Lecture 7 income statement rw (2)
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Transcript of Lecture 7 income statement rw (2)
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Reporting PerformanceIncome Statement and
Statement of Cash Flow
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Cash Flow Statement
Assets
Liabilities&
Equity
Income Statement
Assets
Liabilities&
Equity
Cash
Cash
Balance Sheet shows where I was
Balance Sheet shows where I am
now
Income Statement shows how I got there
Cash Flow explains how cash changed
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Income Statement
Income Statement: measures performance over a certain period of time
Compares inflows (“Revenue” or “Sales”) with outflows (“Costs” or “Expenses”)
Revenue – Expenses = Net Income
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Financial Statements
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Personal Income StatementFor the year ended December 31, 2009
Revenue Salary $ 22,900 eBay 1,050 Total Revenue 23,950
Expenses Rent 9,500 Food 5,200 Books 750 Clothes 50 Gasoline 25 Entertainment 7,500 Total Expenses 23,025
Net Income $ 925
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Business Income Statement
A business income statement reports on operating and non-operating activities.
It lists amounts for revenues less expenses over a period of time.
Sales less expenses yield the “bottom-line” net income amount.
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Income Statement Components
Revenues: value received from the exchange of goods or services to customers
Expenses: cost of doing business; assets and resources used to provide those revenues
Net income: revenues less the expenses associated with getting those revenues
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Income Statement is on Accrual Basis
The Accrual Income Statement reflects the economics of the trade with the customer
Revenue is the value of what the company gives to the customer, regardless of when it gets paid. Customer gives back Cash or Accounts Receivable (cash later)
Expenses are the value of the resources used to produce whatever it is that was traded Might be paid for before used, when used or paid later
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The Income Statement
Sales / Revenue (“top-line”)
- Cost of Sales = Gross Profit
- SGA, R&D, Marketing Expenses = Income From Operations +/- Interest Expense / Income = Income before Taxes
- Tax = Net Income (“bottom line”)
Every company is different but follows same general format…
Direct cost of goods provided to customers
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Revenue 114.6$ Products Revenue 74.1$ Cost of Revenues 87.5 Cost 56.5
Gross Margin 27.1 Gross Margin 17.6
SGA 17.0 Services Revenue 40.1 Earnings from Operations 10.1 Cost 30.7
Gross Margin 9.4 Interest 0.7 Taxes 1.7 Financing Revenue 0.4
Cost 0.3 Net Income 7.7$ Gross Margin 0.1$
FY 2009
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EBITDAEarnings before Interest, Taxes, Depreciation & Amortization
Measures operating results before costs of capital structure and taxes
Net Income 7.7$
Add Back: Depreciation / Amortization 4.8 Interest 0.7 Tax 1.7
EBITDA 14.9$
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EBITDA Example
Two Companies exactly the same: Revenue Products Customers Industry Employees
Net Income: Company A $200 Company B $ 20
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EBITDA Example
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A BRevenue 1000 1000Expenses 980 780Net Income 20 220
Interest 120 10
Tax 60 10
Depreciation /Amortization 50 10
EBITDA 250 250
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Accrual AccountingAssets, liabilities, revenues, and expenses are put on the financial
statements when the transaction that causes them occurs, not when cash is
paid or received.
Required by GAAP.
Cash may be paid or received at same time, but this has
NOTHING to do with when the info goes on the financial
statements
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Accrual Basis
Revenues are earned and recorded when goods or services are provided to customers
Expenses are incurred and recorded when the resources are used to create the goods and services
provided to the customer
The matching principle requires that expenses be recorded in the same period as the associated revenue, NOT the period in which they are paid
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ExerciseBig and Rich Hats LLC - 2008
Buys hats from suppliers: value of $175k $25k paid in 2008, balance on credit
Sells goods to customers: invoice value of $200k Received $150k in cash Remainder to be paid in 2009
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Big and Rich Performance
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CashAccounting
Revenue 150
Expenses 25
Net Income 125
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Big and Rich Performance
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Cash Accrual Accounting Accounting
Revenue 150 200
Expenses 25 175
Net Income 125 25
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Revenue Recognition Rules in GAAP
Revenue is recognized when all conditions are met:
1. Persuasive evidence of an arrangement exists
2. Delivery of products or services has occurred
3. Price is fixed and determinable
4. Collection is reasonably assured
…often lots of judgment in determining revenue
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Revenue Recognition Rules in GAAP
Revenue is recognized when all conditions are met:
1. Persuasive evidence of an arrangement exists
2. Delivery of products or services has occurred
3. Price is fixed and determinable
4. Collection is reasonably assured
…often lots of judgment in determining revenue
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85 – 88
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87
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Revenue Games ExerciseBlue Train Computer Corp.
List Price: Hardware $20
Software License $1 / month
Full Maintenance $2 / month
Mingus Inc. purchases system for $20; includes 3 months of software license and 1 month warranty
“Irrevocable” contract signed Nov 24. 2009: $5 non refundable deposit with contract $5 per month Jan 2010 – Mar 2010 If no pay, only recourse is take back hardware
Dec 31, 2009: ½ hardware delivered Jan 31, 2010: ½ hardware delivered Feb 28, 2010: software delivered Mar 31, 2010: system up and running
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Percentage-of-Completion
For certain industries requiring long-term contacts, revenue is by determining the costs incurred to date compared with the project’s total expected costs.
Percentage-of-completion method requires an estimate of total anticipated costs.
This estimate is made at the beginning of the contract and is used to initially bid the contract.
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Percentage-of-Completion
2005 10-K report footnotes of Raytheon Company:
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Unearned Revenue
Deposits from customers are liability until service obligation is fulfilled
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Expense Rules in GAAP
Once revenue is determined, then expenses are recorded
The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue
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Expense Rules in GAAP
Once revenue is determined, then expenses are recorded
The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue
…even more judgment in expenses
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Accrual-Based Measurement of Expenses
Company incurs a cost.
Expense
If benefit is for current period, report the cost
as…
As the benefits are used up, reduce the asset and
report this cost as…
Asset
If benefit extends to future periods, initially
report the cost as…
A capitalized cost is the cost that is reported as an asset on the balance sheet.
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Earnings Per Share
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102 – 103