C4LO1

What are the three usefulnesses of the IS?

1. Evaluate the past performance of the company.
2. Provide a basis for predicting future performances.
3. Help assess the risk or uncertainty of achieving future cash flows. 

C3LO1

What are the limitations of the IS?

1. The stmt does include many items that contribute to general growth and well-being of a company
2. Income numbers are often affected by the accounting methods used.
3. Income measures are subject to estimates. 

1. Operating Sections
2. Nonoperting sections
3. Income tax
4. Discontinued operations
5. Extraordinary items
6. Non controlling interest
7. Earnings per share

1. Sales and Rev
2. COGS
3. Selling Expenses
4. Administrative or General Expenses

1. Other revenues and Gains
2. Other Expenses and Losses

• Sale of investments or plant assets
• Settlements of liabilities
• Write-offs of assets 

no

Only in multi-step IS

NO.

Income tax is shown on a separate line - not as part of expenses - "ALWAYS SUBTRACTS" 

• Certain components of inc that analysts use to assess financial performance.
• Important relationships

1. Sales
2. COGS
3. Operating Exp (Selling & Admin)

1. Income tax
2. Discontinued operations
3. Extraordinary items
4. Noncontrolling interest
5. Earnings per share

• No details presented; only category totals
• Supplemental schedules support totals
• Highly summarized

1. Net sales-COGS=Gross profit
2. Less Selling & Admin expenses = Inc from operations
3. Other rev and gains
4. Other expenses and losses
5. = Inc b/f taxes
6. Income taxes
7. =Net inc of the year
8. Earning per share 

Discontinued Operations

 destruction of facilities by an earthquake, or the destruction of a vineyard by a hailstorm in a region where hailstorm damage is rare.

VERY RARE

 " The allocation of tax within a period. "

For example, extraordinary items must be reported after income tax on the income statement, while operating revenues are reported before income tax. 

Intraperiod tax allocation on the income statement is 

used for:

(1) income from continuing operations, 

(2) discontinued operations, and

(3) extraordinary items. 

Begin Inventory

ADD: Purchases

Less: Purchase Returns and Allow

Less: Discounts

ADD: Freight in 

= Goods Available for sale

Less: Ending Inventory

= COGS

What is the difference b/t "PreTax" and "Net of Tax"?

PreTax - Before taxes are taken out, therefore taxes will need to be taken out. 

Net of tax - taxes has already been taken out. 

Operations income

Net Income

All "net of tax" items except extraordinary items or unusual items. 

All "net of tax" totals:

IBEI

Ext(Loss/gain)

NI 

SEPARATELY 

Before = PreTax

After = Net of Tax

Note* Remember to put parathesis around any subtractions*

Income taxes (under IBIT)

Taxes from ExtroItems

-Any taxes paid (remember tax savings from losses)

Note* Don't look over detail..

You got a question wrong concerning the Revenue recongnition with words "Cost of" that you didn't see.. which changed the definition .

Note* 

Don't overlook detail concerning headings. 

Look for if you are doing year end statements.

Ex. For the Year Ended December 31, 2014

Just adjusting entires

Ex. Jan, 31 2014

Nominal.

Ex: 

Revenues

Expenes

Gains

Losses 

What detail in ACC named such as 

"Prepaid Insurance Expense"

This would go on the BS because it has Prepaid...

The word prepaid is superior to "Expense"

**Note

Pay close attention to dates for enties and adjustments...

Not seeing dates can change numbers. 

Intraperiod Tax Allocation (Required to show EPS for all "net of tax" category totals. 

- Allocation of tax within a period. 

i.e. Must show taxes for usual sales and extraordinary items in separate sections. 

DEF - An intraperiod tax allocation is the allocation of income taxes to different parts of the results appearing in the income statement of a business, so that some line items are stated net of tax.

 - Common stock dividends - 

You only need the total shares of common stock for the denominator. 

Stock in arrears 

DEF = the omitted dividends on cumulative preferred stock.

NONCUMULATIVE preferred stock

INFO** 

In the case that preferred shares are cumulative, holders are entitled to any missed or omitted dividends. For example, let's assume that ABC Company chooses to not pay its $1.10 annual dividend to its cumulative preferred stockholders.

1. Unusual gains and losses
2. Discontined operations
3. Extraordinary items
4. Noncontrolling items

1. Losses on the write-down or write-off of assets
2. Gains or lossess from exchange or translation of oreign currencies
3. Restructuring charges
4. Other gains and losses from sale or abandonment of property, plant, or equipment used the business. 
5. Effects of a strike
6. Adjustment of accruals on long-term contracts. 

Jo has Inc b/f inc tax of 250,000 > gain of 100K from discont op. 30% tax > 

Do a small IS.

IBIT - 250k

Income tax (.3) - 75k

IFCO-175k

Gain on discont op 100k        

        Less: App Inc tax 30k    70k

Net Income 245k

____

Net income - Preferred Dividends / Weighted av # of shares outstanding.

*If there is no preferred dividends then you just exclude from formula. *

Jo has :

1. NI - 1M
2. Declared and pays preferred Stk Div 250k
3. 190k CT outstand

What is the EPS ?

1M-250K / 190k = 3.95 per share

It does not matter wether the perferred DIV are paid, we just need the amount declared. 

"net of tax"

      a.     Income from continuing operations

b.     Discontinued operations.

1.  

    

                 c.      Income before extraordinary items.

    

                 d.     Extraordinary items.

    

                 e.     Net income.

    

Non-communilative  - A type of preferred stock that does not pay the holder any unpaid or omitted dividends. If the corporation chooses to not pay dividends in a given year, the investor does not have the right to claim any of those forgone dividends in the future.

 Communilative - A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.

Companies record most items, including unusual and irregular ones, as part of net income. 

These income items are in four categories:

1. Unusual gains and losses
2. Discontinued operations
3. Extraordinary items
4. Noncontrolling interest. 

Pretax - Material items are unusual and infrequent, but not both, should be reported in a separate section just above "income from continuing operations before income taxes". 

Note- *Net-of-tax treatment for these items is prohibited.*

1. Write-down or write off of assets
2. exchange or translation of foreign currencies
3. Restructuring charges (reorganization)
4. Sale or abandonment of PPE used in Bus.
5. Adj of accruals on long-term contracts. 

• Company eliminates the results of operations and cash flow of a component AND
• There is no significant contining involvement in that component after the disposal. 

A component is the lowest level at which the company can clearly distinguish the operations and cash flows from the rest of the company. 

*****Disposal of component = Discont operations******

(EMPHASIZED) She said know!

YES, it is required by GAAP to disclose the discontinued operations on the IS and NOT apart of continuing activities. It must be disclosed separately on the IS. 

Amount reported "net of tax"

1. Gain/loss from operating the component during the current period.
2. Gain or loss from disposal of the component. 

Must be disclosed net of tax

Must be able to clearly identify the continuring and discontining parts of the CO for all years presented. 

Jo disposed of its rest div at pretax loss of 270k

Prio to disposal, the div operate at pretax loss of 450k

30% tax rate

What will be disclosed on the IS?

Loss from operations, net of 135k tax -  (315k)

Loss on disposal, net of 81k tax - (189k)

Total loss on discont operations (504k)

____

Material events and transactions that meet two conditions: 

1. Unusual in nature
2. Infrequent in occurence

Both conditions must be met

What is the restated def of extraordinary items?

(SHE EMPHASIZED)

Effects of major natural casualities, if rare in the area..

Extraordinary?

Exproproiation (takeover) of property by foreign gov?

Extraordinary?

YES, rarely happens in US. 

Ex if so.. Gov may want to put a interstate through your bus..

Write-down of inventories or write-off of recievables?

Extraordinary?

IFCO - 55k

Extr loss, net of 231k tax (539k)

Net income 54,461,000

_________

When a company owns substantial interest (generally > 50%) in another company, GAAP requires....

AND what is this called?

Required that the financial statements of both companies be consolidated together into one set of financials. 

This is called Noncontrolling interest. 

Net income - XXX

Less net inc allocated to minority interest - XX

Net inc allocated to SH of_____ - XXX

1. Change entity
2. Change in principle
3. Change in Estimate

1. Change from FIFO to average cost
2. Change from the percentage-of-completion to the completed-contract method. 

1. Useful lives and salvage values of depreciable assets
2. Allowance for uncollectible recievables
3. Inventory obsolecence

Change in Acc Principle

Illus 4-20(pg180)

Adjustment to retained earning looks like ?

Begin RE - 50k

Cum Effect (net of tax 2400) - 5600

RE ad adjusted 44400

Pretax Communalative Effect

You report it on the RE stmt net of tax

prospectively

Change are NOT carried back to prior years. 

1. Mathematical mistakes
2. Mistakes in application of accounting principles
3. oversight or misuse of facts

Treated as prior period adjustment. Adjusted to the beginning balance of RE

 DR - RE 100,000

          CR -         A/R 100,000

1. Net income
2. Change in accounting principle
3. Prior period adjustment 

1. Net loss
2. Dividends
3. Change in accounting principles
4. Prior period adjustments

• All revenues and gains, expenses and losses reported in net income, and
• All gains and losses that bypass net income but effect SE

1. Unrealized gains and losses on available for sale securities
2. Translation gains and losses on foreign currency. 
3. Unrealized gains and losses on certerin hedging transactions
4. Adjustment related to....(NEED TO GET FROM SOMEONE)

IS

BS

Stmt of Cash flows

Compre inc

What three things concerning Compre-inc you MUST know!!

(SHE EMPHASIZED)

1. What is it?
2. What is the "other"?
3. How to report it?

One stmt approach you just add an additional line on your IS.

Two statement appraoch you turn the page and add NI# and begin your comprehensive inc stmt on a separate page. 

Would :

• Increase in value of CO reputation
• Unrealized gain on value of patents

effect net income when prepareing the IS?

Assets

Liabilities

Equity

• Computing rates of return
• Evaluating the capital structure
• Assess risk and future cash flows
• Analyze the company's:
• Liquidity
• Solvency
• Financial flexibility

• Most assets and liabilities are reported at historical cost
• Use of judgements and estimates
• Many items of fincial value are omited. 

• Assets
• Liabilities
• OE

What are all the usual asset accounts and in what order?

KNOW ORDER - MEMORIZE

1. Current assets
2. Long-term investments
3. PPE
4. Intangible assets
5. Other assets

Presented in order of liquidity 

1. Cash and cash equivalents
2. Short-term investments
3. Recievables
4. Inventories
5. Prepaid expenses

Cash

1. Generally any monies...
2. Cash equivalents def
3. What must be disclosed ?

1. Availiable "on demand"
2. Short-term highly liquid invesments that mature within three months or less. 
3. Restrictions or commitmets must be disclosed. 

A/R

N/R

1. Securities
2. Tangible fixed assets
3. Special funds
4. Non-consolizated subsidiaries.

1. Bonds
2. CS
3. longterm notes

Not currently used in operations

(Land held for speculation)

1. Sinking funds
2. pension funds
3. plant expansion fund

Long term investment

examples of securites: 

• Bonds
• Stock
• Long-term notes

Long term investment

Examples of Fixed Assets:

• Land held for future plant sites
• Retired machine no longer in use

Long term investment

Examples of special funds (long term restricted cash)

• Sinking fund
• Pensions
• Cash surrender value of life ins.

Long term investment

Examples of "Nonconsolidated Subsidiaries or Affiliated Companies

• Investment in Uncon. Sub. 

Concerning Unconsolidated Subsidiaries or Affiliated Companies -

<20% is called

Concerning Unconsolidated Subsidiaries or Affiliated Companies -

>20% - < 50% is called..

Concerning Unconsolidated Subsidiaries or Affiliated Companies -

>50% is when you..

• Land
• Building
• Machinery
• furniture
• tools
• wasting resources (minerals)

1. Goodwill
2. Patents
3. Trademarks

• Long-term prepaid expenses
• Non-current recievables
• Assets in special funds
• Property held for sale
• Restricted sale or securities

"obligations that a company reasonably expects to liquidate iehter through the use of current assets or the creation of current liabilities."

In general, debts that will be padi or will come due within the next year & will use current assets. 

Working Capital

• Excess of...
• Represents....
• _____buffer available to meet...
• Current ratio =

• Excess of current assets over current liabilities
• Represents the net amount of a company's relatively liquid resources
• Current ratio = current assets/current liabilities

8:1

• Do i have too much cash
• Recieveables to high (bad debts)
• Inventory to high (Not selling)

Note* Cash is unproductive. Must be used to produce more revenue. 

• Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.
• All covenants and restrictions must be disclosed
• Premium/discount shown right below bond account

the excress of amounts paid in over the par or stated value

Noncontrolling interest (minority interest)