Instructor : Ryan Williams
Learning Objectives

1. Recognize items that belong on an Income Statement.

2. Prepare an Income Statement.

3. Calculate COGS given information about changes in inventory.

4. Calculate net profit margin.

5. Recognize items that belong on a Balance Sheet.

6. Prepare a Balance Sheet.

7. Calculate accumulated depreciation, net fixed assets and gross fixed assets.

8. Discuss the purpose and potential shortcomings of the Income Statement and Balance Sheet.

9. Calculate dividends paid, number of shares outstanding, earnings per share, and the P/E ratio
using the current Income Statement and two most recent Balance Sheets.
Income Statement
 Other names: Statement of income, statement of
earnings, “P&L” (profit and loss).
 This matches revenues & expenses for the same
period, it is a SUMMARY of FLOWS, or a recording of
cumulative historical activity. Think of it like a history
book.
Basic Income Statement – 2.1
Income Statement
Company Name
For the time period ending date
Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
- Operating Expenses
=Operating Profit (EBIT)
-Interest Expense
=Profit Before Taxes (=EBT)
-Taxes
=Net Income
Coca-Cola’s Income Statement
Three Months Ended
April 3, 2009
NET OPERATING REVENUES
$
7,169
Cost of goods sold
2,590
GROSS PROFIT
4,579
Selling, general and administrative expenses
2,624
Other operating charges
OPERATING INCOME
92
1,863
Interest income
60
Interest expense
85
Equity income — net
17
Other income (loss) — net
INCOME BEFORE INCOME TAXES
Income taxes
CONSOLIDATED NET INCOME
(40)
1,815
456
1,359
Basic Income Statement Items
• NET SALES: sale revenue is recorded when the ownership is transferred
from the seller to the buyer. Consider, though, that some revenue is
never collected (bad creditors, trial periods, money-back guarantee…)
Net sales= Gross sales – (returns & allowances)
• COST OF GOODS SOLD (COGS): direct costs of manufacturing/selling a
product
COGS = Beginning Inventory
+ Materials purchases
– Ending inventory
Basic Income Statement Items
 OPERATING EXPENSES: Include management
salaries, advertising expenditures, lease payments,
repairs & maintenance, R&D, general &
administrative expenses
 INTEREST EXPENSE: cost of borrowing money
 TAXES: Federal, state and/or local levels
 NET INCOME: it is the ‘bottom line’ of income
statement, and it represents the base profit earned
during accounting period
We will go through Assignment 2.1
Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
- Operating Expenses
=Operating Profit (EBIT)
-Interest Expense
=Profit Before Taxes (=EBT)
-Taxes
=Net Income
Income Statement
 Earnings per share (EPS) : it indicates the profit earned by each
share of stock.
EPS 
net income available
no. of common
to shareholde
shares outstandin
rs
g
 P/E ratio
P/E Ratio 
current
market price of the stock
EPS
 Net Profit Margin: Net income divided by Net Sales
Balance Sheet
 Company’s resources are identified as:
 Assets
 Liabilities
 Owner’s equity
 Balance sheet identity:
Total Assets = Total Liabilities + Shareholders’ Equity
 “Stock” measure statement: each value is the value of the account
at the specific date associated with the balance sheet.
 Assets and Liabilities ordered by liquidity (from the most liquid
to the less liquid)
Another way to think about it
 Balance sheet:
Assets: The stuff a company owns.
Liabilities & Equity: How a company paid for their stuff.
 Income Statement: How much money the company’s
stuff is making for them.
Balance Sheet – Table 2.2
ASSETS
LIABILITIES
Cash
Net Accounts Receivable
Inventories
Notes Payable
Accounts Payable
Accrued Expenses
Total Current Assets
Current Portion of LT Debt
Total Current Liabilities
Gross Fixed Assets
(Accumulated Depreciation)
LT Debt
Net Fixed Assets
Total Liabilities
Total Assets
Preferred Stock
Common Stock
Retained Earnings
Total Liabilities and Equity
Current assets
CURRENT ASSETS: assets that can be converted into
cash within a year (arbitrary)
 Cash
 Most liquid asset.
 It includes highly liquid marketable securities
 Net accounts receivable (Net A/R)
 Companies sell products/services on credit, they do not always ask
for cash.
 Some customers don’t pay up: Allowance for doubtful accounts
Net A/R = Gross A/R – allowance for doubtful accounts
Current assets – cont.
 Inventory
 Raw materials, work in process, finished goods
 FIFO, LIFO, average cost
End of year inventory
= Beginning of year inventory + purchases - COGS
Total current assets
= Cash + Net A/R + Inventory
Long-term assets
FIXED ASSETS
 Equipment, buildings, vehicles, computers etc
 Permanent nature; needed for business operations
 Reported at book value
= original historical cost – allowable depreciation
 Gross fixed assets: original cost of assets
 Accumulated depreciation
 Straight-line
 Accelerated cost recovery
Net fixed assets
= gross fixed assets – accumulated depreciation
Total assets (final left hand side)
Total assets
= Current assets + long-term assets
Assets (LHS of balance sheet) must be financed by a
combination of liabilities and owner’s equity (RHS of
balance sheet)
 In other words, the balance sheet has to balance.
 If you have constructed a balance sheet and it does not
balance, you have done something wrong.
Liabilities
 CURRENT LIABILITIES
• Notes payable
• Accounts payable (A/P)
• Accrued expenses (accruals)
• Current portion of long-term debt
→ SUM = TOTAL CURRENT LIABILITIES
 LONG-TERM DEBT
• Liabilities with maturities in excess of 1 year
Total liabilities
= current liabilities + L.T. debt
Equity
 COMMON STOCK
 Common stock at par
Book Value of Common
Stock  ( par value)  (# of common
shares outstandin
 Additional paid-in capital (capital surplus): additional money
generated when company sold stocks
Paid - In Capital
 ( mkt value - par value)  (# of common
shares outstandin
 RETAINED EARNINGS
 Cumulative total of all net income reinvested into the
company: this income is NOT available o shareholders!
Annual addition to retained earnings
= net income – dividends paid
g)
g)
Total Equity
Shareholders’ equity
= common stock at par +
additional paid-in capital +
retained earnings
 Shareholders’ equity also known as Net worth, owners’
equity or book value of firm’s equity
Preferred Stock
 PREFERRED STOCK
 Hybrid security – Mixture of Debt & Equity
 Debt component: pays fixed periodic amount (like the
interest on debt).
 Equity component: if payment is not made, company is
not in default (in the case of debt there is default).
 Preferred dividends usually cumulative; no voting rights.
Total Liabilities and equity (right
hand side)
Total liabilities and equity
= total liabilities +
preferred stock (if any) +
shareholders’ equity
 In other words, the balance sheet has to balance.
 If you have constructed a balance sheet and it does not
balance, you have done something wrong.
Net Sales
- Cost of Goods Sold (COGS)
= Gross Profit
ASSETS
LIABILITIES
Cash
Net Accounts Receivable
Inventories
Notes Payable
Accounts Payable
Accrued Expenses
Total Current Assets
Current Portion of LT Debt
Total Current Liabilities
Gross Fixed Assets
(Accumulated Depreciation) LT Debt
Net Fixed Assets
Total Liabilities
Total Assets
Preferred Stock
Common Stock
Retained Earnings
Total Liabilities and Equity
- Operating Expenses
=Operating Profit (EBIT)
-Interest Expense
=Profit Before Taxes
(=EBT)
-Taxes
=Net Income
Next Class
 Quiz 1