Chapter 13 - Student

Chapter 13 - Student - Chapter 13: Financial Analysis The...

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Chapter 13 : Financial Analysis The Big picture AIS 100 – Introductory
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Study Objectives 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. Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability. Understand the concept of quality of earnings.
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Sustainable Income Irregular items Changes in accounting principles Comprehensive income Alternative accounting methods Pro forma income Improper recognition Price-earnings ratio Liquidity ratios Solvency ratios Profitability ratios Horizontal analysis Vertical analysis Comparative Analysis Ratio Analysis Quality of Earnings Financial Analysis: The Big Picture
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Sustainable Income - Net income adjusted for irregular items. Irregular items are separately identified on the income statement. Two types are: 1. Discontinued operations . 2. Extraordinary items . These “irregular” items are reported net of income taxes. Sustainable Income
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Components of the income statement Sustainable Income
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Discontinued Operations (a) Disposal of a significant component of a business. (b) Income statement should report a gain (or loss) from discontinued operations, net of tax . Sustainable Income
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Extraordinary items are events and transactions that meet two conditions: Both u Unusual in nature and u Infrequent in occurrence Company must consider the environment in which it operates. Amounts reported “net of tax.” Sustainable Income
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Are these considered Extraordinary Items ? u Effects of major natural casualties, if rare in the area. u Effects of major natural casualties, not uncommon in the area. u Write-down of inventories or write-off of receivables. u Expropriation (takeover) of property by a foreign government. Sustainable Income
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u Losses attributable to labor strikes. u Effects of a newly enacted law or regulation, such as a condemnation action. u Gains or losses from sales of property, plant, or equipment. Are these considered Extraordinary Items ? Sustainable Income
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Practice Problem Listed below are some selected Items that may appear on a corporate income statement. Indicate the order in which these items would appear on an income statement. (The first one should be assigned the number “1”, the second “2,” etc.) ______ Extraordinary item ______ Income before income taxes ______ Discontinued operations
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Principle used in the current year is different from one used in the preceding year. u Example - change from FIFO to average cost. u Permissible when management can show new principle is preferable. u
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Chapter 13 - Student - Chapter 13: Financial Analysis The...

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