Income Statements

Chapter Map: Income Statements

 

Chapter: Introduction

Outsider Perspective: What Do I See?

Insider Perspective:  What’s Behind the Numbers?

Outsider Perspective: How Do I Use the Numbers?

 

 

What Do I See? 1

Income Statements

Learning objectives and key take-aways


Express Route Video [31 min]

Exercises

Scenic Route Videos:

1. How do companies perform for owners?  [11 min]

Management’s goal: Performance related to reporting period changes in balance sheets. Owners’ Equity Change Map: OEC Map – phase 1; Transactions with owners; Comprehensive income; Changes in accounting policies or estimates. Intel’s performance: 1968-2010.

2. Level 1: Comprehensive income  [24 min]

Comprehensive income statement – level 1: Statement introduction. Owners’ equity change map – phase 2: Connecting OEC Map to comprehensive income statement. Intel’s level-1 performance: 1992-2010. Controlling and non-controlling interests: Parent company and other equity holders; Big-picture implications for balance sheets and comprehensive income. Assessing performance – level 1: Return-on-Equity – Comprehensive Income ratio (ROE-CI) formula; example; and locating ROE-CI inputs. Company disclosures: Vodafone; América Móvil; AT&T; ROE-CI comparisons.

3. Level 2: Major categories  [23 min]

Comprehensive income statement – level 2: Dissecting comprehensive income into net profit (loss) and other comprehensive income. Owners’ equity change map – phase 3: Connecting OEC Map to income statement. Other comprehensive income (OCI): Big-picture OCI example and implications for forecasting performance; Transient versus persistent. Intel’s level-2 performance: 1992-2010. Assessing performance - level 2: Dissecting ROE-CI into ROE and ROE-OCI formulas; ROE and ROE-OCI example. Company disclosures: Vodafone; América Móvil; AT&T; ROE and ROE-OCI comparisons.

4. Level 3: Significant subcategories  [30 min]

Comprehensive income statement – level 3: Dissecting net profit (loss) into pretax profit and taxes; and pretax profit into operating and non-operating pretax profits. Assessing performance - level 3: Profit margins formulas and examples, DuPont model formula and example. Company disclosures: Vodafone; América Móvil; AT&T; Profit margin and DuPont model comparisons.

5. Level 4: Line items  [38 min]

Comprehensive income statement – level 4: Dissecting net profit (loss) into common line items. Owners’ equity change map – complete: Connecting OEC Map to comprehensive income statement. Primary elements: Income (revenue and gains) and expenses (ordinary expenses and losses). Common line items: Net revenues; Cost of goods sold; Selling, general, and administrative expenses (SG&A); Other income and expenses. Assessing performance: Common size income statements. Company disclosures: Vodafone; América Móvil; AT&T; Common size income statement comparisons.

6. Inco me statement formats  [12 min]

Number of statements: One comprehensive income statement or two statements. Line item signing conventions: Expenses negatively and positively signed. Company disclosures: Qantas Airways
(nature versus function reporting for expenses); Vodafone; América Móvil; AT&T.

 

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What Do I See? 2

Statements of Changes in Owners’ Equity

Learning objectives and key take-aways


Express Route Video [12 min]

Exercises

Scenic Route Video:

1. Statements of changes in owners’ equity [29 min]

Goal of statement of owners’ equity: explain changes in owners’ equity. Retained earnings and reserves (Accumulated OCI): New balance sheet concepts. Connect balance sheet to statement of changes in owners’ equity. Connect OEC map to statement of changes in owners’ equity. Company disclosures: Vodafone; América Móvil; AT&T (including controlling and non-controlling interests examples).


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What’s Behind the Numbers? 1

Income Statements

Learning objectives and key take-aways


Express Route Video [40 min]

Exercises

Scenic Route Videos:

1. Accounts [5 min]

Temporary accounts: Permanent balance sheet accounts versus temporary income accounts. Account signs: Income account signs using balance-sheet equation approach for entries. Debit and credit accounts: Income account debit and credits using journal entry approach.

2.Revenues  [52 min] 

Introduction: Sales agreements events timeline; Revenue recognition decisions; Performance obligations. Basic revenue recognition: Concepts and entries using Starbucks’ coffee examples. Tied to asset increases: Example 1- recognizing revenue at the time of a cash sale. Example 2- recognizing revenue at the time of a credit sale. Tied to liability decreases: Example 3- recognizing revenue when derecognizing deferred revenue liability. Summary of basic revenue recognition concepts. Challenging revenue recognition: Challenges - Big-picture example using Apple’s iPhones. Authoritative guidance – Demand for revenue recognition guidance; Overview of current and proposed IASB and US GAAP revenue guidance.

3.Expenses [66 min]

Introduction: Expense recognition decisions. Expense recognition tied to asset decreases:
Cash expenses- Example 1- Monthly Internet costs paid; Example 2- Monthly advertising costs paid; Example 3- Parking ticket received and paid in current month. Asset usage expenses- Example 4- Prepaid insurance usage; Example 5- Truck usage; Example 6- Inventory sold. Asset impairment expense- Example 7- Building impaired. Expense recognition tied to liability increases: Accounts payable accruals expense- Example 8- Advertising invoice received. Accrued liabilities expense- Example 9- Compensation expense, never invoiced; Example 10- Cable services, not invoiced before expensed; Example 11- Parking ticket received (invoiced), but paid in subsequent month.

4. Gains and losses  [17 min]

Introduction: Gains and losses recognition decisions. Terms and concepts: Realized gains and losses definitions; Example 1- Land sold for more than cost; Example 2- Truck sold for less than adjusted historical cost. Unrealized gains and losses definitions; Example 3- Land unrealized gain; Recognition decision challenges. Entries: Example 4- Land realized gain; Example 5- Truck realized loss.

5. End-of-period accounting and business decisions [26 min]

Accounting decisions: Accrual systems- Accrual versus cash accounting systems. Accrual and deferral entries. Accounting cycle- reporting period and closing period; end of period adjusting and closing entries. Adjusting entries- Accruals and deferrals. Judgments- During the closing period, intensified incentives and opportunities to record adjusting entries that align or conflict with interests of outsiders. Business decisions: Near end of reporting period, intensified incentives and opportunities to take actions that align or conflict with interests of owners.

6. Creating income statements  [6 min]

Pre-close trial balances: Summarize performance during the reporting period. Creating income statements: Use trial balances to prepare statements.

7. Matching principle and conservatism  [11 min]

Historical income recognition: Revenue and expense recognition and matching principle and conservatism.  Standard setters’ views:IASB and FASB perspectives on conservatism and matching principle in the past and proposed new criteria.

 

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What’s Behind the Numbers? 2

Statements of Changes in Owners’ Equity

Learning objectives and key take-aways


Express Route Video [15 min]

Exercises

Scenic Route Video: 

1. Dividends, Closing Entries, and Record Keeping and Reporting Map [29 min]

Entries: Dividends entries- Declaring and paying dividends. Closing entries- Transferring temporary income account balances to permanent balance sheet accounts. Record Keeping and Reporting (R&R) Map: Creating statements- Balance sheets, income statements, and statements of changes in owners’ equity. Mapping entries into statements- Tracing the effects of entries to financial statements; Stock issuance, inventory purchase, and depreciation examples. 


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How Do I Use the Numbers?

Analyzing Financial Performance: Basics

Learning objectives and key take-aways

Exercises

Scenic Route Video: 

1. Analyzing Financial Performance: Basics [34 min]

Analysis of financial performance for Intel® and Advanced Micro Devices (AMD): Level 1: Comprehensive income; Return-on-Equity based on comprehensive income (ROE-CI). Level 2: Major categories; Return-on-Equity based on net profit (ROE); Return-on-Equity based on other comprehensive income (ROE-OCI). Level 3: Significant subcategories; DuPont model components of ROE; Profit margins. Level 4: Line items; Common size income statements; Controlling and non-controlling interests example.
 

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