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200782 Lecture Notes - Lecture 5: Income Statement, Financial Statement

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School
UWS
Department
University of Western Sydney
Course
200782
Professor
anonymous

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Document Summary

Revenue is known as the top line because it is displayed first on a company"s income statement. Expenses are then deducted from revenue in order to obtain net income or profit, also referred to as the bottom line. The profit of a company is calculated simply as revenues minus expenses. In order to increase profit, and hence, earnings per share for its shareholders, a company can increase its revenues and/or reduce expenses. Investors will often consider a company"s revenue and net income separately to determine the health of a business. It is possible for net income to grow while revenue remains stagnant, as a result of cost-cutting; such a situation does not bode well for a company"s long-term growth. When public companies report their quarterly earnings, the two figures that receive the most attention are typically revenue and earnings per share ("earnings" being equivalent to net income).

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Related Questions

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

Please analyze the future of IBM with a company that does not have solid financials, such as Tesla. Qualitative measures will be required. What are tthe likelihoods of success and how could that be determined (for Tesla) if current numbers do not provide promise. Tesla is breaking into an emerging market of hybrid vehicle technology, and though the technology has not fully evovled, will it? How do Telsa's finaincial compare to IBM as they compare to success or failre?

Thank you

TESLA INC (TSLA) CashFlowFlag INCOME STATEMENT
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Revenue 4046 7000
Cost of revenue 3123 5401
Gross profit 924 1599
Operating expenses
Research and development 718 834
Sales, General and administrative 922 1432
Total operating expenses 1640 2267
Operating income -717 -667
Interest Expense 119 199
Other income (expense) -40 120
Income before taxes -876 -746
Provision for income taxes 13 27
Net income from continuing operations -889 -773
Other 98
Net income -889 -675
Net income available to common shareholders -889 -675
Earnings per share
Basic -6.93 -4.68
Diluted -6.93 -4.68
Weighted average shares outstanding
Basic 128 144
Diluted 128 144
EBITDA -334 400
TESLA INC (TSLA) Statement of CASH FLOW
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Cash Flows From Operating Activities
Net income -889 -773
Depreciation & amortization 423 947
Amortization of debt discount/premium and issuance costs 72 87
Stock based compensation 198 334
Accounts receivable 46 -217
Inventory -1574 -2466
Prepaid expenses -30 57
Accounts payable
Accrued liabilities
Other working capital 1064 1932
Other non-cash items 165 -26
Net cash provided by operating activities -524 -124
Cash Flows From Investing Activities
Investments in property, plant, and equipment -1635 -1440
Acquisitions, net -12 214
Purchases of investments
Sales/Maturities of investments 17
Other investing activities -26 -206
Net cash used for investing activities -1674 -1416
Cash Flows From Financing Activities
Debt issued 319 2853
Debt repayment -204 -1904
Warrant issued
Common stock issued 750 1702
Other financing activities 658 1094
Net cash provided by (used for) financing activities 1524 3744
Effect of exchange rate changes -34 -7
Net change in cash -709 2196
Cash at beginning of period 1906 1197
Cash at end of period 1197 3393
Free Cash Flow
Operating cash flow -524 -124
Capital expenditure -1635 -1440
Free cash flow -2159 -1564
TESLA INC (TSLA) CashFlowFlag BALANCE SHEET
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Assets
Current assets
Cash
Cash and cash equivalents 1197 3393
Total cash 1197 3393
Receivables 169 499
Inventories 1278 2067
Prepaid expenses 125 194
Other current assets 23 106
Total current assets 2792 6260
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 5766 12920
Accumulated Depreciation -571 -1018
Net property, plant and equipment 5195 15037
Intangible assets 376
Other long-term assets 106 991
Total non-current assets 5301 16404
Total assets 8092 22664
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 1150
Capital leases 633
Accounts payable 916 1860
Taxes payable 101 153
Accrued liabilities 322 1005
Deferred revenues 707 1427
Other current liabilities 137 232
Total current liabilities 2816 5827
Non-current liabilities
Long-term debt 2082 118
Capital leases
Deferred taxes liabilities
Accrued liabilities 150
Deferred revenues 446 852
Minority interest 785
Other long-term liabilities 1659 10179
Total non-current liabilities 4187 12084
Total liabilities 7004 17911
Stockholders' equity
Common stock 0 0
Additional paid-in capital 3415 7774
Retained earnings -2322 -2997
Accumulated other comprehensive income -4 -24
Total stockholders' equity 1089 4753
Total liabilities and stockholders' equity 8092 22664
INTERNATIONAL BUSINESS MACHINES CORP (IBM) CashFlowFlag INCOME STATEMENT
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Revenue 81741 79919
Cost of revenue 41057 41625
Gross profit 40684 38294
Operating expenses
Research and development 4565 4120
Sales, General and administrative 19894 20479
Other operating expenses 535 590
Total operating expenses 24994 25189
Operating income 15690 13105
Interest Expense 468 630
Other income (expense) 723 -145
Income before taxes 15945 12330
Provision for income taxes 2581 449
Net income from continuing operations 13364 11881
Net income from discontinuing ops -174 -9
Net income 13190 11872
Net income available to common shareholders 13190 11872
Earnings per share
Basic 13.48 12.43
Diluted 13.42 12.38
Weighted average shares outstanding
Basic 979 955
Diluted 983 959
EBITDA 20268 17341
INTERNATIONAL BUSINESS MACHINES CORP (IBM) Statement of CASH FLOW
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Cash Flows From Operating Activities
Net income 13190 11872
Depreciation & amortization 3855 4381
Deferred income taxes 1387 -1132
Stock based compensation 468 544
Inventory 133 -14
Accounts payable 81 197
Accrued liabilities
Other working capital -2658 1048
Other non-cash items 552 62
Net cash provided by operating activities 17008 16958
Cash Flows From Investing Activities
Investments in property, plant, and equipment -3579 -3567
Property, plant, and equipment reductions 370 424
Acquisitions, net -3750 -6133
Purchases of investments -3073 -5917
Sales/Maturities of investments 2842 5692
Purchases of intangibles -572 -583
Other investing activities -397 -892
Net cash used for investing activities -8159 -10976
Cash Flows From Financing Activities
Debt issued 5540 9132
Debt repayment -5622 -6395
Common stock issued 322 204
Common stock repurchased -4609 -3502
Dividend paid -4897 -5256
Other financing activities 100 26
Net cash provided by (used for) financing activities -9166 -5791
Effect of exchange rate changes
Net change in cash -317 191
Cash at beginning of period 8476 7686
Cash at end of period 8159 7877
Free Cash Flow
Operating cash flow 17008 16958
Capital expenditure -4151 -4150
Free cash flow 12857 12808
INTERNATIONAL BUSINESS MACHINES CORP (IBM) CashFlowFlag BALANCE SHEET
Fiscal year ends in December. USD in millions except per share data. 2015-12 2016-12
Assets
Current assets
Cash
Cash and cash equivalents 7686 7826
Short-term investments 508 701
Total cash 8194 8527
Receivables 1201 1057
Inventories 1551 1553
Deferred income taxes
Prepaid expenses 4205 4564
Other current assets 27353 28187
Total current assets 42504 43888
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 29341 60267
Accumulated Depreciation -18616 -38606
Net property, plant and equipment 10725 21661
Equity and other investments 5187 4585
Goodwill 32021 36199
Intangible assets 3486 4689
Deferred income taxes 4822 5224
Prepaid pension benefit
Other long-term assets 11747 12055
Total non-current assets 67988 84413
Total assets 110492 128301
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 6461 7513
Accounts payable 6028 6209
Taxes payable 2847 3235
Accrued liabilities 7913 8282
Deferred revenues 11021 11035
Other current liabilities -1 1
Total current liabilities 34269 36275
Non-current liabilities
Long-term debt 33428 34655
Deferred taxes liabilities
Accrued liabilities
Deferred revenues 3771 3600
Pensions and other benefits 16504 17070
Minority interest 162 146
Other long-term liabilities 8099 7478
Total non-current liabilities 61964 62949
Total liabilities 96233 99224
Stockholders' equity
Common stock 53262 53935
Retained earnings 146124 152759
Treasury stock -155518 -159050
Accumulated other comprehensive income -29606 -29398
Total stockholders' equity 14262 18246
Total liabilities and stockholders' equity 110495 117470

QUESTION 2 You are a corporate finance analyst at a investment management firm, which is looking at making an investment into the company called Boston Turkey Inc. The company, Boston Turkey Inc., has been in existence for only two years, and its stock is currently trading at $20 per share (There are 100,000 shares outstanding.) The following are the most recent financial statements of the company: Further company and market information is indicated below: Current Numbers:

Earnings per share = $ 2.40

Net Income = $240,000

Dividends per share = $ 1.00

Interest Expenses = $100,000

Market price per share = $ 20

Market Value of Debt = 1,250,000

Number of shares = 100,000

Book Value of Equity = $1,500,000

Cash is only Current Asset

Tax Rate = 40%

Boston Turkey expects its revenues to grow 10% next 5 years, and its expenses to remain at the same percentage as indicated in the base year. The depreciation and interest expenses will remain unchanged at $100,000 next year. The working capital, as a percentage of revenue, will remain unchanged. Develop the next 5 years worth of income statement and common size it to the base year Income Statement-

BASE YEAR Revenues$ 1,000,000

Expenses$400,000

Depreciation$100,000

EBIT$500,000-

Interest Expense$100,000

Taxable Income$400,000-

Tax$160,000

Net Income$240,000 i

Assume in your revision year that the company will maintain the perpetual net income for the going remaining years at a market discount rate of 12%. The firm expects to maintain the dividend payout policy relative to its net income each year going forward until the final year of the investment whereafter it will pay a fixed $1.85 per share into perpetuity Questions to answer:

1.You are looking to invest $200,000 for the firm for a period of 5 years, how many shares do you purchase a part of the purchase price?

2.What is the dividend payout percentage for the company in the base year?

3.What is the nominal dollar value of dividend earnings for the company in the third year of the investment?

4.If the company is selling for a price to earning ratio of 8.33 in the base year and that P/E multiple is maintained till the 5th year, what will be the price of the stock in the fifth year of the investment horizon?

5.If your investment firm has a 8% preputial discount rate relating to the firm dividend for the perpetuity value of the company, what is the per share value of the company in the 5th year of the investment horizon?

6.If you firm has a hurdle rate of 10% to the make the investment, would you make the investment?

7.What is the NPV value for this investment at a 10% discount rate?

8.What is the IRR for this investment?

9.What is the Enterprise Value of the investment in the base year?