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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<ul><li><p>Understanding Financial Reports and the Income StatementChapter 2</p><p>Chap 2</p></li><li><p>Learning ObjectivesIncome statementsOperating and non-operating resultsQuality and conservatism of earnings</p><p>Chap 2</p></li><li><p>A complete set of financial statements includes:</p><p>Balance sheetIncome statementStatement of changes in equityCash flow statementExplanatory notes</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>US Securities Regulations Annual report to shareholdersSchedule 14A Proxy solicitation materialsForm 10K Annual reportForm 10Q Quarterly filingForm 8K Current report</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>Of the 4 statements,the income statement receives the greatest scrutiny by analysts.</p><p>Chap 2</p></li><li><p>Chap 2</p><p>Examples</p><p>Activity level (units)20,00015,00010,000</p><p>Sales$100,000$75,000$50,000</p><p>Cost of sales$60,000$45,000$30,000</p><p>Gross profit$40,000$30,000$20,000</p><p>S, G &amp; A$30,000$30,000$30,000</p><p>Net Income$10,0000.0$(10,000)</p><p>Activity level (units)20,00015,00010,000</p><p>Sales$100,000$75,000$50,000</p><p>Variable costs$60,000$45,000$30,000</p><p>Contribution margin$40,000$30,000$20,0001.2502.0001.667</p><p>Fixed costs$8,000$15,000$8,000</p><p>Net Income$32,000$15,000$12,000</p><p>Nokia IS</p><p>200120001999</p><p>EURmEURmEURm</p><p>Net sales31,19130,37619,772</p><p>Cost of goods sold(19,787)(19,072)(12,227)</p><p>Research and development expenses(2,985)(2,584)(1,755)</p><p>Selling, general and administrative expenses(3,443)(2,804)(1,811)</p><p>One-time customer finance charges(714)0.00.0</p><p>Impairment of minority investments(80)0.00.0</p><p>Impairment of goodwill(518)0.00.0</p><p>Amortization of goodwill(302)(140)(71)</p><p>Operating profit3,3625,7763,908</p><p>Share of results of associated companies(12)(16)(5)</p><p>Financial income and expenses125102(58)</p><p>Profit before tax and minority interests3,4755,8623,845</p><p>Tax(1,192)(1,784)(1,189)</p><p>Minority interests(83)(140)(79)</p><p>Net profit2,2003,9382,577</p><p>200120001999</p><p>Net sales100%100%100%</p><p>Cost of goods sold63%63%62%</p><p>Research and development expenses10%9%9%</p><p>Selling, general and administrative expenses11%9%9%</p><p>One-time customer finance charges2%0%0%</p><p>Impairment of minority investments-0%0%0%</p><p>Impairment of goodwill2%0%0%</p><p>Amortization of goodwill1%0%0%</p><p>Operating profit11%19%20%</p><p>Share of results of associated companies-0%-0%-0%</p><p>Financial income and expenses0%0%-0%</p><p>Profit before tax and minority interests11%19%19%</p><p>Tax4%6%6%</p><p>Minority interests-0%-0%-0%</p><p>Net profit7%13%13%</p><p>200120001999</p><p>Net sales158%154%100%</p><p>Cost of goods sold162%156%100%</p><p>Research and development expenses170%147%100%</p><p>Selling, general and administrative expenses190%155%100%</p><p>One-time customer finance charges</p><p>Impairment of minority investments</p><p>Impairment of goodwill</p><p>Amortization of goodwill425%197%100%</p><p>Operating profit86%148%100%</p><p>Share of results of associated companies240%320%100%</p><p>Financial income and expenses100%</p><p>Profit before tax and minority interests90%152%100%</p><p>Tax100%150%100%</p><p>Minority interests105%177%100%</p><p>Net profit85%153%100%</p><p>200120001999</p><p>Net sales58%54%100%</p><p>Cost of goods sold62%56%100%</p><p>Research and development expenses70%47%100%</p><p>Selling, general and administrative expenses90%55%100%</p><p>One-time customer finance charges</p><p>Impairment of minority investments</p><p>Impairment of goodwill</p><p>Amortization of goodwill325%97%100%</p><p>Operating profit-14%48%100%</p><p>Share of results of associated companies140%220%100%</p><p>Financial income and expenses100%</p><p>Profit before tax and minority interests-10%52%100%</p><p>Tax0%50%100%</p><p>Minority interests5%77%100%</p><p>Net profit-15%53%100%</p><p>Motorola IS</p><p>Motorola, Inc. and SubsidiariesConsolidated Statements of Operations</p><p>(millions, except per share data)Year ended December, 31</p><p>200120001999</p><p>Net Sales30,00437,58033,075</p><p>Costs and Expenses</p><p>Manufacturing and other costs of sales21,44523,62820,631</p><p>Selling, general and administrative expenses3,7035,1415,220</p><p>Research and development expenditures4,3184,4373,560</p><p>Depreciation expense2,3572,3522,243</p><p>Reorganizations of businesses1,858596(226)</p><p>Other charges3,3285171,406</p><p>Interest expense, net437248138</p><p>Gains on sales of invesements and businesses(1,931)(1,570)(1,180)</p><p>Total costs and expenses35,51535,34931,792</p><p>Earnings (loss) before income taxes(5,511)2,2311,283</p><p>Income tax provision (benefit)(1,574)913392</p><p>Net earnings (loss)(3,937)1,318891</p><p>Basic Earnings (loss) per common share(1.78)0.610.42</p><p>Diluted Earnings (loss) per common share(1.78)0.580.41</p><p>Basic wgtd avg common shares outstanding2213.32170.12119.5</p><p>Diluted wgtd avg common shares outstanding2213.32256.62202.0</p><p>Nokia BS</p><p>Nokia Consolidated Common-size Balance Sheet, IAS (EURm)Nokia Consolidated Balance Sheet, IAS (EURm), 2000=Base</p><p>December 31,20012000December 31,2001Change2000</p><p>ASSETSASSETS</p><p>Fixed assets and other non-current assetsFixed assets and other non-current assets</p><p>Capitalized development costs8934%6403%Capitalized development costs89340%640</p><p>Goodwill8544%1,1126%Goodwill854-23%1,112</p><p>Other intangible assets2371%2421%Other intangible assets237-2%242</p><p>Property, plant and equipment2,51411%2,73214%Property, plant and equipment2,514-8%2,732</p><p>Investments in associated companies490%610%Investments in associated companies49-20%61</p><p>Available-for-sale investments3992%3372%Available-for-sale investments39918%337</p><p>Deferred tax assets8324%4012%Deferred tax assets832107%401</p><p>Long-term notes receivable1,1285%8084%Long-term notes receivable1,12840%808</p><p>Other non-current assets60%550%Other non-current assets6-89%55</p><p>6,91231%6,38832%6,9128%6,388</p><p>Current assetsCurrent assets</p><p>Inventories1,7888%2,26311%Inventories1,788-21%2,263</p><p>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</p><p>Prepaid expenses and accrued income1,4807%1,4187%Prepaid expenses and accrued income1,4804%1,418</p><p>Short-term loan receivable4032%440%Short-term loan receivable403816%44</p><p>Available-for-sale investments4,27119%2,77414%Available-for-sale investments4,27154%2,774</p><p>Bank and cash1,8548%1,4097%Bank and cash1,85432%1,409</p><p>15,51569%13,50268%15,51515%13,502</p><p>Total assets22,427100%19,890100%Total assets22,42713%19,890</p><p>Nokia Consolidated Common-size Balance Sheet, IAS (EURm)Nokia Consolidated Balance Sheet, IAS (EURm). 2000=Base</p><p>December 31,20012000December 31,2001Change2000</p><p>SHAREHOLDERS' EQUITY AND LIABILITIESSHAREHOLDERS' EQUITY AND LIABILITIES</p><p>Shareholders' equityShareholders' equity</p><p>Share capital2841%2821%Share capital2841%282</p><p>Share issue premium2,0609%1,6959%Share issue premium2,06022%1,695</p><p>Treasury shares(21)-0%(157)-1%Treasury shares(21)-87%(157)</p><p>Translation differences3261%3472%Translation differences326-6%347</p><p>Fair value and other reserves200%0.0Fair value and other reserves200.0</p><p>Retained earnings9,53643%8,64143%Retained earnings9,53610%8,641</p><p>12,20554%10,80854%12,20513%10,808</p><p>Minority interests19611%177</p><p>December 31,20019%200010%Long-term liabilities</p><p>Minority interests1961%1771%Long-term interest-bearing liabilities20720%173</p><p>Long-term liabilitiesDeferred tax liabilities177157%69</p><p>Long-term interest-bearing liabilities2071%1731%Other long-term liabilities7610%69</p><p>Deferred tax liabilities1771%690%46048%311</p><p>Other long-term liabilities760%690%Current liabilities</p><p>4602%3112%Short-term borrowings831-22%1,069</p><p>Current liabilitiesCurrent portion of long-term debt0.0-100%47</p><p>Short-term borrowings8314%1,0695%Accounts payable3,0749%2,814</p><p>Current portion of long-term debt0.0470%Accrued expenses3,47722%2,860</p><p>Accounts payable3,07414%2,81414%Provisions2,18421%1,804</p><p>Accrued expenses3,47716%2,86014%9,56611%8,594</p><p>Provisions2,18410%1,8049%Total shareholders' equity and liabilities22,42713%19,890</p><p>9,56643%8,59443%</p><p>Total shareholders' equity and liabilities22,427100%19,890100%</p></li><li><p>Nokia Consolidated profit and loss (IAS)</p><p>Chap 2</p><p>Nokia</p><p>200120001999</p><p>EURmEURmEURm</p><p>Net sales31,19130,37619,772</p><p>Cost of goods sold(19,787)(19,072)(12,227)</p><p>Research and development expenses(2,985)(2,584)(1,755)0.3656182873</p><p>Selling, general and administrative expenses(3,443)(2,804)(1,811)</p><p>One-time customer finance charges(714)0.00.0</p><p>Impairment of minority investments(80)0.00.0</p><p>Impairment of goodwill(518)0.00.0</p><p>Amortization of goodwill(302)(140)(71)</p><p>Operating profit3,3625,7763,908</p><p>Share of results of associated companies(12)(16)(5)</p><p>Financial income and expenses125102(58)</p><p>Profit before tax and minority interests3,4755,8623,845</p><p>Tax(1,192)(1,784)(1,189)</p><p>Minority interests(83)(140)(79)</p><p>Net profit2,2003,9382,577</p><p>Earnings per share</p><p>Basic0.470.840.56</p><p>Diluted0.460.820.54</p><p>Average number of shares (thousands)</p><p>Basic4,702,8524,673,1624,593,761</p><p>Diluted4,787,2194,792,9804,743,184</p><p>Sheet2</p><p>Sheet3</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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)</p><p>Chap 2</p></li><li><p>Gross MarginGross profit SalesMotorolaMargin = (30,004-21,445) 30,004 = 28.6%NokiaMargin = (31,191-19,787) 31,191 = 36.6%</p><p>Chap 2</p></li><li><p>Selling, General and Administrative (SG&amp;A) ExpensesOperating expenses includingSalariesPension costsMarketing costsInsuranceRentDepreciationOtherGenerally reported as a single line item</p><p>Chap 2</p></li><li><p>DepreciationCan be a component of Cost of sales or SG&amp;AStraight-line depreciationMost common methodAnnual expense = (Cost salvage value) LifeAccelerated depreciationGreater expense in early years of assets life</p><p>Chap 2</p></li><li><p>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&amp;D appears when one company purchases another</p><p>Chap 2</p></li><li><p>Restructuring and Other ChargesAppears when a business reorganizesIncludes charges associated with asset write downs and employee separationsBe aware whether these charges will continue </p><p>Chap 2</p></li><li><p>Operating incomeResults of primary operations, independent of investment, financing and tax expenses</p><p>Sales(Cost of sales)Gross profit(S G &amp; A)Operating income</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>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</p><p>Chap 2</p></li><li><p>Special revenue recognition methodsLong-term contractCompleted contractPercentage of completionWarranty contracts</p><p>Chap 2</p></li><li><p>Comprehensive incomeAll income statement itemsOther comprehensive incomeChange in the value of some securities held for investmentGain/losses on foreign currency translation</p><p>Chap 2</p></li><li><p>Earnings QualityEarnings that reflect underlying economic effectsEarnings that are better estimates of cash flowsEarnings that are more conservativeEarnings that are more predictable</p><p>Accounting methods that could affect earnings quality: depreciation, inventory valuation, revenue recognition, assumptions regarding retirement benefits, reserves (sales returns, bad debts, etc.</p><p>Chap 2</p></li></ul>