Unit 3: Financial Statements: Module 3: Financial Statements Overview, Lesson 9: The Income Statement, Lesson: 10: The Statement of Retained Earnings, Lesson 11: The Statement of Cash Flows, Lesson: 12: The Statement of Cash Flows, Module 3 Quiz
Net Income Formula
Net Income= Revenues-Expenses
Kamila Company has asked a local bank for a business loan. In order to process the loan application, the bank is requiring that Kamila provide an income statement for the most recent year. Here are some data from Kamila Company's financial statements. Cost of Goods Sold600Cash70Sales1,500Operating Expenses250Inventory300Interest Expense50Accounts Payable100Income Tax Expense200 Using the data above from Kamila's financial statements, how would Kamila calculate gross profit?
Sales − cost of goods sold
Using the data above from Kamila's financial statements, how would Kamila calculate operating income?
Sales − cost of goods sold − operating expenses
EPS Formula
(Net Income/Outstanding Number of Shares of Stock)
Statement of Retained Earnings: Parts: Exxon Example
+414 b in retained earnings (<2017) +20.8 in net income -13.8 b dividends = 421 b (<2018)
Statement of Retained Earnings: Parts
+begining retained earnings +net income for the period -(minus) dividends paid during the period
Module Quiz #1: What is the purpose of a classified balance sheet?
-A classified balance sheet distinguishes between current and long-term assets. Explan A classified balance sheet is a balance sheet that distinguishes between current and long-term assets.
What is a statement of cash flows?
-A report of the operating, investing, and financing cash flows of a company over a period of time
What is an income statement?
-A report of the revenues and expenses of a company during a period
Which statement best characterizes the elements and purposes of a statement of retained earnings?
-A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time.
Why do the notes to the financial statements contain a summary of significant accounting policies?
-Because accounting involves making assumptions, estimates, and judgments Explan The financial statement notes contain a summary of significant accounting policies because accounting involves making assumptions, estimates, and judgments.
Why do the notes to the financial statements contain additional information about summary totals?
-Because one summary number in the financial statements represents literally thousands of individual items Explan The notes contain additional information about summary totals because one summary number in the financial statements represents literally thousands of individual items.
2. Why do you think gross profit is computed using net sales rather than total revenues?
-Cost of sales is exactly that—the cost of sales. Total revenues includes sales and membership fees (like fees for Sam's Club) and other miscellaneous items. To get gross profit, think of how much of an item's selling price goes to cover other costs. Thus, subtract from selling price (net sales) the cost associated with those sales. The result is gross profit.
Last Info Needed on Income Statements
-Earnings (loss) per share (EPS)
In 2019, Walmart's operating income was up while its net income was down. Review the income statement for 2019 and identify the primary reason for this inconsistency.
-Interest expense was relatively unchanged from 2018 to 2019. Provision for income tax was also relatively consistent from 2018 to 2019. The big difference was related to "Other losses, net." What could that be? There is no way to tell from reading the income statement, but as you will find later in this module, the notes to the financial statements contain a lot of detail to support the numbers in the financial statements. In this instance, Walmart sold its interest in Walmart Brazil at a huge loss and had to write down the value of its investment in JD.com, a Chinese company with which it had formed a strategic alliance. The good news for Walmart is that these two events will likely not recur in the future.
What is a gain?
-Making money from an activity outside the normal activities of a business
Expenses: Examples (3)
-Microsoft: Programmers/Equipment -Walmart: cost of products and buildings -McDonalds: food costs and employees
Which item would be classified in the owners' equity section of the balance sheet?
-Retained earnings
What is net income?
-The amount by which revenues exceed expenses
What is the purpose of the notes to the financial statements?
-The notes present the assumptions needed to help explain financial statements. Explan This is the purpose of the notes to the financial statements.
Information about accounting policies and practices, including assumptions, estimates, and judgments, are included in which element of the financial statements?
-The notes to the financial statements Explan The notes to the financial statements contain information about accounting policies and practices.
Operating Income: Example
-Walmart buy inventory wholesale -sells retail -costs on daily basis like wages
3. Compute Walmart's cost of sales as a percentage of net sales for 2018 and 2019. Did that percentage increase or decrease? What does that increase or decrease mean?
-Walmart's cost of sales as a percentage of net sales increased slightly from 75.3% ($373,396 / $495,761) to 75.5% from 2018 to 2019. That small increase means that Walmart is making a little less on each dollar of sales that it generates. Making a little less on each sales dollar can make a huge difference when you consider how many sales dollars Walmart generates.
Revenues: Examples (3)
-Walmart: selling products and memberships(Sam) -Microsoft: selling software and hardware -Disney: media networks, parks, resorts, studio entertainment, and consumer products
Expenses
-amount of assets consumed in generating revenues -liabilities created: Pension
Revenues
-amount of assets created from the sale of goods or services
Earnings Per Share (EPS)
-amount of net income (earnings) related to each share of stock -computed by dividing net income by the number of shares of stock oustanding during this period
Disclosure
-approach is to not include estimates and judgments in the financial statements but instead to explain them in the notes to the financial statements.
Revenue does not equal
-asset
Big 3 Financial Statements
-balance sheet, income statement, statement of cash flows
2 Types of EPS: Basic
-based on historical transactions and involves dividing net income by actual average shares outstanding during the period
2 Types of EPS
-basic -diluted
2 Types of EPS: Diluted
-bit more complicated and involves estimating what EPS would be if certain stock transactions had occurred.
3 Cash Flow: Categories: Financing
-borrowing -repaying loans -receiving cash invested by shareholder and paying dividends -obtain capital to gain resources -not every day
3 Cash Flow: Categories: Financing: Inflow (2)
-borrowing money -receiving investments from owners
4 Notes: Financial Statements: Supplementary Information
-business segment information -domestic/international sales breakdown -Exxon Mobile
3 Cash Flow: Categories: Investing
-buying and selling long-term assets such as buildings, equipment, land -things business does from time to time -not every day
Which of these activities is an investing activity?
-buying buildings
Retained Earnings is not
-cash
Notes
-contain such information as the assumptions made in computing certain numbers
Gross Profit (Gross Margin)
-difference between sales and cost of goods sold
Dividends
-earnings not retained by business
Recognition
-estimates and judgments in the financial statements
Two frequent Items on Income Statement
-gains -losses
Information Beyond Financial Statements: Disney Example
-how does the company account for film and TV production costs?
Income Statement (Simple)
-how much did you make last month, last quarter, last year
Income Statement helps find out
-if a company is making enough income to give them a loan
2 Types: Cash Flows
-inflows -outflows
2 Categories of Expenses: Non-operating (2) Examples
-interest -income taxes
4 Notes: Financial Statements: Additional Information about Summary Totals (3)
-inventory make-up- raw materials, work-in-process, finished goods -receivables-gross amount and the allowance for bad debts -pension liability-assumptions about interest rates -bank unclaimed revenue
Expenses does not equal
-liabilities
Net Income
-line on the income statement that reports a company's operating income minus interest expense and taxes
Operating Income
-line on the income statement that reports the results of what a company does on a daily basis -calculated by sales minus cost of goods minus operating expenses
Two frequent Items on Income Statement: Losses
-money lost on activities outside of normal business of a company
Two frequent Items on Income Statement: Gains
-money made on activities outside the normal business of a company
Best Measure of Company's Economic Performance
-net income
What is reported on the Income Statement?
-net income
1. Compute Walmart's gross profit (Sales less Cost of Goods Sold) for each year in the table.
-net sales-cost of sales
2 Categories of Expenses: Non-operating
-no connection with specific nature of operating a business
3 Cash Flow: Categories: Operating
-normal business activities -collect cash -pay cash for inventory, employees, rent -do them everyday
/=
-not equal
Revenue /= Asset
-one source of an asset -other sources are borrowing and owner investment
Expense /= Liability
-one use of asset -other uses are buying other assets adn repaying loans -one way to create a liability -athother way is borrowing money
3 Cash Flow: Categories
-operating -investing -financing
2 Categories of Expenses
-operating -non-operating
Net Income (Net Assets Created)
-overall measure of a company's economic performance during a period
Retained Earnings are part of
-owner's equity
2 Types: Cash Flows: Outflows (6)
-paying to buy new machines, buildings, etc -paying cash wages to employees -paying suppliers for inventory pruchases -paying interest on loans -paying principle on loans -paying dividends to owners
3 Cash Flow: Categories: Operating: Outflow (3)
-paying wages -paying utilities -paying taxes
3 Cash Flow: Categories: Investing: Outflow (2)
-purchasing buildings -purchasing land
2 Types: Cash Flows: Inflows (4)
-receiving cash investments from owners -receiving cash from a bank when borrowing money -collecting cash from customers -collecting cash from the sale of old machines, buildings etc
Retained Earnings are
-reinvested into company in the form of equipement and inventory
3 Cash Flow: Categories: Financing: Outflow (2)
-repaying activities -distribution to owners
4 Notes: Financial Statements: Supplementary Information: FASB and SEC
-require supplementary info in financial statement notes -2019 Walmart 25% revenue outside USA
4 Notes: Financial Statements: Summary of Significant Accounting Policies Disney Example
-residual expenses over lifespan in total revenue for each production
4 Notes: Financial Statements: Summary of Significant Accounting Policies (4)
-revenue recognition -inventory methods -depreciation methods -use of estimates -disney account for film and TV production costs
Not all inflows of assets are
-revenues Explan: loans
2 Common Expenses
-salaries and ulitities
3 Cash Flow: Categories: Investing: Inflow (2)
-selling buildings -selling land
Which of these activities is an operating activity?
-selling goods
3 Cash Flow: Categories: Operating: Inflow (2)
-selling goods -providing services
Some Present ____________instead of statement of retained earnings
-statement of stockholder's equity
Statement of Retained Earnings
-statement of the earnings that have been retained in the business
4 Notes: Financial Statements: Disclosure of Information Not Recognized
-status of legal proceedings -subsequent events -cigarette companies
4 Notes: Financial Statements
-summary of significant accounting policies -additional info about summary totals -disclosure of info not recognized -supplementary info
Two frequent Items on Income Statement: Gains Example
-walmart sells old work truck
Balance Sheet (Simple)
-what do you have? -how much do you owe?
4 Notes: Financial Statements: Supplementary Information: Exxon Mobile Example
-would you like to know about the company's proved oil and natural gas reserve?
Accounting Equation Expanded Owner's Equity: Retained Earnings
A=L+E A=L + (Capital Stock + Retained Earnings) A = L+ ( Capital Stock + Cumulative Net Income - Cumulative Dividends)
Dividends Reduce (2)
Assets (Down) Retained Earnings (Down)
