MGAB01H3 Chapter Notes - Chapter 3: Operating Expense, Accrual

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24 Oct 2017

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MGAB01H3 Full Course Notes

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All business want to turn cash into more cash: done thru investments, does not require borrowing money, does not require selling assets. Typical operating cycle: pay cash for supplies, sell goods and services to customers, receive cash from customers, purchase goods and services. Periodicity assumption: assumes that the long life of a company can be reported in shorter time periods, such as months, quarters, and years. Major sections for statements of earnings: results continuing operations, results of discontinued operations (net earnings, earnings per share. Revenue: increases in assets or settlements of liabilities from ongoing operations of the business. Expenses: decreases in assets or increase in liabilities from ongoing operations, and are incurred to generate revenues during the period: cost of sales (cost of products, operating expenses (usual costs) Gross profit (gross margin): net sales less cost of sales. Earnings from operations: equals net sales less cost of sales and operating expenses.

Related Questions

1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

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

ivorypig770

Statement of Cash Flows Using a Work SheetâIndirect Method (Appendix)

Peoria Corp. just completed another successful year, as indicated by the following income statement:

	For the Year Ended December 31, 2017

Sales revenue	$1,250,000
Cost of goods sold	700,000
Gross profit	$550,000
Operating expenses	150,000
Income before interest and taxes	$400,000
Interest expense	25,000
Income before taxes	$375,000
Income tax expense	150,000
Net income	$225,000

Presented here are comparative balance sheets:

	December 31
	2017	2016

Cash	$52,000	$90,000
Accounts receivable	180,000	130,000
Inventory	230,000	200,000
Prepayments	15,000	25,000
Total current assets	$477,000	$445,000
Land	$750,000	$600,000
Plant and equipment	700,000	500,000
Accumulated depreciation	(250,000)	(200,000)
Total long-term assets	$1,200,000	$900,000
Total assets	$1,677,000	$1,345,000
Accounts payable	$130,000	$148,000
Other accrued liabilities	68,000	63,000
Income taxes payable	90,000	110,000
Total current liabilities	$288,000	$321,000
Long-term bank loan payable	$350,000	$300,000
Common stock	$550,000	$400,000
Retained earnings	489,000	324,000
Total stockholders' equity	$1,039,000	$724,000
Total liabilities and stockholders' equity	$1,677,000	$1,345,000

Other information is as follows:

Dividends of $60,000 were declared and paid during the year.

Operating expenses include $50,000 of depreciation.

Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.

The president has asked you some questions about the year's results. She is very impressed with the profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $50,000.

Required:

1. Using the format in the chapter's appendix, prepare a statement of cash flows work sheet. If an amount box does not require an entry, leave it blank. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.

	Balances			Cash Inflows (Outflows)
Accounts	12/31/17	12/31/16	Changes	Operating	Investing	Financing
Cash	$	$	$	$	$	$
Accounts Receivable
Inventory
Prepayments
Land
Plant and Equipment
Accumulated Depreciation
Accounts Payable
Other Accrued Liabilities
Income Taxes Payable
Long-Term Bank Loan Payable
Common Stock
Retained Earnings
Net Income
Totals	$	$	$	$	$	$
Net increase (decrease) in cash				$

2. Prepare a statement of cash flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.

Peoria Corp.
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flows from Operating Activities
	$
Adjustments to reconcile net income to net cash provided by operating activities:







	$
Cash Flows from Investing Activities
	$

	$
Cash Flows from Financing Activities
	$


	$
	$
Cash balance, December 31, 2016
Cash balance, December 31, 2017	$

3. During the year Peoria experienced a decrease in cash at the end of the year due to

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MGAB01H3 Chapter Notes - Chapter 3: Operating Expense, Accrual

MGAB01H3 Full Course Notes

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