Understanding Financial Reports and the Income Statement

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Understanding Financial Reports and the Income Statement. Chapter 2. Learning Objectives. Income statements Operating and non-operating results Quality and conservatism of earnings. A complete set of financial statements includes:. Balance sheet Income statement - PowerPoint PPT Presentation

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  • Understanding Financial Reports and the Income StatementChapter 2

    Chap 2

  • Learning ObjectivesIncome statementsOperating and non-operating resultsQuality and conservatism of earnings

    Chap 2

  • A complete set of financial statements includes:

    Balance sheetIncome statementStatement of changes in equityCash flow statementExplanatory notes

    Chap 2

  • Generally Accepted Accounting Principals (GAAP)A complete set of financial statements shows:Financial position at the end of the periodEarnings for the periodComprehensive incomeCash flowsInvestments by and distributions to owners

    Chap 2

  • US Securities Regulations Annual report to shareholdersSchedule 14A Proxy solicitation materialsForm 10K Annual reportForm 10Q Quarterly filingForm 8K Current report

    Chap 2

  • Proxy Statement Table of Contents (edited)Voting ProceduresProposals 18Ownership of SecuritiesExecutive CompensationReport of Compensation Committee on Executive CompensationReport of Audit and Legal CommitteePerformance GraphOther MattersAPPENDIXManagement's Discussion and Analysis of Financial Condition and Results of OperationsFinancial HighlightsFinancial Statements and Notes

    Chap 2

  • Form 10K includesAnnual reportItems included by reference to another reportFinancial statements included in Proxy statementDiscussion of the nature of business operationsGeographic locationsStock trading informationAuditor informationInformation on managementOther information

    Chap 2

  • Auditors Report Unqualified opinionStatements fairly present the the companys position or resultsQualified opinionEverything is fine except forAdverse opinionStatements do not fairly present the the companys position or resultsDisclaimer of opinionAuditor is unable to state an opinion

    Chap 2

  • Of the 4 statements,the income statement receives the greatest scrutiny by analysts.

    Chap 2

  • Chap 2

    Examples

    Activity level (units)20,00015,00010,000

    Sales$100,000$75,000$50,000

    Cost of sales$60,000$45,000$30,000

    Gross profit$40,000$30,000$20,000

    S, G & A$30,000$30,000$30,000

    Net Income$10,0000.0$(10,000)

    Activity level (units)20,00015,00010,000

    Sales$100,000$75,000$50,000

    Variable costs$60,000$45,000$30,000

    Contribution margin$40,000$30,000$20,0001.2502.0001.667

    Fixed costs$8,000$15,000$8,000

    Net Income$32,000$15,000$12,000

    Nokia IS

    200120001999

    EURmEURmEURm

    Net sales31,19130,37619,772

    Cost of goods sold(19,787)(19,072)(12,227)

    Research and development expenses(2,985)(2,584)(1,755)

    Selling, general and administrative expenses(3,443)(2,804)(1,811)

    One-time customer finance charges(714)0.00.0

    Impairment of minority investments(80)0.00.0

    Impairment of goodwill(518)0.00.0

    Amortization of goodwill(302)(140)(71)

    Operating profit3,3625,7763,908

    Share of results of associated companies(12)(16)(5)

    Financial income and expenses125102(58)

    Profit before tax and minority interests3,4755,8623,845

    Tax(1,192)(1,784)(1,189)

    Minority interests(83)(140)(79)

    Net profit2,2003,9382,577

    200120001999

    Net sales100%100%100%

    Cost of goods sold63%63%62%

    Research and development expenses10%9%9%

    Selling, general and administrative expenses11%9%9%

    One-time customer finance charges2%0%0%

    Impairment of minority investments-0%0%0%

    Impairment of goodwill2%0%0%

    Amortization of goodwill1%0%0%

    Operating profit11%19%20%

    Share of results of associated companies-0%-0%-0%

    Financial income and expenses0%0%-0%

    Profit before tax and minority interests11%19%19%

    Tax4%6%6%

    Minority interests-0%-0%-0%

    Net profit7%13%13%

    200120001999

    Net sales158%154%100%

    Cost of goods sold162%156%100%

    Research and development expenses170%147%100%

    Selling, general and administrative expenses190%155%100%

    One-time customer finance charges

    Impairment of minority investments

    Impairment of goodwill

    Amortization of goodwill425%197%100%

    Operating profit86%148%100%

    Share of results of associated companies240%320%100%

    Financial income and expenses100%

    Profit before tax and minority interests90%152%100%

    Tax100%150%100%

    Minority interests105%177%100%

    Net profit85%153%100%

    200120001999

    Net sales58%54%100%

    Cost of goods sold62%56%100%

    Research and development expenses70%47%100%

    Selling, general and administrative expenses90%55%100%

    One-time customer finance charges

    Impairment of minority investments

    Impairment of goodwill

    Amortization of goodwill325%97%100%

    Operating profit-14%48%100%

    Share of results of associated companies140%220%100%

    Financial income and expenses100%

    Profit before tax and minority interests-10%52%100%

    Tax0%50%100%

    Minority interests5%77%100%

    Net profit-15%53%100%

    Motorola IS

    Motorola, Inc. and SubsidiariesConsolidated Statements of Operations

    (millions, except per share data)Year ended December, 31

    200120001999

    Net Sales30,00437,58033,075

    Costs and Expenses

    Manufacturing and other costs of sales21,44523,62820,631

    Selling, general and administrative expenses3,7035,1415,220

    Research and development expenditures4,3184,4373,560

    Depreciation expense2,3572,3522,243

    Reorganizations of businesses1,858596(226)

    Other charges3,3285171,406

    Interest expense, net437248138

    Gains on sales of invesements and businesses(1,931)(1,570)(1,180)

    Total costs and expenses35,51535,34931,792

    Earnings (loss) before income taxes(5,511)2,2311,283

    Income tax provision (benefit)(1,574)913392

    Net earnings (loss)(3,937)1,318891

    Basic Earnings (loss) per common share(1.78)0.610.42

    Diluted Earnings (loss) per common share(1.78)0.580.41

    Basic wgtd avg common shares outstanding2213.32170.12119.5

    Diluted wgtd avg common shares outstanding2213.32256.62202.0

    Nokia BS

    Nokia Consolidated Common-size Balance Sheet, IAS (EURm)Nokia Consolidated Balance Sheet, IAS (EURm), 2000=Base

    December 31,20012000December 31,2001Change2000

    ASSETSASSETS

    Fixed assets and other non-current assetsFixed assets and other non-current assets

    Capitalized development costs8934%6403%Capitalized development costs89340%640

    Goodwill8544%1,1126%Goodwill854-23%1,112

    Other intangible assets2371%2421%Other intangible assets237-2%242

    Property, plant and equipment2,51411%2,73214%Property, plant and equipment2,514-8%2,732

    Investments in associated companies490%610%Investments in associated companies49-20%61

    Available-for-sale investments3992%3372%Available-for-sale investments39918%337

    Deferred tax assets8324%4012%Deferred tax assets832107%401

    Long-term notes receivable1,1285%8084%Long-term notes receivable1,12840%808

    Other non-current assets60%550%Other non-current assets6-89%55

    6,91231%6,38832%6,9128%6,388

    Current assetsCurrent assets

    Inventories1,7888%2,26311%Inventories1,788-21%2,263

    Accounts receivable, less allowances for doubtful accounts (2001:217, 2000: 236)5,71926%5,59428%Accounts receivable, less allowances for doubtful accounts (2001:217, 2000: 236)5,7192%5,594

    Prepaid expenses and accrued income1,4807%1,4187%Prepaid expenses and accrued income1,4804%1,418

    Short-term loan receivable4032%440%Short-term loan receivable403816%44

    Available-for-sale investments4,27119%2,77414%Available-for-sale investments4,27154%2,774

    Bank and cash1,8548%1,4097%Bank and cash1,85432%1,409

    15,51569%13,50268%15,51515%13,502

    Total assets22,427100%19,890100%Total assets22,42713%19,890

    Nokia Consolidated Common-size Balance Sheet, IAS (EURm)Nokia Consolidated Balance Sheet, IAS (EURm). 2000=Base

    December 31,20012000December 31,2001Change2000

    SHAREHOLDERS' EQUITY AND LIABILITIESSHAREHOLDERS' EQUITY AND LIABILITIES

    Shareholders' equityShareholders' equity

    Share capital2841%2821%Share capital2841%282

    Share issue premium2,0609%1,6959%Share issue premium2,06022%1,695

    Treasury shares(21)-0%(157)-1%Treasury shares(21)-87%(157)

    Translation differences3261%3472%Translation differences326-6%347

    Fair value and other reserves200%0.0Fair value and other reserves200.0

    Retained earnings9,53643%8,64143%Retained earnings9,53610%8,641

    12,20554%10,80854%12,20513%10,808

    Minority interests19611%177

    December 31,20019%200010%Long-term liabilities

    Minority interests1961%1771%Long-term interest-bearing liabilities20720%173

    Long-term liabilitiesDeferred tax liabilities177157%69

    Long-term interest-bearing liabilities2071%1731%Other long-term liabilities7610%69

    Deferred tax liabilities1771%690%46048%311

    Other long-term liabilities760%690%Current liabilities

    4602%3112%Short-term borrowings831-22%1,069

    Current liabilitiesCurrent portion of long-term debt0.0-100%47

    Short-term borrowings8314%1,0695%Accounts payable3,0749%2,814

    Current portion of long-term debt0.0470%Accrued expenses3,47722%2,860

    Accounts payable3,07414%2,81414%Provisions2,18421%1,804

    Accrued expenses3,47716%2,86014%9,56611%8,594

    Provisions2,18410%1,8049%Total shareholders' equity and liabilities22,42713%19,890

    9,56643%8,59443%

    Total shareholders' equity and liabilities22,427100%19,890100%

  • Nokia Consolidated profit and loss (IAS)

    Chap 2

    Nokia

    200120001999

    EURmEURmEURm

    Net sales31,19130,37619,772

    Cost of goods sold(19,787)(19,072)(12,227)

    Research and development expenses(2,985)(2,584)(1,755)0.3656182873

    Selling, general and administrative expenses(3,443)(2,804)(1,811)

    One-time customer finance charges(714)0.00.0

    Impairment of minority investments(80)0.00.0

    Impairment of goodwill(518)0.00.0

    Amortization of goodwill(302)(140)(71)

    Operating profit3,3625,7763,908

    Share of results of associated companies(12)(16)(5)

    Financial income and expenses125102(58)

    Profit before tax and minority interests3,4755,8623,845

    Tax(1,192)(1,784)(1,189)

    Minority interests(83)(140)(79)

    Net profit2,2003,9382,577

    Earnings per share

    Basic0.470.840.56

    Diluted0.460.820.54

    Average number of shares (thousands)

    Basic4,702,8524,673,1624,593,761

    Diluted4,787,2194,792,9804,743,184

    Sheet2

    Sheet3

  • Sales revenueProceeds from customers in exchange for the delivery of goods or servicesAlso use the terms revenue and turnover (U.K.)Generally recognized when earned and realized or realizableWhen goods/services are exchanged for cash or claims to cashSubstantially accomplished what must be doneService revenue is recognized with reference to the percentage of completion

    Chap 2

  • Net salesSales revenue less returns and allowancesReturns: Customer returns goods for a refundAllowance: Customer retains goods but receive a partial refund if unhappy with quality of merchandise

    Chap 2

  • Cost of Sales and Gross ProfitNet sales Cost of sales = Gross profitCost of salesDirect cost of purchasing or producing the goods or services to be delivered to customersAlso Cost of good sold or Cost of services providedRetail: purchase cost of goods sold to customersManufacturing: material, labor and overhead used in the production of goodsService: cost required to provide service (labor and supplies)

    Chap 2

  • Gross MarginGross profit SalesMotorolaMargin = (30,004-21,445) 30,004 = 28.6%NokiaMargin = (31,191-19,787) 31,191 = 36.6%

    Chap 2

  • Selling, General and Administrative (SG&A) ExpensesOperating expenses includingSalariesPension costsMarketing costsInsuranceRentDepreciationOtherGenerally reported as a single line item

    Chap 2

  • DepreciationCan be a component of Cost of sales or SG&AStraight-line depreciationMost common methodAnnual expense = (Cost salvage value) LifeAccelerated depreciationGreater expense in early years of assets life

    Chap 2

  • Research and DevelopmentSearching for new knowledge and translating this knowledge into a plan or design for a new process or product.Expensed immediately on the income statementPurchased in-process R&D appears when one company purchases another

    Chap 2

  • Restructuring and Other ChargesAppears when a business reorganizesIncludes charges associated with asset write downs and employee separationsBe aware whether these charges will continue

    Chap 2

  • Operating incomeResults of primary operations, independent of investment, financing and tax expenses

    Sales(Cost of sales)Gross profit(S G & A)Operating income

    Chap 2

  • Income statement, continuedOperating IncomeNonoperating incomePeripheral activities: interest income/expense, dividend income, gain/losses on asset salesIncome before income taxesProvision for income taxesExpected amount of taxes to be paidNet income or loss

    Chap 2

  • Income statement - Special itemsMinority share of incomeSubsidiaries owned less than 100%Discontinued operationsDisposition (actual or planned) of a large component of businessExtraordinary itemsUnusual and infrequentCumulative effect of change in accounting principles

    Chap 2

  • SFAS 154Retrospective application: a change in accounting principle is treated by restating comparative financial statements to reflect the new method as though it had been applied all along. For fiscal year beginning after Dec 15, 2005.To be consistent with IAS

    Chap 2

  • Earnings per shareBasicNet income/Weighted average number of shares outstandingDilutedEPS equation includes securities that can be converted into common stock (options)As if dilutive securities were exercisedDiscontinued operations, extraordinary items and changes in accounting principles are shown in total and on a per share basis

    Chap 2

  • Special revenue recognition methodsLong-term contractCompleted contractPercentage of completionWarranty contracts

    Chap 2

  • Comprehensive incomeAll income statement itemsOther comprehensive incomeChange in the value of some securities held for investmentGain/losses on foreign currency translation

    Chap 2

  • Earnings QualityEarnings that reflect underlying economic effectsEarnings that are better estimates of cash flowsEarnings that are more conservativeEarnings that are more predictable

    Accounting methods that could affect earnings quality: depreciation, inventory valuation, revenue recognition, assumptions regarding retirement benefits, reserves (sales returns, bad debts, etc.

    Chap 2

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