Chapter 3: Income Statement and Statement of Stockholders’ Equity
1. How would you describe operating performance?
a. What are the important things you would like to know?
2. There are 4 primary categories of things found in an income statement:
a. Gross profit
b. Operating profit
c. Earnings before Taxes
d. Net Income
e. What about EPS
3. Discuss the idea of control?
a. What do the following line items describe with respect to control?
i. Gross profit (GP)
1. production
ii. Operating profit (EBIT)
1. total business “running” expenses
iii. Earnings before income taxes (EBT)
1. control of expenses to do the business (operations and financing)
4. Why do we disclose these items separately?
a. Discontinued operations
b. Extraordinary transactions
5. How do you create a Common-Size Income Statement?
a. What is the benefit?
b. Gross Profit (or Gross Margin)
GPM 
Gross Profit
Sales
OPM 
EBIT
Sales
i. What does it measure?
c. Operating Profit Margin
i. What kind of expenses are here?
6. Effective Tax Rate
Effective Tax Rate 
a. Also known as average tax rate.
Income Tax Expense
Earnings Before Taxes
NPM 
7. Net Earnings
Net Income
Sales
8. Earnings Per Common Share (EPS)
a. How do we calculate?
b. What are outstanding shares?
i. Describe the way common stock is created and then the different categories.
Company becomes a corporation
Decides how many shares it want to distribute
Some it issues
Some it holds in “inventory”
The shares issued are called outstanding shares
The company could buy back some of these over time; called treasury stock
9. Comprehensive Income
a. there are four items
i. Foreign currency translation effects
ii. Unrealized gains and losses
iii. Additional pension liabilities
iv. Cash flow hedges
1. What is a cash flow hedge????
10. The Statement of Stockholders’ Equity
a. What are
i. Dividends
ii. stock dividends and splits
iii. retained earnings
11. Buffett and Gates I would use the disk available from Beth or Ariana.
a. Part 1 of 8
http://www.youtube.com/watch?feature=player_detailpage&v=7zC8DjXUfgU
b. Part 2 of 8
http://www.youtube.com/watch?feature=player_detailpage&v=DdLy4jeT6pc
c. Part 3 of 8
http://www.youtube.com/watch?feature=player_detailpage&v=LwB54Oz-Gs8
d. Part 4 of 8
http://www.youtube.com/watch?feature=player_detailpage&v=e6tBiyDcxfU
Chapter 3
1. Prepare a multiple-step income statement for ABC Company from the
following data:
Cost of goods sold
Interest expense
$450
30
Depreciation expense
120
Net sales
990
Interest income
80
Income tax expense
70
Advertising expense
100
General and administrative expenses 150
Common Size
Net sales
990
100%
COGS
450
45.5%
GP
540
54.5%
Selling and Admin
150
15.5%
Advertising
100
10.1%
Depreciation
120
12.1%
EBIT
320
32.3%
30
3.0%
Interest Income
+80
8.0%
EBT
370
37.4%
Taxes
70
7.0%
Net Income
300
30.4%
Interest Expense
2. Use the above statement to prepare a common-size statement.
3. Use the following information to analyze the BJ Company. Calculate any profit
measures deemed necessary in order to discuss the profitability of the company
.
BJ Company
Income Statements
For the Years Ended Dec. 31, 2009 and 2008
2009
2008
$174,000
$167,000
114,000
115,000
$ 60,000
$ 52,000
54,000
46,000
Operating profit
$ 6,000
$ 6,000
Interest expense
(1,000)
(1,000)
$ 5,000
$ 5,000
2,000
2,000
$ 3,000
$ 3,000
Net sales
COGS
Gross profit
General and administrative expenses
Earnings before taxes
Income taxes
Net income
2009
2008
What is the GPM?
34.5%
31.1%
What is the OPM?
3.4%
3.5%
What is the NPM?
1.7%
1.8%