Class 05

Question 1

what kind of CF statement must we use?

Answer 1

multi-step

Question 2

what is the multi-step format?

Answer 2

1. sales
2. COGS
   a. gross profit
3. operating expenses
   a. selling, admin
   b. depreciation
   i. operating expenses income
4. other revenue G/L (non operating)
   a. interest revenue/expense
   b. PPE G/L
   i. income before tax
5. income tax
   a. cont. operations income
6. discont. operations (net of taxes)
   a. discont. operations income
   b. G/L of disposal
7. non-controlling interest
   a. net income
   b. EPS

Question 3

what are irregular items on the IS?

Answer 3

1. unusual + infrequent G/L
2. change in accounting estimates
3. discontinued operations
4. non-controlling interest

Question 4

what are unusual + infrequent G/L?

Answer 4

unrelated to day to day operations
(interest/dividend revenue)

Question 5

where do “unusual + infrequent G/L” appear?

Answer 5

after income from operations + before income from cont. operation)

Question 6

where do “changes in accounting estimates” appear?

Answer 6

before operating income

Question 7

how do you adjust for “changes in accounting estimates”?

Answer 7

1. recalculate the depreciation from new estimates
2. new depreciation expense = divide year balance / new predictions
3. old > new = overstated (add the difference on the IS)
4. RE value = difference * years overstated

Question 8

where do “discontinued operations” appear?

Answer 8

after income from cont. operations + before net income

Question 9

what’s considered “discontinued operations”?

Answer 9

1. must be able to separate the CFs
2. provide a reason + disclosure
3. record manner + timing
4. record 2 lines on the IS

Question 10

how do you calculate “discontinued operations”?

Answer 10

(net sales - book value) tax rate)

you get a tax credit on L—which means pre-tax is more negative)

Question 11

where do “non-controlling interest” appear?

Answer 11

after income from cont. operations + before net income (NI limited to the % of company you own)

Question 12

what items bypass the IS?

Answer 12

1. changes in AC rules + errors
2. other comprehensive income

Question 13

what are “changes in AC rules + errors”?

Answer 13

back track to prior years assuming the new method

Question 14

where are “changes in AC rules + errors” reflected?

Answer 14

Beg. RE (old vs new + (1 - t)) on the statement of RE (current year)

Question 15

how do you account “changes in AC rules + errors”?

Answer 15

if old balance > new—dr. RE + cr. “account”

Question 16

how do you calculate “other comprehensive income”?

Answer 16

= net income + OCI

(any IS bypasses come here)

Question 17

what types of OCI exist?

Answer 17

1. unrealized G/L on investments
2. foreign currency G/L
3. G/L hedging transactions
4. pension adjustments

Question 18

where do you report OCI?

Answer 18

1. statement of income
2. statement of comp. income (NI + OCI)

Question 19

what does the statement of SE include?

Answer 19

= stocks + RE (NI) + AOCI (OCI)

Question 20

what IS ratios are important?

Answer 20

EPS + PE ratios

Question 21

what is the PE ratio?

Answer 21

= MV of CS/EPS
(high value means overpriced stock)

Question 22

what is the dividend yield?

Answer 22

= dividends per CS (annual)/MV of CS

Question 23

what is profit margin?

Answer 23

= net income/sales

Question 24

what is gross margin?

Answer 24

= (sales - COGS)/sales

Question 25

what is return on equity?

Answer 25

= NI/avg. stakeholder equity

Question 26

what is return on assets after tax?

Answer 26

= EBIAT/avg. total assets

Question 27

what is EBIAT?

Answer 27

= EBIT * (1 - t)