1-1
9-1
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 9
The Income Statement and the
Statement of Cash Flows
McGraw-Hill/Irwin
McGraw-Hill/Irwin
9-1
© 2008
The ©McGraw-Hill
Companies,
Inc., All
Reserved.
Copyright
2011 by The McGraw-Hill
Companies,
Inc.,Rights
All Rights
Reserved.
1-2
9-2
LO1
Revenue
Income Statement
Revenue is generated when a firm sells a product or
provides a service to a client or customer and receives
cash, creates an account receivable, or satisfies an
obligation.
Revenue is generally measured by the amount of cash
received or expected to be received from a transaction.
Revenue is realized when the product or service has been
exchanged for cash, claims to cash, or an asset that is
readily convertible to a known amount of cash.
Revenue is earned when the firm has completed, or
substantially completed, the activities it must perform to
be entitled to the revenue benefits.
Companies should disclose unusual revenue recognition
methods, such as percentage-of-completion or
installment methods.
McGraw-Hill/Irwin
9-2
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-3
9-3
LO2
Shipping Terms
Buyer
Seller
FOB Shipping
Point
Ownership
transfers to
buyer when
merchandise is
passed to
carrier, and the
buyer pays the
shipping costs.
McGraw-Hill/Irwin
Merchandise
Carrier
FOB
Destination
Ownership
transfers to
buyer when
merchandise is
passed to
buyer, and the
seller pays the
shipping costs.
9-3
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-4
9-4
LO2
Cost of Goods Sold
In a perpetual inventory system, cost of
goods sold is determined for each sale.
Calculation of cost of goods sold in a
periodic inventory system
Beginning inventory
Gross purchases
Less: Purchase discounts
Less: Purchase returns and allowances
Net Purchases
Add: Freight-In
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
McGraw-Hill/Irwin
$ 47,000
$ 361,200
(3,500)
(1,800)
355,900
2,000
357,900
404,900
(53,100)
$ 351,800
9-4
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-5
9-5
Gross Profit
LO3
Gross profit is the excess of sales over
cost of goods sold.
Year
2008
2007
2006
$ 400,000 $ 355,000 $ 320,000
285,000
250,000
225,000
115,000
105,000
95,000
Item
Sales
Cost of goods sold
Gross profit
Gross profit ratio = Gross profit ÷ Net sales
Year
Gross
Profit
Sales
Gross
Profit
Ratio
2008 $115,000 ÷ $400,000 = 28.75%
McGraw-Hill/Irwin
2007
105,000 ÷
355,000 = 29.58%
2006
95,000 ÷
320,000 = 29.69%
9-5
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-6
9-6
LO4
Expenses
Outflows or other using up of assets or incurring
liabilities from delivering or producing goods, rendering
services, or carrying out other activities that constitute
the entity’s ongoing central operations.
1. Some expenses are recognized concurrently with the
revenues to which they relate (matching principle).
2. Some expenses are recognized in the period in which
they are incurred (administrative salaries).
3. Some expenses result from an allocation of the cost
of an asset to the period (depreciation).
McGraw-Hill/Irwin
9-6
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-7
9-7
LO4
Operating Expenses
Operating expenses usually are reported in
the following classifications on the income
statement:
1. Selling expenses.
2. General and administrative expenses.
3. Research and development expenses.
McGraw-Hill/Irwin
9-7
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-8
9-8
LO5
Multiple-Step Income
Statement
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
General and admin.
Depreciation
Income from operations
Other revenues and gains:
Interest income
Gain
Other expenses and losses:
Interest
Loss
Income before taxes
Income taxes
Net income
McGraw-Hill/Irwin
$
$
197,350
78,500
17,500
785,250
351,800
433,450
293,350
140,100
62,187
24,600
86,787
27,000
9,000
$
(36,000)
190,887
62,500
128,387
9-8
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-9
9-9
Earnings Per Share
LO6
Basic = Income Available to Common Shareholders
Weighted-Average Common Shares Outstanding
EPS
Income Available
to Common = Net Income − Preferred Stock Dividends
Shareholders
Matrix, Inc. reports net income of $128,387. Matrix
has 1,000 shares of $100 par value, 8%, cumulative
preferred stock outstanding.
Description
Balance
Issued
Purchase
Issued
McGraw-Hill/Irwin
Common Shares
Outstanding
100,000
25,000
(3,000)
10,000
9-9
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-10
9-10
Income Statement
Alternatives
LO7
Single-Step
Multiple-Step
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Revenues and gains:
Sales, net
Interest income
Gain on sale of plant assets
Total revenues and gains
$ 785,250
62,187
24,600
872,037
Expenses and losses:
Cost of goods sold
$ 351,800
Selling Expenses
197,350
General and Admin. Exp.
78,500
Depreciation
17,500
Interest
27,000
Income taxes
62,500
Loss: sale of investment
9,000
Total expenses & losses
743,650
Net income
$ 128,387
McGraw-Hill/Irwin
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
$
General and admin.
Depreciation
Income from operations
Other revenues and gains:
Interest income
Gain
Other expenses and losses:
Interest
Loss
Income before taxes
Income taxes
Net income
$ 785,250
351,800
433,450
197,350
78,500
17,500
62,187
24,600
27,000
9,000
293,350
140,100
86,787
(36,000)
190,887
62,500
$ 128,387
9-10
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-11
9-11
LO8
Gains and Losses
Increases (gains) or decreases (losses) in an entity’s net assets
result from nonoperating activities. Gains/losses are usually
reported as other income and excluded from operating income.
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
General and admin.
Depreciation
Income from operations
Other revenues and gains:
Interest income
Gain
Other expenses and losses:
Interest
Loss
Income before taxes
Income taxes
Net income
McGraw-Hill/Irwin
$
$
197,350
78,500
17,500
785,250
351,800
433,450
293,350
140,100
62,187
24,600
86,787
27,000
9,000
$
(36,000)
190,887
62,500
128,387
9-11
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-12
9-12
LO9
Statement of Cash Flows
Provides relevant information about the cash
receipts and cash payments of an enterprise
during a period. The statement shows why cash
and cash equivalents changed during the period
by reporting net cash provided or used by . . .



Operating
Activities
Investing
Activities
Financing
Activities
McGraw-Hill/Irwin
9-12
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-13
9-13
Cash Inflows
LO9
Operating Activities
Cash received
from revenues
Investing Activities
Financing Activities
Sale of operational assets
Sale of investments
Collections of loans
Issuance of stock
Issuance of bonds
and notes
Enterprise
Cash paid for
expenses
Purchase of operational assets
Purchase of investments
Loans to others
Payment of dividends
Repurchase of stock
Repayment of debt
Cash Outflows
McGraw-Hill/Irwin
9-13
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-14
9-14
Cash Flows from Operating
Activities
L O 10
Supplemental
Reconciliation
Direct
Presentation
Cash Flows from Operating Activities
Cash received from customers
Cash paid to suppliers
Cash paid for operating expenses
Cash Flows from Operating Activities
$ 175,000
120,000
27,630
27,370
Cash Flows from Investing Activities
Proceeds from sale of Equipment
43,000
Cash Flows from Financing Activities
Proceeds from sale of Stock
Principal paid on Bonds
Principal paid on Notes
Net Cash Flows for the Period
Add: Beginning Cash Balance
Ending Cash Balance
McGraw-Hill/Irwin
$
50,000
(100,000)
(10,000)
(60,000)
10,370
21,000
$ 31,370
Net Income
$ 15,020
Add (Deduct) items not affecting cash:
Depreciation expense
5,000
Increase in accounts payable
4,600
Minority interest in subsidiaries
25,000
Gain on sale of land
(17,250)
Increase in accounts receivable
(3,000)
Increase in inventory
(2,000)
Net Cash Flow from Operations
$ 27,370
Note that net cash flow
from operations and cash
flows from operating
activities reconcile.
9-14
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-15
9-15
Statement of Cash Flows
L O 10
Indirect Presentation
Net Income
$ 15,020
Add (Deduct) items not affecting cash:
Depreciation expense
Increase in accounts payable
Minority interest in subsidiaries
Gain on sale of land
Increase in accounts receivable
Increase in inventory
Net Cash Flow from Operations
Cash Flows from Investing Activities
Proceeds from sale of Equipment
Cash Flows from Financing Activities
Proceeds from sale of Stock
$50,000
Principal paid on Bonds
(100,000)
Principal paid on Notes
(10,000)
Net Cash Flows for the Period
Add: Beginning Cash Balance
Ending Cash Balance
McGraw-Hill/Irwin
5,000
4,600
25,000
(17,250)
(3,000)
(2,000)
27,370
43,000
About 98%
of major
corporations
use the indirect
method of
presentation!
(60,000)
10,370
21,000
31,370
9-15
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-16
9-16
L O 11
Interpreting the Statement
A business entity should have positive cash
flows from operational activities. If operating
activities do not generate cash, the entity must
look to outside parties for funds to meet its
day-to-day activities.
McGraw-Hill/Irwin
9-16
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.