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Chapter 9
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Chapter 9

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  1. Chapter 9 The Corporate Income Statement and Financial Statement Analysis

  2. The Income Statement Income From Operations = Revenue – COGS- General Expenses Other Items include: Interest Income/Expense Earnings (or losses) from stock or bond investments Discontinued operations Extraordinary items Cumulative effects of accounting changes Deferred income taxes Chapter 9

  3. Avon Consolidated Statement of Income Example Chapter 9

  4. Investments in Stocks • Cost Method • Equity Method Chapter 9

  5. Equity Terms • Parent • Subsidiary • Consolidation • Minority Interest Chapter 9

  6. Visual Recap 9.1 Accounting Methods for Long-term Stock Investments Method Cost Equity Ownership < 20% 20%–80% >80% Initial Investment Investment Cash Investment Cash Investment Cash Receipt of Dividends Cash Dividend Revenue Cash Investment Cash Investment Year-End Procedures Debit or credit the Investment account to adjust it to FMV. The other debit or credit will be to Stockholders’ Equity Investment Income from Unconsolidated Affiliates Consolidate the financial statements of both companies; remove the effects of transactions between the two companies. Subtract minority interest. Chapter 9

  7. Corporate Income Taxes Taxable income over Not over Tax rate $ 0 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,000,000 35% Chapter 9

  8. Two Sets of Books? • Temporary Differences • Permanent Differences • Deferred Tax Liability • Deferred Tax Asset Chapter 9

  9. Income From Noncontinuing Items • Discontinued Operations • Extraordinary Items • Cumulative Effect of a change in Accounting Principle Chapter 9

  10. Discontinued Operations Income Statement will contain: (1) the operating income (or loss) for that business segment (2) the gain (or loss) resulting from the disposal of the segment. Chapter 9

  11. Extraordinary Items Unusual in nature: The event should be highly abnormal, taking into account the environment in which the entity operates AND Infrequent in occurrence: The event should not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates. Chapter 9

  12. Corporate Income Statement Format Chapter 9

  13. Analytical Techniques • Trend Analysis • Common-sized Financial Statements • Ratio Analysis Trend Analysis: Shows percentage changes from year to year. Common Size Financials: each line item is expressed as a percentage of a major financial statement component within the year. Ratio Analysis: study of relationships between two financial statement items. Chapter 9

  14. Avon Trend Analysis of Income Statements Chapter 9

  15. Avon Common-Sized Income Statements Chapter 9

  16. Ratio Analysis Chapter 9

  17. Ratio Analysis Chapter 9

  18. Key Financial Liquidity Ratios for Avon Chapter 9

  19. Key Financial Leverage Ratios for Avon Chapter 9

  20. Key Financial Leverage Ratios for Avon Continued Chapter 9

  21. Key Activity Ratios for Avon Chapter 9

  22. Key Activity Ratios for Avon Continued Chapter 9

  23. Key Profitability Ratios for Avon Chapter 9

  24. Key Profitability Ratios for Avon Continued Chapter 9

  25. Key Market Strength Ratios for Avon Chapter 9

  26. Ways to Assess the Quality of a Firm’s Reported Earnings Chapter 9