Chapter 13

Chapter 13 - Financial Accounting: Chapter 13 Tools for...

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1 13-1 Financial Accounting: Tools for Business Decision Making, 4th Edition Kimmel, Weygandt, Kieso CHAPTER 13 FINANCIAL ANALYSIS: The Big Picture 13-2 Chapter 13 After studying Chapter 13, you should be able to: ± Understand the concept of sustainable income. ± Indicate how irregular items are presented. ± Explain the concept of comprehensive income. ± Describe and apply horizontal analysis. ± Describe and apply vertical analysis. 13-3 After studying Chapter 13, you should be able to: ± Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability. ± Understand the concept of quality of earnings. Chapter 13 13-4 Sustainable Income. .. ± Is the most likely level of income to be obtained in the future. ± Does not include irregular revenues, expenses, gains, or losses. DO FINANCIAL STATEMENTS SERVE AS PSYCHIC UNDERSTANDING, OR HISTORICAL RECORDS? HISTORICAL RECORDS WHY DO POTENTIAL NEW INVESTORS AND CREDITORS CARE ABOUT WHAT ALREADY HAPPENED? THE PAST IS A STRONG INDICATOR OF THE FUTURE. 11 1
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2 13-5 &RPSRQHQWV RI WKH ,QFRPH 6WDWHPHQW Revenue X COGS Y Gross Profit x-y=GP Operating expenses A Income before taxes GP-A=IBT Taxes Tax rate*IBT=T Inc. from continuing Op’s ICO=IBT-T Discontinued op’s (Net of Tax!) D Extraordinary items (Net of Tax!) E Net Income ICO+-D+-E Typical examples: SG&A Depreciation exp. Rent Etc. 13-6 Irregular Items Two types of irregular items are reported -- (all net of taxes) ± discontinued operations ± extraordinary items 11 2 13-7 Discontinued Operations. .. Refers to the disposal of a significant segment of a business. .. ± the elimination of a major class of customers or ± an entire activity. 13-8 Rozek net income of $800,000 from continuing operations in 2007. During 2007 the company discontinued and sold its unprofitable chemical division. The loss in 2007 from chemical operations (net of $90,000 taxes) was $210,000. The tax rate is 30%. Discontinued Operations
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3 13-9 Extraordinary Items. .. Are events and transactions that meet two conditions: ± Unusual in nature ± Infrequent in occurrence HELP FROM BOB: (1) Has not happened before (2) is not expected to happen again. 13-10 ± In 2007 a revolutionary foreign government expropriated property held as an investment by Rozek Inc.
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This note was uploaded on 09/12/2011 for the course ECON 3A taught by Professor Loster during the Spring '07 term at UCSB.

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Chapter 13 - Financial Accounting: Chapter 13 Tools for...

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