Jan 15 Intermed Ch 3 4 - Intermediate – Jan 15 Next Class...

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Unformatted text preview: Intermediate – Jan 15 Next Class: • Read Ch 4 Keiso and Ch 2 Primer & HB sections • P4-1; P4-6; E4-11 • WileyPlus Assignment for Tuesday • Note that questions can be slightly different from text Thursday: E4-16; E4-17 * Assignment is due Thurs Jan 22 - midnight • In class exercise Financial Reporting Financial Reporting • Business Model identifies three activities: 1. Financing • Obtaining cash funding 2. Investing • Use of funding to obtain resources 3. Operating • Use of resources to generate profits Financial statements should capture these fundamental business activities • Financial Reporting Financial Reporting 1. Balance Sheet • Reports financing and investing activities 2. Income Statement • Reports operating and performance related activities 3. Statement of Cash Flows • Reports interrelationship between all three activities Uses and Limitations of the Income Uses and Limitations of the Income Statement Uses: • Evaluate past performance and profitability • Assist in predicting future performance • Assess potential risk or uncertainty in achieving future cash flows Limitations: • Items are excluded if they cannot be measured reliably • Amounts reported are affected by accounting methods used • Use of estimates in measuring income Quality of Earnings Quality of Earnings • The reliability of the information presented is dependent on the quality of earnings • Characteristics of high quality earnings: 1. Nature of Content • Unbiased and determined objectively • Represents economic reality • Reflects earnings from ongoing operations • Can be correlated with cash flows from operations • Based on sound business strategy/model • Presentation • Does not disguise or mislead (transparent) • Information presented is understandable • Also, information is clear and concise Single­Step Income Statement • Presents only two groupings before Income before Discontinued Operations and Extraordinary Items: 1. Revenues (includes gains) 2. Expenses (includes losses) Income tax expense often reported separate from expenses as the last line item in determining net income Advantages: – Simplicity – Eliminates classification problems for revenues and expenses Disadvantage: – Operating and non-operating activities reported together • • • Single­Step Income Statement Revenues Revenues Net Sales Other Revenues (e.g. Dividend, Rental) Expenses Cost of Goods Sold Selling Expenses Administrative Expenses Interest Expense Income Tax Expense Any Gains/Losses from Discontinued Operations or Discontinued or Extraordinary Items must be Extraordinary must disclosed separately from Continuing Operations – Expenses = Net Income Earnings per Share Multiple­Step Income Statement Multiple­Step Income Statement • Operating and non-operating activities are separated • Expenses are classified by function (e.g. Selling and Administrative Expenses, Cost of Goods Sold) • Advantages: • Highlighting regular and irregular activities allows for greater predictive value (assess future earnings) and feedback value (assess past earnings) • Provides better detail to compare companies • Allows for ratio analysis used to assess performance Multiple­Step Income Statement Continuing Operations Continuing •Operating section •Nonoperating section •Income tax •Income/Loss from operations Discontinued Operations •Gain/Loss from disposition •Both reported net of taxes Extraordinary Items •Material gains/losses •Reported net of taxes •Includes other Includes gains/losses not included in net income included Other Comprehensive Income Continuing Operations–Detail Operating Section Operating •Net Sales •Cost of Goods Sold •Selling Expenses •Administrative or General Expenses •Other Revenues and Gains •Other Expenses and Losses •Separate income tax section on Separate Income from Continuing Operations only Operations Nonoperating Section Income Tax ...
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