SRT510 Business Case Studies Financial Statements: Income Statement.
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<ul><li> Slide 1 </li> <li> SRT510 Business Case Studies Financial Statements: Income Statement </li> <li> Slide 2 </li> <li> TABLE 1-2 Scotts Miracle-Gro Co., Balance Sheets ($ millions) </li> <li> Slide 3 </li> <li> Income Statement Net Income = Revenues Expenses Revenues:-Expenses: Net sales-Cost of goods sold + Operating expenses + Non-operating expenses + Taxes </li> <li> Slide 4 </li> <li> Understanding the Income Statement Net Income sometimes called: (net) earnings (net) profits Net Sales sometimes called: (net) revenues Cost of goods sold sometimes called: cost of sales </li> <li> Slide 5 </li> <li> TABLE 1-3 Scotts Miracle-Gro Co., Income Statement ($ millions) Revenues Expenses </li> <li> Slide 6 </li> <li> Understanding the Income Statement Accrual Accounting (aka A Cruel Accounting) Recognize the revenue as soon as the effort required to generate the sale is substantially complete and there is reasonable certainty that payment will be received For credit salesthe sale might come significantly before the payment </li> <li> Slide 7 </li> <li> Understanding the Income Statement From Income Statement: Net Sales in 2007 = $2871.8 millions From Balance Sheet (change in 2007-2006): A/R increased by $17.4 millions This means actual CASH from sales was: $2871.8 - $17.4 = $2854.4 millions $17.4 million is still to be collected. </li> <li> Slide 8 </li> <li> Exercise: Wibleys Foods Excerpt from Balance Sheet 20072008Change in Account Accounts Receivable (less reserve for possible losses) $190M$255M$65M Excerpt from Income Statement 20072008 Net Sales (less reserve for possible losses) $3000M$4050M Question 1: How much did Wibleys receive IN CASH from sales in 2008? Question 2: How much is still missing in credit? </li> <li> Slide 9 </li> <li> Understanding the Income Statement Depreciation Build a new facility for $50million in 2009 If entire cost is assigned to 2009 (as an expense), what does that do to financial results for 2009? Depreciation allows evening out: allocate past expenses to future periods </li> <li> Slide 10 </li> <li> Understanding the Income Statement Need to know: assets useful life; salvage value; method of allocation Straight Linedepreciate by same amount each year Accelerated Depreciationmore depreciation in early years, less in later (alters timing of depreciation) </li> <li> Slide 11 </li> <li> Understanding the Income Statement Straight Line E.g. $50 million asset value, useful life of 10 yrs, salvage value of $10 million: Straight line depreciation will be $4 Million per year ([$50million-$10million]/10) The Depreciation deduction in the income statement will be $4M each year, instead of $50M the first year. </li> <li> Slide 12 </li> <li> Understanding the Income Statement What does depreciation method chosen mean? Straight line might tend to overstate earnings Accelerated might tend to understate earnings </li> <li> Slide 13 </li> <li> Reporting Taxes: Be Aware For shareholders: Accurately portray performance For government Minimize tax payable (e.g. rapid depreciation) This means actual tax payments may differ from provision for taxes on income statement Enough said We arent going to get into this. But be aware that how taxes are handled can create a false picture of performance. </li> <li> Slide 14 </li> <li> Earnings isnt always Earnings Defining Earnings Net income Operating income Creative income Proforma Omit anything that might cloud investor perceptions EIATBS Ignore all the bad stuff </li> <li> Slide 15 </li> <li> Exercise Explain what this means: Financial statements are like fine perfume; to be sniffed but not swallowed - Abraham Brilloff </li> </ul>
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