Making Informed Judgments
Part 7
Income Measures
Navigating Accounting, G. Peter & Carolyn R. Wilson, © NavAcc LLC, 1991-2009. Modified by [Your Name].
1
Menu

Income definition

Connecting income statements to balance sheets
 Intel
 Evolution of balance sheet
 Dissecting changes in owners’ equity
 Connecting owners’ equity changes to income statement
 Navigating statement of owners’ equity
 Exercises
 Perez 1
 Perez 2
 True- False

Income measurement

Closing thoughts
2
Income Definition
Things You Need to Know

Income measures performance during a reporting
period (such as a month or year).

Income is the increase in owners’ equity during the
period, excluding the effects of transactions with
owners, accounting policy changes, and restatements.

You have an income statement, and measurement
aside, your income during a period is based on the
increase in your owners’ equity during the period,
excluding gifts.

Thus, income is based on the increase in your net worth
or equivalently, your net assets (assets – liabilities).
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3
Income Definition
Questions
 Measurement aside, what events or circumstances
will likely have the biggest impact on a
representative student’s income for the reporting
period that starts today and ends with this course?
 What events and circumstances will likely have the
biggest impact on the student’s assets, without
having an offsetting affect on his or her liabilities?
 What events and circumstances will likely have the
biggest impact on the student’s liabilities, without
having an offsetting affect on his or her assets?
 What actions can the student take to increase his or
her income over this period?
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4
Income Definition
Take Aways

Income is the increase in owners’ equity during a
reporting period, excluding the effects of transactions
with owners, accounting policy changes, and
restatements.
 The definition of income depends on the definition of
owners’ equity, which depends on the definitions of assets
and liabilities.
 Income statements and balance sheets are connected.
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5
Income Definition
Take Aways

Measurement aside, the best way students can generate
income is to increase the financial value of their human
capital (earnings power) by studying and learning as
much as possible.
 Students’ income is mostly captured by the increase in
earnings power during the period plus compensation
earned from part-time jobs less operating costs associated
with housing, food, entertainment, tuition,
telecommunications, and transportation.
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6
Connecting Income Statements to Balance Sheets
Evolution of Intel’s Balance Sheet
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7
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 27, 2008 and December 29, 2007
2008
(In Millions--Except Par Value)
Assets
Current assets:
Cash and cash equivalents
$
Short-term investments
Trading assets
Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007)
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Marketable equity securities
Other long-term investments
Goodwill
Other long-term assets
Total assets
$
Liabilities and stockholders' equity
Current liabilities:
Short-term debt
$
Accounts payable
Accrued compensation and benefits
Accrued advertising
Deferred income on shipments to distributors
Other accrued liabilities
Total current liabilities
Long-term income taxes payable
Deferred tax liabilities
Long-term debt
Other long-term liabilities
Commitments and contingencies (Notes 18 and 24)
Stockholders' equity:
Preferred stock, $0.001 par value, 50 shares authorized; none issued
Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued
and outstanding (5,818 in 2007) and capital in excess of par value
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
2007
3,350
5,331
3,162
1,712
3,744
1,390
1,182
19,871
17,544
352
2,924
3,932
6,092
50,715
$
102
2,390
2,015
807
463
2,041
7,818
736
46
1,886
1,141
$
$
7,307
5,490
2,566
2,576
3,370
1,186
1,390
23,885
16,918
987
4,398
3,916
5,547
55,651
142
2,361
2,417
749
625
2,277
8,571
785
411
1,980
1,142
-
-
12,944
(393)
26,537
39,088
50,715
11,653
261
30,848
42,762
55,651
$
Intel's 2008 Form 10-K, page 57. www.sec.gov
See accompanying notes in the 10-K.
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Connecting Income Statements to Balance Sheets
Things You Need to Know
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Connecting Income Statements to Balance Sheets
Things You Need to Know
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Connecting Income Statements to Balance Sheets
Dissecting Changes in Intel’s Owners’ Equity
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Connecting Income Statements to Balance Sheets
Things You Need to Know
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Connecting Income Statements to Balance Sheets
Things You Need to Know
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13
Connecting Income Statements to Balance Sheets
Things You Need to Know
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14
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 27, 2008 and December 29, 2007
2008
(In Millions--Except Par Value)
Assets
Current assets:
Cash and cash equivalents
$
Short-term investments
Trading assets
Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007)
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Marketable equity securities
Other long-term investments
Goodwill
Other long-term assets
Total assets
$
Liabilities and stockholders' equity
Current liabilities:
Short-term debt
$
Accounts payable
Accrued compensation and benefits
Accrued advertising
Deferred income on shipments to distributors
Other accrued liabilities
Total current liabilities
Long-term income taxes payable
Deferred tax liabilities
Long-term debt
Other long-term liabilities
Commitments and contingencies (Notes 18 and 24)
Stockholders' equity:
Preferred stock, $0.001 par value, 50 shares authorized; none issued
Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued
and outstanding (5,818 in 2007) and capital in excess of par value
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
2007
3,350
5,331
3,162
1,712
3,744
1,390
1,182
19,871
17,544
352
2,924
3,932
6,092
50,715
$
102
2,390
2,015
807
463
2,041
7,818
736
46
1,886
1,141
$
$
7,307
5,490
2,566
2,576
3,370
1,186
1,390
23,885
16,918
987
4,398
3,916
5,547
55,651
142
2,361
2,417
749
625
2,277
8,571
785
411
1,980
1,142
-
-
12,944
(393)
26,537
39,088
50,715
11,653
261
30,848
42,762
55,651
$
Intel's 2008 Form 10-K, page 57. www.sec.gov
See accompanying notes in the 10-K.
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15
Connecting Income Statements to Balance Sheets
Things You Need to Know
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16
Connecting Income Statements to Balance Sheets
Things You Need to Know
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Connecting Income Statements to Balance Sheets
Connecting Intel’s Owners’ Equity Changes
to the
Income Statement
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18
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Years Ended December 27, 2008
(In Millions--Except Per Share Amounts)
Net revenue
Cost of sales
Gross margin
Research and development
Marketing, general and administrative
Restructuring and asset impairment charges
Operating expenses
Operating income
Gains (losses) on equity method investments, net
Gains (losses) on other equity investments, net
Interest and other, net
Income before taxes
Provision for taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Weighted average shares outstanding
Basic
Diluted
2008
37,586
16,742
20,844
5,722
5,458
710
11,890
8,954
(1,380)
(376)
488
7,686
2,394
$
5,292
$
$0.93
$0.92
$5,663.00
$5,748.00
Intel's 2008 Form 10-K, page 56. www.sec.gov
See accompanying notes in the 10-K.
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Connecting Income Statements to Balance Sheets
Navigating Intel’s Statement of Owners’ Equity
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20
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended December 27, 2008
(In Millions--Except Per Share Amounts)
Balance as of December 31, 2005
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Adjustment for initially applying SFAS No. 158, net of tax 1
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.40 per share)
Common Stock
and Capital
in Excess of Par Value
Number of
Shares
Amount
5,919
$
6,245
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Income (Loss)
$
127
Retained
Earnings
$ 29,810
$
Total
36,182
Three Years Ended December 27, 2008
-
-
26
5,044
-
-
-
(210)
-
5,044
26
5,070
(210)
-
(3,550)
(2,320)
1,248
1,375
(4,593)
(2,320)
(57)
28,984
36,752
73
(226)
-
1,248
1,375
(1,043)
-
Balance as of December 30, 2006
Cumulative-effect adjustments, net of tax 1:
Adoption of EITF 06-02
Adoption of FIN 48
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.45 per share)
5,766
7,825
-
-
-
-
-
318
Balance as of December 29, 2007
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.5475 per share)
5,818
-
Balance as of December 27, 2008
5,562
165
(113)
-
(181)
181
(181)
181
6,976
-
6,976
318
7,294
-
(2,494)
(2,618)
3,170
952
(2,788)
(2,618)
11,653
261
30,848
42,762
-
(654)
5,292
-
3,170
952
(294)
-
(In Millions--Except Per Share Amounts)
Balance as of December 29, 2007
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.5475 per share)
Balance as of December 27, 2008
1
1
72
(328)
-
1,132
851
(692)
$
12,944
$
(393)
5,292
(654)
4,638
(6,503)
(3,100)
$
26,537
Common Stock
and Capital
in Excess of Par Value
Number of
Shares
Amount
5,818
11,653
-
-
72
(328)
5,562
Accumulated
Other
Comprehensive
Income (Loss)
261
(654)
1,132
851
(692)
$
12,944
Retained
Earnings
30,848
$
(393)
$
Total
42,762
5,292
-
5,292
(654)
4,638
(6,503)
(3,100)
1,132
851
(7,195)
(3,100)
26,537
$
39,088
For further discussion of the adjustments recorded at the beginning of fiscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."
Intel's 2008 Form 10-K, page 59. www.sec.gov
See accompanying notes in the 10-K.
1,132
851
(7,195)
(3,100)
$
39,088
For further discussion of the adjustments recorded at the beginning of fiscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."
Intel's 2008 Form 10-K, page 59. www.sec.gov
See accompanying notes in the 10-K.
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21
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 27, 2008 and December 29, 2007
2008
(In Millions--Except Par Value)
Assets
Current assets:
Cash and cash equivalents
$
Short-term investments
Trading assets
Accounts receivable, net of allow ance for doubtful accounts of $17 ($27 in 2007)
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Marketable equity securities
Other long-term investments
Goodwill
Other long-term assets
Total assets
$
Liabilities and stockholders' equity
Current liabilities:
Short-term debt
$
Accounts payable
Accrued compensation and benefits
Accrued advertising
Deferred income on shipments to distributors
Other accrued liabilities
Total current liabilities
Long-term income taxes payable
Deferred tax liabilities
Long-term debt
Other long-term liabilities
Commitments and contingencies (Notes 18 and 24)
Stockholders' equity:
Preferred stock, $0.001 par value, 50 shares authorized; none issued
Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued
and outstanding (5,818 in 2007) and capital in excess of par value
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
2007
3,350
5,331
3,162
1,712
3,744
1,390
1,182
19,871
17,544
352
2,924
3,932
6,092
50,715
$
102
2,390
2,015
807
463
2,041
7,818
736
46
1,886
1,141
$
$
7,307
5,490
2,566
2,576
3,370
1,186
1,390
23,885
16,918
987
4,398
3,916
5,547
55,651
142
2,361
2,417
749
625
2,277
8,571
785
411
1,980
1,142
-
-
12,944
(393)
26,537
39,088
50,715
11,653
261
30,848
42,762
55,651
$
Three Years Ended December 27, 2008
(In Millions--Except Per Share Amounts)
Balance as of December 29, 2007
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.5475 per share)
Balance as of December 27, 2008
1
Common Stock
and Capital
in Excess of Par Value
Number of
Shares
Amount
5,818
11,653
-
-
72
(328)
5,562
Accumulated
Other
Comprehensive
Income (Loss)
261
(654)
1,132
851
(692)
$
12,944
Retained
Earnings
30,848
$
(393)
$
Total
42,762
5,292
-
5,292
(654)
4,638
(6,503)
(3,100)
1,132
851
(7,195)
(3,100)
26,537
$
39,088
For further discussion of the adjustments recorded at the beginning of fiscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."
Intel's 2008 Form 10-K, page 59. www.sec.gov
See accompanying notes in the 10-K.
Intel's 2008 Form 10-K, page 57. www.sec.gov
See accompanying notes in the 10-K.
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22
Connecting Income Statements to Balance Sheets
Things You Need to Know
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended December 27, 2008
(In Millions--Except Per Share Amounts)
Balance as of December 29, 2007
Components of comprehensive income, net of tax:
Net income
Other comprehensive income
Total comprehensive income
Proceeds from sales of shares through
employee equity incentive plans, net excess
tax benefit, and other
Share-based compensation
Repurchase and retirement of common stock
Cash dividends declared ($0.5475 per share)
Balance as of December 27, 2008
1
Common Stock
and Capital
in Excess of Par Value
Number of
Shares
Amount
5,818
11,653
-
-
72
(328)
5,562
Accumulated
Other
Comprehensive
Income (Loss)
261
(654)
1,132
851
(692)
$
12,944
Retained
Earnings
30,848
$
(393)
$
Total
42,762
5,292
-
5,292
(654)
4,638
(6,503)
(3,100)
1,132
851
(7,195)
(3,100)
26,537
$
39,088
For further discussion of the adjustments recorded at the beginning of fiscal years 2006 and 2007, see "Accounting Changes" in "Note 2: Accounting Policies."
Intel's 2008 Form 10-K, page 59. www.sec.gov
See accompanying notes in the 10-K.
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23
Connecting Income Statements to Balance Sheets
Exercises
Perez 1
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24
Question
25
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Connecting Income Statements to Balance Sheets
Perez 1(a)
Solution
26
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Connecting Income Statements to Balance Sheets
Perez 1(a)
Question
27
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Connecting Income Statements to Balance Sheets
Perez 1(b)
Solution
28
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Connecting Income Statements to Balance Sheets
Perez 1(b)
Question
29
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Connecting Income Statements to Balance Sheets
Perez 1(c)
Solution
30
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Connecting Income Statements to Balance Sheets
Perez 1(c)
Connecting Income Statements to Balance Sheets
Exercises
Perez 2
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Question
32
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Connecting Income Statements to Balance Sheets
Perez 2(a)
Solution
33
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Connecting Income Statements to Balance Sheets
Perez 2(a)
Question
34
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Connecting Income Statements to Balance Sheets
Perez 2(b)
Solution
35
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Connecting Income Statements to Balance Sheets
Perez 2(b)
Question
36
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Connecting Income Statements to Balance Sheets
Perez 2(c)
Solution
37
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Connecting Income Statements to Balance Sheets
Perez 2(c)
Connecting Income Statements to Balance Sheets
Exercises
True-False
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38
Connecting Income Statements to Balance Sheets
Questions
1.
True or False: Net income for a reporting period is the
increase in owners’ equity during the period,
excluding the effects of transactions with owners,
changes in accounting policies, and restatements.
2.
True or False: For revenue to be recognized, net
assets must increase.
3.
True or False: For expenses to be recognized, net
assets must decrease.
4.
True or False: The statement of owners’ equity
explains how comprehensive income effects balance
sheets.
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Connecting Income Statements to Balance Sheets
Answers
1.
True or False: Net income for a reporting period is the
increase in owners’ equity during the period, excluding
the effects of transactions with owners, changes in
accounting policies, and restatements.
This is the definition for comprehensive income.
2.
True or False: For revenue to be recognized, net assets
must increase.
3.
True or False: For expenses to be recognized, net
assets must decrease.
4.
True or False: The statement of owners’ equity explains
how comprehensive income effects balance sheets.
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Connecting Income Statements to Balance Sheets
Take Aways
 Balance sheets, income, statements, and statements of
owners’ equity are tightly connected.

The statement of owners’ equity helps outsiders
distinguish changes in owners’ equity associated with:
 Transactions with owners
 Distributions to shareholders: dividends or share repurchases
 Contributions from shareholders: stock issuances including
stock based compensation
 Comprehensive income
 Net income
 Other comprehensive income
 Accounting policy changes and restatements
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Income Measurement
Things You Need to Know

At the end of this course, a thousand objective
measurement experts will measure the income
earned by a representative student for the period that
starts today and ends with the course.

The representative student’s income is expected to
be similar to that earned by you and your classmates
over this reporting period.

The experts will interview your group to acquire
information needed to complete this task.
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42
Income Measurement
Questions
 What questions will the experts need to ask the
representative student to measure this income?
 How reliable is this measure: to what extent would
experts agree on the measurement?
 How does the reliability of income measures relate
to the reliability of balance sheet measures?
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43
Income Measurement
Take Aways
 To determine income measures for a period, you need to
first determine the changes in asset and liability
measures during the period.
 Thus, income measures depend on asset and liability
measures.
 The dispersion of experts’ estimates of the value of
income for a period depends on the entity’s assets and
obligations and how changes in experts’ estimates over
the period are dispersed.
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Closing Thoughts
 Balance sheets report the net effects of all entries
recorded from the time the entity was founded until the
reporting date.
 Balance sheets are useful:
 Help insiders and outsiders assess companies’ financial
health at reporting dates, meaning their ability to:
 Meet obligations
 Support operations
 Weather economic downturns
 Finance growth
 Balance sheets are imperfect:
 Some assets and liabilities are not recognized.
 Others are measured with varying degrees of reliability.
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Closing Thoughts
 Income statements measure performance over reporting
periods.
 Income statements are useful:
 Help insiders and outsiders assess past performance and
predict future performance.
 Can significantly affect insiders’ compensation.
 Can significantly affect outsiders’ investment decisions.
 Income statements are imperfect:
 Some revenues, expenses, gains, and losses are not
recognized.
 Others are measured with varying degrees of reliability.
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