Kế toán, kiểm toán - Chapter 9: The income statement and the statement of cash flows

CHAPTER 9THE INCOME STATEMENT AND THE STATEMENT OF CASH FLOWSMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives What is revenue, and what are the two criteria that permit revenue recognition?How is cost of goods sold determined under both perpetual and periodic inventory accounting systems?What is the significance of gross profit, and how is gross profit calculated and used?What are the principal categories and components of “other operating expenses,” and how are these items reported on the income statement?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives5. What is included in “income from operations,” and why is this income statement subtotal significant to managers and financial analysts?6. What are the components of the earnings per share calculation, and what are the reasons for some of the refinements made in that calculation?7. What are the alternative income statement presentation models?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives 8. What are the unusual items that may appear on the income statement? 9. What are the purpose and general format of the statement of cash flows? What is the difference between the direct and the indirect methods of presenting cash flows from operating activities?11. Why is the statement of cash flows significant to financial analysts and investors who rely on the financial statements? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1What is revenue, and what are the two criteria that permit revenue recognition? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Income StatementAnswers important questions such as:What are the financial results of operations of the entity for the fiscal year?Are sales increasing relative to cost of goods sold and other operating expenses?Reports what has happened over a period of timeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002RevenuesInflows or other enhancements of assets from rendering goods or services that constitute the entity’s ongoing, major operationsTo be recognized, revenue must be:Realized or realizableEarnedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Realization and EarnedRealization – the product or service has been exchanged for cash or claims to cashEarned – the entity has completed the activities it must perform to be entitled to the revenue benefitsBoth criteria are usually satisfied when product being sold is delivered to the customerMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002SalesSales – describes the revenues of firms that sell purchased or manufactured productsSales returns and allowances – a refund or reduced price for defective merchandiseNet sales – gross sales less sales returns and allowancesOther terms for revenues include Rental Revenue, Fees, and Other RevenuesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Shipping TermsFOB destination – the seller owns the product until accepted by the buyer at the buyer’s designated location. Title to the merchandise passes when the merchandise is received by the buyer. Seller incurs shipping costsFOB shipping point – buyer accepts ownership of the product at the seller’s shipping location. Buyer incurs shipping costs. McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002GainsIncreases in net assets resulting from incidental transactions or nonoperating activitiesNot included with revenues at the beginning of the income statementReported as “other income”McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002ExpensesOutflows or other using up of assets or incurrence of liabilities from delivering goods or services that constitute the entity’s ongoing, major operationsBased on the matching principleSome recognized in the period in which they are incurred (administrative expenses)Others are an allocation of cost (depreciation)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002LossesDecreases in an entity’s net assets resulting from incidental transactions or nonoperating activitiesNot included with expenses on the income statementReported after “income from operations”McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2How is cost of goods sold determined under both perpetual and periodic inventory accounting systems?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cost of Goods SoldMost significant expense for many manufacturing and merchandising firmsInventory shrinkage usually includedIs a function of the inventory cost flow assumptionComputed as (under periodic system):Cost of beginning inventory + Net purchases – Cost of ending inventoryMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Net PurchasesPurchases are the inventory bought for resale in a merchandising firmFreight charges are addedPurchase discounts are deductedPurchase returns and allowances – refunds or credits for defective merchandise – are deductedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Expanded Cost of Goods Sold Cost of beginning inventory XX + Purchases XX + Freight charges XX - Purchase discounts XX - Purchase returns and allowances XX Net purchases XX  = Cost of goods available for sale XX - Cost of ending inventory XX = Cost of goods sold XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What is the significance of gross profit, and how is gross profit calculated and used?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Gross Profit or Gross MarginThe difference between sales revenue and cost of goods soldMay be expressed as a dollar amount or as a percentage of sales (gross profit ratio)A measure of the amount of each sales dollar that is available to cover operating expenses and profitCan be used to estimate cost of good sold and ending inventory when physical inventory has not been takenMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Gross Profit RatioGross profit divided by salesCan be used to set selling pricesDiffers by class of merchandise soldSales mix is the proportion of sales of each class of merchandiseOverall gross profit ratio depends on the sales mixMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4What are the principal categories and components of “other operating expenses,” and how are these items reported on the income statement?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Operating ExpensesConsists of:Selling expensesGeneral and administrative expensesResearch and development expensesFootnotes to the financial statements often offer details about these expensesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What is included in “income from operations,” and why is this income statement subtotal significant to managers and financial analysts?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Income From OperationsThe difference between gross profit and operating expensesMost appropriate measure of management’s ability to utilize the firm’s operating assetsExcludes interest expense, interest income, gains and losses, income taxes, and other nonoperating transactionsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Income and ExpensesIncludes interest expense, interest income, gains, and lossesItems that are not significant are reported in “other income” and “other expenses”Nonoperating gains and losses include sale or disposal of assets, losses from inventory obsolescence, and litigation gains and lossesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Income Before Income TaxesListed on the income statement after other income and expensesListed before income tax expenseUsually a footnote to the financial statements discloses detail of the income tax calculationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Net IncomeNet income is often referred to as “the bottom line”All revenues and gains less all expenses and lossesSince net income impacts dividends, stockholders and potential investors are very interested in net incomeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6What are the components of the earnings per share calculation, and what are the reasons for some of the refinements made in that calculation?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Earnings Per ShareUsed to facilitate interpretation of net incomeBasic earnings per share is net income divided by the weighted average number of shares of common stock outstandingDiluted earnings per share also is shown if a firm has convertible securitiesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Calculation of Earnings Per ShareBasic earnings per share =Net income – preferred stock dividendsWeighted average number of common shares outstandingThe weighting of the shares outstanding is done based on the number of months each block of shares has been outstandingMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Earnings PerShare AmountsIf any securities (bonds or preferred stock) are convertible to common stock, diluted earnings per share is reportedIn this calculation, it is assumed that the securities have been converted and the dividends or interest have not been paidEarnings per share also is shown for any unusual items on the income statementMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What are the alternative income statement presentation models?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Income Statement Presentation AlternativesSingle step format uses no breakdowns as to gross profit, operating income, etc.All items are listed in order with no subtotals in the single step formatMultiple step format uses subtotals and categories of income and expensesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What are the unusual items that may appear on the income statement?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Unusual Items Sometimes Seen on an Income StatementIncome statements are used by investors to predict probable results of future operations, but they only want to consider recurring itemsNonrecurring items are reported separately, net of the income tax effect of the eventThese events include: discontinued operations, extraordinary items, minority interest in subsidiaries, and cumulative effect of change in accounting principleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Discontinued OperationsDisclose the impact of a the disposal of a segment or major portion of a businessHelps investors see the impact on the firm’s operations without the disposed business segmentShown net of taxesReport earnings per share effect of disposalMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Extraordinary ItemsMust be unusual in nature and infrequent in occurrence to qualify as an extraordinary item (or if prescribed by the FASB)The event is not likely to recurExamples include: gains and losses from early repayment of long-term debt, litigation settlements, and pension plan terminationsShown net of taxReport earnings per share for extraordinary itemsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Minority Interest in Earnings of SubsidiariesThe financial statements of a subsidiary are combined with those of the parentOnly the parent’s equity in the subsidiary’s earnings is reportedThe minority interest earnings are deducted from income after taxesReported separately only if significantMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cumulative Effect of a Change in Accounting PrincipleA change from one generally accepted accounting principle to another is permitted only if the change is promulgated by a standard-setting body or if the change can be justifiedReport the cumulative effect of the change net of taxMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9What are the purpose and general format of the statement of cash flows?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Statement of Cash FlowsRelatively new financial statementPrimary purpose is to provide relevant information about the cash receipts and cash payments of an entity during a periodKey word is “cash”McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10What is the difference between the direct and the indirect methods of presenting cash flows from operating activities?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cash Flows fromOperating ActivitiesTwo methods of presenting the operating activities section:The direct method involves listing each major class of cash receipts and cash disbursementsThe indirect method explains cash flow by explaining the change in each of the non-cash operating accounts in the balance sheetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Direct MethodLists cash activities such as:Cash received from customersCash paid to merchandise or raw materials suppliersCash paid to employees for wagesCash paid for interestCash paid for income taxesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Indirect MethodBegins with net income and adds back depreciation expenseAdjusts for changes in non-cash operating accounts in the balance sheet such as accounts receivable, inventory, and accounts payableAlso need to include deferred income taxes, gains and losses on assets, and amortization on bonds payableMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cash Flows from Investingand Financing ActivitiesInvesting activities relate to the purchase and sale of noncurrent assets such as land and buildings and debt and equity securitiesFinancing activities relate to changes in noncurrent liabilities and owners’ equity accounts such as issuing bonds or stock and paying dividendsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 11Why is the statement of cash flows significant to financial analysts and investors who rely on the financial statements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Interpreting the Statement of Cash FlowsDid the firm’s cash balance increase or decrease during the period?A firm should have a positive cash flow from operating activitiesCash from operating activities should be greater than cash used for investing activitiesCan often determine a firm’s growth strategy from the statement of cash flowsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002