Chapter 13 Notes

Topics: Income statement, Financial ratios, Balance sheet Pages: 21 (3857 words) Published: June 20, 2013
13-113-2
FINANCIAL ANALYSIS:
THE BIG PICTURE
Accounting, Fourth Edition
1313-3
1. Understand the concept of sustainable income.
2. Indicate how irregular items are presented.
3. Explain the concept of comprehensive income.
4. Describe and apply horizontal analysis.
5. Describe and apply vertical analysis.
6. Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability.
7. Understand the concept of quality of earnings.
Study Objectives13-4
Sustainable
Income
Irregular items
Changes in
accounting
principles
Comprehensive
income
Alternative
accounting
methods
Pro forma
income
Improper
recognition
Price-earnings
ratio
Liquidity ratios
Solvency ratios
Profitability
ratios
Horizontal
analysis
Vertical
analysis
Comparative
Analysis Ratio Analysis Quality of
Earnings
Financial Analysis: The Big Picture13-5 SO 2 Indicate how irregular items are presented. Sustainable Income
Sustainable Income - Net income adjusted for irregular
items.
Irregular items are separately identified on the income
statement. Two types are:
1. Discontinued operations.
2. Extraordinary items.
These “irregular” items are reported net of income
taxes.
SO 1 Understand the concept of sustainable income.13-6 SO 2 Indicate how irregular items are presented. Sustainable Income
Components of
the income
statement
Illustration 13-113-7
Discontinued Operations
(a) Disposal of a significant component of a business.
(b) Income statement should report a gain (or loss)
from discontinued operations, net of tax.
Sustainable Income
SO 2 Indicate how irregular items are presented.13-8
Illustration: Rozek Inc. has revenues of $2.5 million and
expenses of $1.7 million from continuing operations in 2012. The company therefore has income before income taxes of
$800,000. During 2012 the company discontinued and sold its unprofitable chemical division at a loss of $210,000 (net of $90,000 tax savings).
Sustainable Income
SO 2
Illustration 13-213-9
Extraordinary items are events and transactions that
meet two conditions:
Both
 Unusual in nature and
 Infrequent in occurrence
Company must consider the environment in which it
operates.
Amounts reported “net of tax.”
Sustainable Income
SO 2 Indicate how irregular items are presented.13-10
Illustration: In 2012 a revolutionary foreign government
expropriated property held as an investment by Rozek Inc. If the loss is $70,000 before applicable income tax savings of $21,000, how will the loss be presented in the income statement?
Sustainable Income
Illustration 13-3
SO 2 Indicate how irregular items are presented.13-11
Are these considered Extraordinary Items?
YES
NO
NO
YES
Sustainable Income
 Effects of major natural casualties, if rare in
the area.
 Effects of major natural casualties, not
uncommon in the area.
 Write-down of inventories or write-off of
receivables.
 Expropriation (takeover) of property by a
foreign government.
SO 2 Indicate how irregular items are presented.13-12
NO
YES
NO
Sustainable Income
 Losses attributable to labor strikes.
 Effects of a newly enacted law or regulation,
such as a condemnation action.
 Gains or losses from sales of property, plant,
or equipment.
SO 2 Indicate how irregular items are presented.
Are these considered Extraordinary Items?13-1313-14
Sustainable Income
SO 2 Indicate how irregular items are presented.
 Principle used in the current year is different from
one used in the preceding year.
 Example - change from FIFO to average cost.
 Permissible when management can show new
principle is preferable.
 Most changes are reported retroactively.
Changes in Accounting Principle13-15
Sustainable Income
SO 3 Explain the concept of comprehensive income.
All changes in stockholders’ equity except those resulting from
 investments by stockholders and
 distributions to stockholders....
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