Income Statement and Balance Sheet

Instructor : Ryan Williams

Learning Objectives 1. Recognize items that belong on an Income Statement.

2. Prepare an Income Statement.

3. Calculate COGS given information about changes in inventory.

4. Calculate net profit margin.

5. Recognize items that belong on a Balance Sheet.

6. Prepare a Balance Sheet.

7. Calculate accumulated depreciation, net fixed assets and gross fixed assets.

8. Discuss the purpose and potential shortcomings of the Income Statement and Balance Sheet.

9. Calculate dividends paid, number of shares outstanding, earnings per share, and the P/E ratio using the current Income Statement and two most recent Balance Sheets.

Income StatementOther names: Statement of income,

statement of earnings, “P&L” (profit and loss).

This matches revenues & expenses for the same period, it is a SUMMARY of FLOWS, or a recording of cumulative historical activity. Think of it like a history book.

Basic Income Statement – 2.1Income StatementCompany Name

For the time period ending date

Net Sales- Cost of Goods Sold (COGS)= Gross Profit

- Operating Expenses=Operating Profit (EBIT)

-Interest Expense=Profit Before Taxes (=EBT)

-Taxes=Net Income

Coca-Cola’s Income StatementThree Months Ended

April 3, 2009 

NET OPERATING REVENUES $ 7,169  

Cost of goods sold 2,590  

GROSS PROFIT 4,579  

Selling, general and administrative expenses 2,624  

Other operating charges 92  

OPERATING INCOME 1,863  

Interest income 60  

Interest expense 85  

Equity income — net 17  

Other income (loss) — net (40) 

INCOME BEFORE INCOME TAXES 1,815  

Income taxes 456  

CONSOLIDATED NET INCOME 1,359

Basic Income Statement Items• NET SALES: sale revenue is recorded when the ownership

is transferred from the seller to the buyer. Consider, though, that some revenue is never collected (bad creditors, trial periods, money-back guarantee…)

Net sales= Gross sales – (returns & allowances)

• COST OF GOODS SOLD (COGS): direct costs of manufacturing/selling a product

COGS = Beginning Inventory

+ Materials purchases

– Ending inventory

Basic Income Statement ItemsOPERATING EXPENSES: Include

management salaries, advertising expenditures, lease payments, repairs & maintenance, R&D, general & administrative expenses

INTEREST EXPENSE: cost of borrowing money

TAXES: Federal, state and/or local levelsNET INCOME: it is the ‘bottom line’ of

income statement, and it represents the base profit earned during accounting period

We will go through Assignment 2.1 Net Sales- Cost of Goods Sold (COGS)= Gross Profit

- Operating Expenses=Operating Profit (EBIT)

-Interest Expense=Profit Before Taxes (=EBT)

-Taxes=Net Income

Income StatementEarnings per share (EPS) : it indicates the profit earned

by each share of stock.

P/E ratio

Net Profit Margin: Net income divided by Net Sales

goutstandin shares common of no.rsshareholde to available incomenet EPS

EPSstock the of pricemarket current Ratio P/E

Balance SheetCompany’s resources are identified as:

AssetsLiabilitiesOwner’s equity

Balance sheet identity:

“Stock” measure statement: each value is the value of the account at the specific date associated with the balance sheet.

Assets and Liabilities ordered by liquidity (from the most liquid to the less liquid)

Total Assets = Total Liabilities + Shareholders’ Equity

Another way to think about itBalance sheet:Assets: The stuff a company owns.Liabilities & Equity: How a company paid for

their stuff.

Income Statement: How much money the company’s stuff is making for them.

Balance Sheet – Table 2.2ASSETS LIABILITIES

Cash Notes PayableNet Accounts Receivable Accounts PayableI nventories Accrued ExpensesTotal Current Assets Current Portion of LT Debt

Total Current LiabilitiesGross Fixed Assets(Accumulated Depreciation) LT DebtNet Fixed Assets Total Liabilities

Total Assets Preferred StockCommon StockRetained EarningsTotal Liabilities and Equity

Current assetsCURRENT ASSETS: assets that can be

converted into cash within a year (arbitrary)Cash

Most liquid asset. It includes highly liquid marketable securities

Net accounts receivable (Net A/R)Companies sell products/services on credit, they do not

always ask for cash. Some customers don’t pay up: Allowance for doubtful

accountsNet A/R = Gross A/R – allowance for doubtful

accounts

Current assets – cont.Inventory

Raw materials, work in process, finished goodsFIFO, LIFO, average cost

End of year inventory = Beginning of year inventory + purchases -

COGS

Total current assets = Cash + Net A/R + Inventory

Long-term assetsFIXED ASSETS

Equipment, buildings, vehicles, computers etcPermanent nature; needed for business operationsReported at book value

= original historical cost – allowable depreciationGross fixed assets: original cost of assetsAccumulated depreciation

Straight-line Accelerated cost recovery

Net fixed assets = gross fixed assets – accumulated depreciation

Total assets (final left hand side)Total assets

= Current assets + long-term assets

Assets (LHS of balance sheet) must be financed by a combination of liabilities and owner’s equity (RHS of balance sheet)

In other words, the balance sheet has to balance. If you have constructed a balance sheet and it does

not balance, you have done something wrong.

LiabilitiesCURRENT LIABILITIES

• Notes payable• Accounts payable (A/P)• Accrued expenses (accruals)• Current portion of long-term debt

→ SUM = TOTAL CURRENT LIABILITIES

LONG-TERM DEBT• Liabilities with maturities in excess of 1 year

Total liabilities= current liabilities + L.T. debt

EquityCOMMON STOCK

Common stock at par

Additional paid-in capital (capital surplus): additional money generated when company sold stocks

RETAINED EARNINGSCumulative total of all net income reinvested into

the company: this income is NOT available o shareholders!

Annual addition to retained earnings = net income – dividends paid

g)outstandin shares common of (#value)par Stock Common of Value Book (

g)outstandin shares common of (#value)par -valuemkt Capital In-Paid (

Total EquityShareholders’ equity

= common stock at par + additional paid-in capital + retained earnings

Shareholders’ equity also known as Net worth, owners’ equity or book value of firm’s equity

Preferred StockPREFERRED STOCK

Hybrid security – Mixture of Debt & EquityDebt component: pays fixed periodic amount

(like the interest on debt).Equity component: if payment is not made,

company is not in default (in the case of debt there is default).

Preferred dividends usually cumulative; no voting rights.

Total Liabilities and equity (right hand side) Total liabilities and equity

= total liabilities + preferred stock (if any) + shareholders’ equity

In other words, the balance sheet has to balance.

If you have constructed a balance sheet and it does not balance, you have done something wrong.

Assignment 2.2ASSETS LIABILITIES

Cash Notes PayableNet Accounts Receivable Accounts PayableI nventories Accrued ExpensesTotal Current Assets Current Portion of LT Debt

Total Current LiabilitiesGross Fixed Assets(Accumulated Depreciation) LT DebtNet Fixed Assets Total Liabilities

Total Assets Preferred StockCommon StockRetained EarningsTotal Liabilities and Equity

Next Monday:You owe me:

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Prepare for Quiz 1: Introduction, Income Statement and Balance Sheet