6 Income Statement The elements of the income statement are: Revenues are inflows or other enhancements of mejoras assets of a company or settlement of its liabilities pagos during a period from delivering or producing entregar goods, rendering services, or other activities that prestar are the company s ongoing major operation. continúan Expenses are outflows or other using up of assets of a company or incurrences of liabilities during a period that are the company s ongoing major operation.

7 7 Income Statement The elements of the income statement are: Gains are increases in equity from peripheral or incidental transactions of a company and from all other transactions and other events and circumstances affecting the company, except those that result from revenues or investments by owners. Losses are decreases in equity from peripheral or incidental transactions of a company, except those that result from expenses or distribution to owners.

8 8 Income Statement Expenses decrease the equity of the company Revenues increase the equity of the company

9 9 Statement of Cash Flows A statement of of cash flows summarizes the cash inflows and outflows of of a company for a period.

10 10 Statement of Cash Flows The elements of a statement of cash flows are: Operating cash flows are the flows of cash from acquiring, selling, and delivering goods for sale, as well as providing services. Investing cash flows are the flows of cash from acquiring and selling investments, property, plant, and equipment, as well as from lending money prestar and collecting on loans. Financing cash flows are the flows of cash to and from the owners and long-term creditors.

11 11 Statement of Changes in Equity A statement of of changes in in equity summarizes the changes in in a company s equity for a period.

12 12 Statement of Changes in Equity A statement of changes in equity contains two elements: Investments by owners are increases in equity resulting from transfers of something valuable to the company from other entities in order to obtain or increase ownership interest. Distribution to owners are decreases in equity of a company caused by transferring assets, rendering services, or incurring liabilities to prestar owners.

13 13 Business Reporting Framework of the Model Financial and nonfinancial data. Management s analysis of the financial and nonfinancial data. Forward-looking information. Information about management and shareholders. Background about the company.

14 14 The Balance Sheet and the Statement of Changes in Stockholders Equity

15 15 Objectives Understand the purposes of the balance sheet. Define the elements of a balance sheet. Explain how to measure the elements of a balance sheet. Classify the assets of a balance sheet. Classify the liabilities of a balance sheet. Report the stockholders equity of a balance sheet.

16 16 Objectives Prepare a statement of changes in stockholders equity. Understand the other disclosure issues for a balance sheet. Describe the SEC integrated disclosures. Explain the reporting techniques used in an annual report.

17 17 FASB Statement of Concepts No. 5 recommends that a full set of financial statements for an accounting period should show a company s...

18 18 FASB Statement of Concepts No. 5 Financial position at the end of the period. Net income for the period. Comprehensive income for the period. Cash flows for the period. Investments by and distributions to owners for the period.

19 Interrelationship of 19 Financial Statements Beginning Balance Sheet Assets Liabilities Stockholders Equity Transactions and Events

20 Interrelationship of 20 Financial Statements Income Statement Revenues Expenses Transactions and Events Statement of Cash Flows Operating Activities Investing Activities Financing Activities

21 Interrelationship of 21 Financial Statements Income Statement Revenues Expenses Statement of Cash Flows Operating Activities Investing Activities Financing Activities Ending Balance Sheet Assets Liabilities Stockholders Equity

22 22 Basic Accounting Equation Assets = Liabilities + Stockholders Equity Economic resources Economic obligations Net assets

23 23 Liquidity The term liquidity is used to describe how quickly an asset can be converted into cash or a liability paid.

24 24 Financial Flexibility Financial flexibility refers to the ability of a company to use its financial resources to adapt to change.

25 25 Operating Capability Operating capability refers to the ability of a company to maintain a given physical level of operations.

26 26 Process for Disclosing Information revelar on the Balance Sheet Identification of what items meet the definition of the elements. Measurement (valuation) of the elements. Reporting (classification) of the elements.

27 Balance Sheet

28 Balance Sheet Assets

29 Balance Sheet Assets Liabilities (Debt) & Equity

30 Balance Sheet Assets Liabilities (Debt) & Equity Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accrued Expenses acumulados Short-term notes Long-Term Liabilities Long-term notes Mortgages hipotecas Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings

31 Elements of the Balance Sheet Assets Assets are probable future economic benefits obtained or or controlled by a company as as a result of of past transactions or or events.

32 Elements of the Balance Sheet Assets The resource must be able to contribute directly or indirectly to the company s future net cash inflows. The company must be able to obtain the future benefit and control others access to it. The transaction or event giving the company the right to or control over the benefit must have occurred.

33 Elements of the Balance Sheet Assets Assets may be natural or or manmade, tangible or or intangible, and exchangeable or or useful in in the company s activities.

34 Elements of the Balance Sheet Liabilities of of a company Liabilities to to are transfer probable assets or or provide future services sacrifices to to other of of entities economic in in the future benefits as as a result arising of of past from transactions present obligations...l or or events.

35 Elements of the Balance Sheet Stockholders Equity Assets = Liabilities + Stockholders Equity Equity is is residual interest in in the assets of of a company that remain after deducting liabilities.

36 Measurement of the Elements of 36 the Balance Sheet Present Value Net Realizable Value Current Market Value Current Cost Historical Cost

37 Measurement of the Elements of 37 the Balance Sheet The historical cost of of an The current cost of of an asset is is the exchange price The asset net realizable is is the amount value of of cash in in the The transaction in in which (or equivalent) that would current market value of of an asset is is the amount the asset was acquired. The present of be required on the date of of an asset is is the amount of value of cash of of (or an equivalent) of asset is is the net of the balance sheet to to obtain of cash (or equivalent) that into amount which of of the asset is is discounted expected could the same asset. be obtained on the expected cash to to be converted inflows less date of of the balance sheet in the in the discounted ordinary operations expected cash by selling the asset in in an of of the outflows company, less any related to to orderly liquidation. expected the asset. conversion costs.

38 38 Limitations of the Balance Sheet Use of of historical cost to to value assets and liabilities does not help assess the likely amounts of of future cash flows. Human resources such as as high-quality management or or highly motivated workers are not included as as assets. Many of of the amounts that a company reports are based on estimates. In In periods of of inflation, the amounts listed do not show the purchasing power of of assets and liabilities.

39 39 Current Assets Current assets are cash and other assets that are expected to to be converted into cash, sold, or or consumed within one en year or or the normal operating cycle, whichever is is longer. Lo que sea

40 40 Operating Cycle process An operating and sell cycle the inventory, is is the average and collect time taken the receivables, Cuentas by por cobrar a company converting to to spend cash them for back inventory,... into cash.

41 41 Current Assets Cash equivalents are risk-free securities, valores such as as money market funds and treasury bills that will mature in in three months or or less from the date acquired by the holder. Cash includes cash on hand and readily available in checking and savings accounts.

42 42 Current Assets Temporary investments in marketable securities include debt and equity securities that are classified as trading securities and availablefor-sale securities.

43 43 Current Assets Receivables include accounts receivable and notes receivable with short-term Inventories maturity dates. include goods held They are listed for resale at their in the normal course estimated collectible of business amounts plus, in the case of a (net realizable Prepaid manufacturing items values). include company, raw insurance, materials rent, and office goods in process. supplies and taxes that will not be converted into cash but will be consumed.

44 44 Current Liabilities Current liabilities are those obligations whose liquidation is is expected to to require the use of of existing current assets, or or the creation of of other current liabilities.

45 45 Long-Term Investments Investment items that management expects to to hold for more than one year influyan or or the operating cycle, whichever is Cualquiera is longer, are classified as as long-term (noncurrent) investments.

46 46 Long-Term Investments A company makes investments for a variety of reasons. The company expects the market value of the investment to increase. The company wishes to receive income from interest or dividends. The company may desire to exercise control over another company or a supplier. The company may acquire property, plant, or equipment for future expansion.

47 47 Property, Plant, and Equipment Also called fixed assets Property, plant, and equipment includes the tangible assets used in the firm s operations.

48 48 Intangible Assets Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence. a registered trademark Trademarks Computer Goodwill software Copyrights Franchises Patents costs Crédito mercantil

49 49 Long-Term Liabilities Long-term liabilities are those obligations that are not expected to require the use of current assets or not expected to create current liabilities within one year or the normal operating cycle (if longer than a year).

50 50 Other Liabilities Deferred tax liabilities and obligations of of a segment of of the company that is is being discontinued are examples of of items that might be included in in this section.

51 51 Conceptual Guidelines FASB suggested guidelines for developing homogeneous classes of assets and liabilities. Reporting assets according to their type or expected function in the central operations or other activities of the company. Reporting as separate items assets and liabilities that affect the financial flexibility of the company differently. Reporting assets and liabilities according to measurement method used to value the items.

52 52 Stockholders Equity Stockholders equity is is the residual interest of the stockholders in the assets of the corporation. The corporation is a A partnership A sole proprietorship involves two complex business or more is a persons single-owner who have organization. Usually agreed to company. combine their there is absentee capital and efforts in the ownership. operations of a company.

53 53 Stockholders Equity Components of Stockholders Equity Contributed capital Retained earnings Accumulated other comprehensive income

54 54 Stockholders Equity Contributed Capital Legal capital is is the Preferred stock minimum amount of of receives preference stockholders equity that the in in declared corporation may not dividends. Common stock carries distribute as as dividends. the right to to vote at at the annual P stockholders meeting and to to share in in residual profits.

55 55 Stockholders Equity Contributed Capital A corporation sells 100 shares of its $5 par common stock for $30 per share. Cash 3,000 Common Stock, $5 par 500 Additional Paid-in Capital on Common Stock 2,500

56 56 Stockholders Equity Contributed Capital A corporation sells 20 shares of its $100 par preferred stock for $110 per share. Cash 2,200 Preferred Stock, $100 par 2,000 Additional Paid-in Capital on Preferred Stock 200

57 57 Stockholders Equity Contributed Capital A corporation sells 100 shares of its no-par common stock at $50 per share. Cash 5,000 Common Stock--No-Par Value 5,000

58 58 Stockholders Equity Retained earnings is is the total amount of corporate net income that has not been distributed to stockholders as dividends. Uses of net income To use in daily operations To maintain its productive facilities For growth

59 59 Stockholders Equity Retained earnings is is the total amount of corporate net income that has not been distributed to stockholders as dividends. Uses of net income To use in daily operations To maintain its productive facilities For growth

60 60 Stockholders Equity Comprehensive Unrealized increases income (gains) includes or both decreases net income (losses) and other in the comprehensive market value of income. investments Accumulated in availablefor-sale securities. income might include four items: Transaction adjustments from converting the other comprehensive financial statements of a company s foreign operations into U. S. dollars. Certain gains and losses on derivative financial instruments. Certain pension liability adjustments.

61 61 Stockholders Equity A company is is required to to report its total comprehensive income for the accounting period.

62 Statement of Changes in 62 Stockholders Equity A This corporation statement must should disclose show the changes investments in its stockholders by and distributions equity account to to owners when issuing during the period, financial among statements. other items.

63 Statement of Changes in 63 Stockholders Equity SCHEDULE A CARON MANUFACTURING COMPANY Statement of Changes in Stockholders Equity For Year Ended December 31, 2000 Accumulated Common Additional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income Total Balance, Jan. 1, 2000 $65,000 $143,400 $ 64,900 $10,000 $283,300 Unrealized increase in value of availablefor-sale securities 2,000 2,000 Net income 62,500 62,500 Cash dividends paid (11,200) (11,200) Common stock issued 6,500 30,500 37,000 Balance, Dec. 31, 2000 $71,500 $173,900 $116,200 $12,000 $373,600

64 64 Summary of Accounting Policies APB Opinion No. 22 requires that a company include a description of of all significant accounting policies as as an integral part of of its financial statements. In particular, when these principles and methods involve-- A selection from existing acceptable alternatives. Principles and methods peculiar to the industry in which the company operates. Unusual or innovative applications of GAAP.

65 65 Derivative Financial Instruments FASB Statement No. 133 requires a company to to recognize all derivative financial instruments as as either assets or or liabilities on the balance sheet. These instruments should be measured at at fair value. Fair value is is the justo amount at at which the instrument could be purchased or or sold in in a current transaction between willing parties.

66 66 Derivative Financial Instruments FASB Statement No. 133 also requires the following information: The type of derivative instruments it it holds. Its objectives in holding the instruments. Its strategies for achieving these objectives.

67 67 Contingent Liabilities and Assets Loss Disclosure No or No Probable (?) Reasonably estimated (?) Yes and Yes Report amount in financial statements Reasonably possible Disclose in notes publicar to the financial statements

68 68 Subsequent Events A subsequent event is is one that occurs between the balance sheet date and the date of issuance of the annual report. End of Accounting Period Annual Report Publication Date Subsequent Events

69 69 SEC Disclosures The Securities and Exchange Commission has the legal authority to to prescribe accounting principles and reporting practices for all regulated companies. A regulated company must file a Form 10-K annual report with the SEC within 90 days of of its fiscal year-end. This report must be filed electronically according to to the EDGAR requirements. Continued

70 70 SEC Disclosures divulgación The SEC requires comparative balance sheets for two years and comparative income statements and statements of of cash flows for three years. The SEC requires specific disclosures of of important accounting information for a five-year period. These include net sales or or operating revenues, income (loss) from continuing operations, and related earnings per share, total assets, long-term obligations and redeemable stock, and cash dividends declared per share.

71 71 Balance Sheet Formats Most companies use the report form or or the account form format in in presenting their balance sheets.

72 72 Balance Sheet Formats xxxx xxxx Total assets Report Form Assets $xxx xxx $xxx Liabilities and Stockholders Equity xxxx $xxx xxxx xxx Total liabilities and stockholders eq. $xxx

73 73 Balance Sheet Formats Assets xxxx xxxx Total assets Account Form In In the seldom-used financial Raramente usado position format, $xxx current assets and current liabilities xxx are listed first $xxx to to emphasize working capital. Liabilities and Stockholders Equity xxxx $xxx xxxx xxx Total liab. & stock. eq. $xxx

74 74 The Income Statement and Statement of Cash Flows

75 75 Objectives 1. Understand the concept of income. 2. Explain the conceptual guidelines for reporting income. 3. Define the elements of an income statement. 4. Describe the major components of an income statement. 5. Compute income from continuing operations.

76 76 Objectives 6. Compute results from discontinued operations. 7. Identify extraordinary items. 8. Prepare a statement of retained earnings. 9. Report comprehensive income. 10. Explain the statement of cash flows. 11. Classify cash flows as operating, investing, or financing.

77 Income Statement SALES -EXPENSES = PROFIT

78 Income Statement SALES Revenue -EXPENSES = PROFIT

79 Income Statement SALES -EXPENSES = PROFIT

80 Income Statement SALES Cost of Goods Sold -EXPENSES = PROFIT

81 Income Statement SALES -EXPENSES Cost of Goods Sold Operating Expenses = PROFIT

82 Income Statement SALES -EXPENSES Cost of Goods Sold Operating Expenses (marketing, administrative) = PROFIT

83 Income Statement SALES -EXPENSES = PROFIT Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs

84 Income Statement SALES -EXPENSES = PROFIT Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs Taxes

85 SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

86 SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

87 SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

88 88 Concepts of Income Capital Maintenance Concept Under this concept, corporate income for a period of time is the amount that may be paid to stockholders during that period and still enable the corporation to be as well off at the end of the period as it was at the beginning.

89 89 Concepts of Income Capital Maintenance Concept Assume a corporation has net assets of $50,000 at the beginning and $90,000 at the end of the year, and that no additional investments or withdrawals were made. retiros Ending net assets $90,000 Less: Additional The investment corporation could 0 Ending net assets pay excluding out $40,000 investment to $90,000 Less: Beginning stockholders net assets and still be (50,000) Total income for as well the year off at year-end. end. $40,000

90 90 Concepts of Income Capital Maintenance Concept Assume a corporation has net assets of $45,000 at the beginning and $80,000 at the end of the year. Stockholders made additional capital investments of $10,000. Ending net assets $80,000 Less: Additional investment -10,000 Ending net assets excluding investment $70,000 Less: Beginning net assets (45,000) Total income for the year $25,000

91 91 Concepts of Income Transactional Approach The transactional approach to Under this concept, income measurement a company is records is its used net assets at their in historical accounting today. cost, and it does not record changes in the asset and liabilities unless a transaction, event, or circumstance has occurred that provides reliable evidence of a change in value.

92 92 Conceptual Reporting Guidelines Providing information about its operating performance separately from other aspects of performance. The FASB suggests that Presenting the results of particularly significant a company s activities or events income that predict the amounts, timing, statement and uncertainty can be of its future income and cash flows. improved by-- Providing information useful for assessing the return on investment. Continued

93 93 Conceptual Reporting Guidelines Providing feedback that enables users to assess their previous predictions of income and its components. Providing information to help assess the cost of maintaining its operating capability. Presenting information about how effectively management has discharged its stewardship gerenciales responsibilities regarding the company s resources.

94 94 Specific Conceptual Guidelines Those items that are judged to be unusual in amount based on past experience should be reported separately. Revenues, Guidelines expenses, gains, on how and losses to that are affected report in different ways by changes in revenues, expenses, economic conditions should be distinguished from one another. gains, and losses. Sufficient detail should be given to aid in understanding the primary relationships among revenues, expenses, gains, and losses. Continued

95 95 Specific Conceptual Guidelines When the measurements of revenues, expenses, gains, or losses are subject to different levels of reliability, they should be reported separately. Items whose amounts must be known for the calculation of summary indicators (e.g., rate of return) should be reported separately.

96 96 Revenues from Revenues delivering are or inflows or producing of of assets goods, of rendering of a company services, or or settlement or of or other of its activities liabilities that during are the a company s period... ongoing major or or central operations. permiten

97 97 Revenues Recognition is is the process of of formally recording and reporting an item in in a company s financial statements.

98 98 Revenues A company usually recognizes revenue at at the time goods are sold or or services are rendered.

99 99 Expenses Expenses rendering are services, outflows or of or of carrying assets of of out a company other activities or or incurrences that are the of of liabilities company s during ongoing a period major from or or delivering central or or producing operations. goods,...

100 100 Cost: Asset or Expense Transaction Cost If a cost results in an economic resource providing future benefits, record it as an... Asset Continue

101 101 Cost: Asset or Expense Transaction Cost If a cost is a result of providing goods or services in a time period, record it as an... Expense

102 102 Cost: Asset or Expense If If the benefits have been used up, the asset is is changed to to an expense.

103 103 Income Statement Content 1. Income from continuing operations. a. a. Sales revenue (net) b. b. Cost of goods sold c. c. Operating expenses d. d. Other items e. e. Income tax expense related to to continued operations

104 104 Income Statement Content 2. Results from discontinued operations. a. a. Income (loss) from operations of discontinued segments (net of income taxes). b. b. Gain (loss) from disposals of discontinued segments (net of income taxes).

105 105 Income Statement Content 3. Extraordinary items (net of income taxes). 4. Cumulative effects of changes in accounting principles (net of income taxes). 5. Net income. 6. Earnings per share. That s it!

106 106 Cost of Goods Sold: BANNER CORPORATION Schedule 1: Cost of Goods Sold For Year Ended December 31, 2000 Merchandising Company Inventory, January 1, 2000 $ 41,000 Purchases $80,300 Freight-in 5,500 Cost of purchases $85,800 Less: Purchases returns (2,800) Net purchases 83,000 Cost of goods available for sale $124,000 Less: Inventory, December 31, 2000 (38,000) Cost of goods sold $ 86,000

107 107 Cost of Goods Sold: BANNER CORPORATION Schedule 1: Cost of Goods Sold Manufacturing For Year Ended Company December 31, 2000 Raw materials used $ 35,000 Direct labor 29,000 Factory overhead Depreciation of factory items $5,100 Heat, light, and power 4,000 Indirect factory labor 7,300 Repairs and maintenance 3,400 Miscellaneous factory expense 1,200 21,000 Continued Current manufacturing costs $ 85,000

108 108 Cost of Goods Sold: Current manufacturing costs $ 85,000 Add: Goods in process, January 1, ,000 Less: Gods in process, December 31, 2000 (29,000) Cost of goods manufactured $ 83,000 Add: Finished goods inventory, Jan. 1, ,000 Cost of goods available for sale $124,000 Less: Finished goods inventory, December 31, 2000 (38,000) Cost of goods sold $ 86,000

109 109 Income Tax Expense Interperiod tax allocation involves allocating a corporation s income tax obligation as as an expense to to various accounting periods because of of temporary (timing) differences between its taxable income and pretax financial income.

110 110 Income Tax Expense Intraperiod tax allocation involves allocating a corporation s total income tax expense for a period to to the various components of of its net income, retained earnings, and other comprehensive income.

111 111 Income Tax Expense Income tax expense is matched against the following: income from continuing operations income (loss) from the operations of a discontinued segment gain (loss) from the disposal of a discontinued segment extraordinary items cumulative effect of any change in accounting principles any prior period adjustments any items of other comprehensive income

112 112 Single-Step Income Statement Revenues Sales revenue $143,700 Interest revenue 1,800 Dividend revenue 600 Total revenues $146,100 Expenses Cost of goods sold $ 86,000 Selling expense 10,200 General and admin. expense 16,000 Depreciation expense 7,800 Continued

113 Expenses (continued) Loss on sale of equipment 4,000 Interest expense 2,100 Income tax expense 6,000 Total expenses (132,100) Income from continuing operations $14,000 Results from discontinued operations Income from operations of segment A (net of $1,950 income taxes) $ 4,550 Loss on disposal of segment A (net of $3,150 income tax) (7,350) (2,800) Income before extraordinary items $ 11,200 Continued 113

114 Income before extraordinary items $ 11,200 Extraordinary loss from explosion (net of $750 income tax credit) (1,750) Cumulative effect on prior years income of change in depreciation method (net of $600 income taxes) 1,400 Net income $ 10, Components of Income Earnings per Common Share (8,000 shares) Income from continuing operations $2.80 Results from discontinued operations (0.56) Extraordinary loss from explosion (0.35) Cumulative effect on prior years income 0.28 Net income $2.17

115 115 Income Statement: Results from Discontinued Operations Examples from APB No. 30 The sale by a diversified company of of a major division that represented the company s only activities in in the electronic industry.

116 116 Income Statement: Results from Discontinued Operations The sale by a meat packing company of its 20% interest in a professional football team. Examples from APB No. 30

117 117 Income Statement: Results from Discontinued Operations Income from continuing operations $93,000 Results from discontinued operations: Income from operations of discontinued Division X (net of $2,880 income taxes) $ 6,720 Loss on disposal of Division X (net of $6,000 income tax credit) (14,000) (7,280) Income before extraordinary items $85,720 Reported net of taxes

118 118 Income Statement: Results from Discontinued Operations Discontinued operations are reported on the income statement after the continuing operations, but before extraordinary items.

119 119 Income Statement: Results from Discontinued Operations Income from continuing operations $93,000 Results from discontinued operations: Income from operations of discontinued Division X (net of $2,880 income taxes) $ 6,720 Loss on disposal of Division X (net of $6,000 income tax credit) (14,000) (7,280) Income before extraordinary items $85,720 Component 1: operating income (loss)

120 120 Income Statement: Results from Discontinued Operations Income from continuing operations $93,000 Results from discontinued operations: Income from operations of discontinued Division X (net of $2,880 income taxes) $ 6,720 Loss on disposal of Division X (net of $6,000 income tax credit) (14,000) (7,280) Income before extraordinary items $85,720 Component 2: gain or loss on disposal

121 121 Gain or Loss on Disposal Phase-Out Within Accounting Period 1/1/00 Measurement Date 7/1/00 Pretax operating income, $8,000

122 122 Gain or Loss on Disposal Phase-Out Within Accounting Period Measurement Date 7/1/00 Segment X was sold at a loss of $10,000 (pretax) Disposal Date 12/1/00 Pretax operating income, $2,000

123 123 Gain or Loss on Disposal Phase-Out Within Accounting Period Results from discontinued operations Income from operations of discontinued Segment X (net of $2,400 income taxes) $ 5,600 Operating income 1/1-7/1 $ 8,000 Less taxes (30%) (2,400)

124 124 Gain or Loss on Disposal Phase-Out Within Accounting Period Results from Operating discontinued income operations 7/1-12/1 $ 2,000 Income from Loss operations on sale of of segment discontinued (12,000) Segment Loss X (net (pretax) of $2,400 income $(10,000) taxes) Less tax credit (30%) $ 5,600 3,000 Loss on disposal of Segment X (net of $3,000 income tax credit) (7,000) $(1,400)

125 125 Gain or Loss on Disposal Phase-Out After Fiscal Year-End 1/1/00 Measurement Date 8/1/00 Pretax operating income, $14,000* *Recognized on the measurement date

126 126 Gain or Loss on Disposal Phase-Out After Fiscal Year-End Measurement Date 8/1/00 Fiscal Year-End 12/31/00 Disposal Date 5/1/01 Pretax operating income, $11,000 Pretax operating loss, $8,000

127 127 Gain or Loss on Disposal Phase-Out After Fiscal Year-End Results from discontinued operations Income from operations of discontinued Segment Y (net of $4,200 income taxes) $ 9,800 Operating income 1/1-8/1 $14,000 Less taxes (30%) (4,200)

128 128 Gain or Loss on Disposal Phase-Out After Fiscal Year-End Results from Operating discontinued income operations 8/1/00-5/1/01 $ 3,000 Income from Loss operations on sale of of segment discontinued (22,000) Segment Loss Y (net (pretax) of $4,200 income $(19,000) taxes) Less tax credit (30%) $ 9,800 5,700 Loss on disposal of Segment Y (net of $5,700 income tax credit) (13,300) $(3,500)

129 129 Extraordinary Items An extraordinary item is an event or transaction that is both unusual in nature and infrequent in occurrence. Unusual nature--the underlying Infrequency event of of or or transaction occurrence--the possesses a underlying high degree event of of or or abnormality transaction is is and of of a is is type of of a type that clearly is is not reasonably unrelated to, expected or or only to incidentally to recur the related foreseeable to, the future. ordinary and typical activities of of the company.

130 130 Extraordinary Items Events that the APB identified as not qualifying as extraordinary: The write-down or write-off of receivables, inventories, equipment leased to others, or intangible assets. Gains or losses from exchanges or transactions of foreign currency. Gains or losses from the disposal of a business segment. Continued

131 131 Extraordinary Items Events that the APB identified as not qualifying as extraordinary (continued): Other gains or losses from the sale or abandonment of property, plant, or equipment. The effects of a strike. The adjustment of accruals on long-term contracts.

132 132 Extraordinary Items Event Report Gain (Loss) As No or No Unusual? Infrequent? Income from Continuing Operation (Other Items section)

133 133 Extraordinary Items Event Report Gain (Loss) As No or Unusual? Yes and Extraordinary Item No Infrequent? Yes

134 134 Statement of Retained Earnings Beginning retained earnings $59,200 Plus (minus): Prior period adjustment (net of $2,400 income taxes) 5,600 Adjusted beginning retained earnings $64,800 Plus (minus): Net income (loss) 22,300 $87,100 Minus: Dividends (specifically identified, including per share amounts) (9,400) Ending retained earnings $77,700

135 135 Statement of Retained Earnings Retained earnings is is the link between a corporation s balance sheet and its income statement.

136 136 Comprehensive Income Recall in in Chapter 3 that the FASB now requires companies to to report their comprehensive income (or loss) for the accounting period. A company s comprehensive income consists of of two parts: net income and other comprehensive net income. Currently, there are four items of of a company s other comprehensive income: Continued

137 137 Comprehensive Income Any unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-sale securities. Any change in the excess of its additional pension liability over unrecognized prior service costs. Certain gains and losses on derivative financial instruments. Any transaction adjustment from converting the financial statements of a company s foreign operations into U. S. dollars.

138 138 Comprehensive Income The FASB allows a company to report its comprehensive income under three alternatives: On the face of its income statement. In a separate statement of comprehensive income. In its statement of changes in stockholders equity. The company must display the statement containing the comprehensive income as as a major financial statement in in its annual report.

139 139 Comprehensive Income In In reporting its comprehensive income, a company The other must comprehensive add its other income comprehensive items may be A If income reported to to net If each income. at item at their is gross is reported company is at at its is not required gross amounts amount, or or net then of of tax. the to total to report earnings pretax amount per of of other share on its comprehensive comprehensive income income. must be reduced by the related income tax expense.

140 140 Statement of Cash Flows The statement of cash flows helps users to assess-- The company s ability to generate positive future cash flows. The company s ability to meet its obligations and pay dividends. The company s need for external financing. The reasons for differences between the company s net income and associated cash receipts and payments. Both the cash and noncash aspects of the company s investing and financing transactions.

141 141 Statement of Cash Flows Operating activities include all the transactions and other events related to to its earnings process. Investing activities include all the transactions involving acquiring and selling long-term investment, acquiring and selling property, plant, and equipment, and lending money and collecting on loans. Financing activities include all the transactions involved in in obtaining and disbursing resources from and to to owners and repaying the amounts borrowed.

142 142 Statement of Cash Flows The statement of of cash flows includes three major sections. (1) Net cash flow from operating activities. (2) Cash flows from investing activities. (3) Cash flows from financing activities.

143 143 Statement of Cash Flows In the Net Cash Flows from Operating Activities section, net income is listed first and then adjustments are made to net income (indirect method)-- To eliminate certain amounts that were included in net income but that did not involve a cash inflow or cash outflow for operating activities. To include any changes in the current assets (other than cash) and current liabilities involved in the company s operating cycle that affect cash flow differently than net income.

144 144 Statement of Cash Flows The Cash Flows From Investing Activities section includes all the cash inflows and outflows involved in investing activities transactions of the company. Common investing activities are-- Receipts from selling investments in stocks and debt securities. Receipts from selling property, plant, and equipment. Payments for investments in stocks and debt securities. Payments for purchases of property, plant, and equipment.

145 145 Statement of Cash Flows The Cash Flows From Financing Activities section includes all the cash inflows and outflows involved in the financing activities transactions of the company. Common financing activities are-- Receipts from the issuance of debt securities. Receipts from the issuance of stocks. Payment of dividends. Payments to retire debt securities. Payments to reacquire stock.