Week 2 - Analysis of Financial Statements

Week 2 - Analysis of Financial Statements - WEEK 2 ANALYSIS...

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WEEK 2 – ANALYSIS OF FINANCIAL STATEMENTS Week 2 – Topics Topic 2.1 – Income Statement Analysis Topic 2.2 – Cash Flow Analysis Topic 2.3 – Financial Statement Ratio Analysis Topic 2.4 - Internal Control Week 2 - Learning Outcomes Upon completion of Week 2, you should be able to: Analyze and interpret income statement information Analyze a company’s statement of cash flows, and evaluate its cash flow situation Assess an organization’s liquidity, efficiency of asset management, long-term solvency, and profitability, and present the assessment in the form of a written report Explain what is meant by internal control and describe its purpose
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TOPIC 2.1 INCOME STATEMENT ANALYSIS Learning Objectives Upon completion of this topic you should be able to: Explain the advantages of the multi-step income statement as compared to the single-step format Analyze and interpret income statement information The single-step income statement The term single-step income statement refers to an income statement in which all of the various kinds of revenues are presented together, and then all of the various kinds of costs and expenses. The only expense shown separately is Income tax expense. The single-step income statement is the type of income statement that is generally used in Annual Reports to stockholders. Adams Distributors, Inc. Income Statement [single step format] For the year ended December 31, 2001 Revenues: Sales $ 100,000 Interest income 2,000 Gain on sale of equipment 3,000 Total revenues 105,000 Costs and expenses: Cost of goods sold 65,000 Selling, general and administrative 23,000 Interest expense 4,000 Total costs and expenses 92,000 _______ Income before taxes 13,000 Income tax expense 3,000 ______ Net income $ 10,000
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The multi-step income statement The multi-step form of income statement illustrated below is generally preferred by management for internal use since it provides important subtotals such as Gross Profit Margin and Income from Operations. In the illustration below, key operating percentages are shown as well as the amounts, since these ratios help management compare these operating figures not only with prior years, but also with other companies in the same industry. Analysis Questions Adams Distributors, Inc. Income Statement [multi-step format] For the year ended December 31, 2001 Sales revenue Gross sales $ 108,000 Less: sales returns and allowances 8,000 Net sales 100,000 100.0% Cost of goods sold 65,000 ___ Gross profit 35,000 35.0% Operating expenses: Advertising expense 4,000 Depreciation expense 1,000 Rent expense 5,000 Telephone expense 3,000 Wages expense 10,000 Total operating expenses 23,000 ______ Operating income 12,000 12.0% Non-operating revenues (expenses): Interest income 3,000 Gain on sale of equipment 2,000 Interest expense (4,000 ) Total non-operating revenues (expense) 1,000 ______ Income before tax 13,000 13.0% Income taxes 3,000 _______ For certain companies, the amount of returns from customers is important information for management All percentages are based on Net Sales The Gross Profit % is an especially important indicator! Since operating expenses tend to be “fixed”, every $1 increase in sales will produce 35% (35 cents)
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This note was uploaded on 03/28/2011 for the course ACC 501 taught by Professor Patriciam.casey during the Spring '07 term at National.

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Week 2 - Analysis of Financial Statements - WEEK 2 ANALYSIS...

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