Chapter 13 Analyzing and Interpreting Financial Statements Mc

Chapter 13 Analyzing and Interpreting Financial Statements Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -2 Conceptual Learning Objectives C 1: Explain the purpose of analysis C 2: Identify the building blocks of analysis C 3: Describe standards for comparisons in analysis C 4: Identify the tools of analysis Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -3 Analytical Learning Objectives A 1: Summarize and report results of analysis A 2: Appendix 17 A: Explain the form and assess the content of a complete income statement Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -4 Procedural Learning Objectives P 1: Explain and apply methods of horizontal analysis P 2: Describe and apply methods of vertical analysis P 3: Define and apply ratio analysis Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -5 C 1 Basics of Analysis Application of analytical tools Reduces uncertainty Mc. Graw-Hill/Irwin Involves transforming data © The Mc. Graw-Hill Companies, Inc. , 2008

13 -6 C 1 Purpose of Analysis Financial statement analysis helps users make better decisions. Internal Users Managers Officers Internal Auditors Mc. Graw-Hill/Irwin External Users Shareholders Lenders Customers © The Mc. Graw-Hill Companies, Inc. , 2008

13 -7 C 2 Building Blocks of Analysis Ability to meet short-term obligations and to efficiently generate revenues Ability to provide financial rewards sufficient to attract and retain financing Mc. Graw-Hill/Irwin Liquidity and Efficiency Solvency Market Profitability Prospects Ability to generate future revenues and meet long-term obligations Ability to generate positive market expectations © The Mc. Graw-Hill Companies, Inc. , 2008

13 -8 C 2 Information for Analysis Income Statement Notes Balance Sheet Statement of Stockholders’ Equity Statement of Cash Flows Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -9 C 3 Standards for Comparison To help me interpret our financial statements, I use several standards of comparison. ŒIntracompany Competitor Ž Industry Guidelines Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -10 C 4 Tools of Analysis Horizontal Analysis Comparing a company’s financial condition and performance across time. Time Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -11 C 4 Tools of Analysis Comparing a company’s financial condition and performance to a base amount V e r t i c a l A n a l y s i s Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -12 C 4 Tools of Analysis Measurement of key relations between financial statement items Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -13 C 4 Horizontal Analysis Time Mc. Graw-Hill/Irwin Now, let’s look at some ways to use horizontal analysis. © The Mc. Graw-Hill Companies, Inc. , 2008

13 -14 C 4 CLOVER CORPORATION Horizontal Analysis Comparative (Partial) Balance Sheet December 31, 2007 Assets Current assets: Cash and equivalents Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets Mc. Graw-Hill/Irwin Dollar Change 2006 Percent Change $ 12, 000 $ 23, 500 60, 000 40, 000 80, 000 100, 000 3, 000 1, 200 $ 155, 000 $ 164, 700 40, 000 120, 000 85, 000 $ 160, 000 $ 125, 000 $ 315, 000 $ 289, 700 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -15 P 1 Comparative Statements Calculate Change in Dollar Amount Dollar Change = Analysis Period Amount – Base Period Amount Since we are measuring the amount of the change between 2006 and 2007, the dollar amounts for 2006 become the “base” period amounts. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -16 P 1 Comparative Statements Calculate Change as a Percent Change Mc. Graw-Hill/Irwin = Dollar Change Base Period Amount × 100 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -17 P 1 CLOVER CORPORATION Comparative (partial) Balance Sheet December 31, 2007 Dollar 2007 2006 Change Percent Change* Assets Current assets: Cash and equivalents $ 12, 000 $ 23, 500 $ (11, 500) (48. 9) Accounts receivable, net 60, 000 40, 000 Inventory 80, 000 100, 000 Prepaid expenses 3, 000 1, 200 1, 800 $12, 000 – $23, 500 = $(11, 500) Total current assets $ 155, 000 $ 164, 700 Property and equipment: ($11, 500 ÷ $23, 500) Land 40, 000× 100 -= 48. 9% 0. 0 Buildings and equipment, net 120, 000 85, 000 Total property and equipment $ 160, 000 $ 125, 000 Total assets $ 315, 000 $ 289, 700 * Percent rounded to first decimal point. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -18 P 1 CLOVER CORPORATION Comparative (Partial) Balance Sheet December 31, 2007 Dollar 2007 2006 Change Assets Current assets: Cash and equivalents $ 12, 000 Accounts receivable, net 60, 000 Inventory 80, 000 Prepaid expenses 3, 000 Total current assets $ 155, 000 Property and equipment: Land 40, 000 Buildings and equipment, net 120, 000 Total property and equipment $ 160, 000 Total assets $ 315, 000 * Percent rounded to first decimal point. Mc. Graw-Hill/Irwin Percent Change* $ 23, 500 $ (11, 500) 40, 000 20, 000 100, 000 (20, 000) 1, 200 1, 800 $ 164, 700 $ (9, 700) (48. 9) 50. 0 (20. 0) 150. 0 (5. 9) 40, 000 85, 000 35, 000 $ 125, 000 $ 35, 000 $ 289, 700 $ 25, 300 0. 0 41. 2 28. 0 8. 7 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -19 Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -20 P 1 Trend Analysis Now, let’s look at trend analysis! Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -21 P 1 Trend Analysis Trend analysis is used to reveal patterns in data covering successive periods. Trend Analysis Period Amount = Percent Base Period Amount Mc. Graw-Hill/Irwin × 100 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -22 P 1 Trend Analysis Berry Products Income Information For the Years Ended December 31, Item Revenues Cost of sales Gross profit 2005 $ 400, 000 285, 000 115, 000 2004 $ 355, 000 250, 000 105, 000 2003 $ 320, 000 225, 000 95, 000 2002 $ 290, 000 198, 000 92, 000 2001 $ 275, 000 190, 000 85, 000 2001 is the base period so its amounts will equal 100%. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -23 P 1 Trend Analysis Berry Products Income Information For the Years Ended December 31, Item Revenues Cost of sales Gross profit Mc. Graw-Hill/Irwin 2005 $ 400, 000 285, 000 115, 000 2004 $ 355, 000 250, 000 105, 000 2003 $ 320, 000 225, 000 95, 000 2005 2004 2003 2002 $ 290, 000 198, 000 92, 000 2002 105% 104% 108% 2001 $ 275, 000 190, 000 85, 000 2001 100% © The Mc. Graw-Hill Companies, Inc. , 2008

13 -24 P 1 Trend Analysis Berry Products Income Information For the Years Ended December 31, Item Revenues Cost of sales Gross profit Mc. Graw-Hill/Irwin 2005 $ 400, 000 285, 000 115, 000 2005 145% 150% 135% 2004 $ 355, 000 250, 000 105, 000 2004 129% 132% 124% 2003 $ 320, 000 225, 000 95, 000 2003 116% 118% 112% 2002 $ 290, 000 198, 000 92, 000 2002 105% 104% 108% How would this trend analysis look on a line graph? 2001 $ 275, 000 190, 000 85, 000 2001 100% © The Mc. Graw-Hill Companies, Inc. , 2008

13 -25 P 1 Trend Analysis We can use the trend percentages to construct a graph so we can see the trend over time. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -26 P 2 V e r t i c a l A n a l y s i s Mc. Graw-Hill/Irwin Common-Size Statements Now, let’s look at some vertical analysis tools! © The Mc. Graw-Hill Companies, Inc. , 2008

13 -27 P 2 Common-Size Statements Calculate Common-size Percent Mc. Graw-Hill/Irwin = Analysis Amount Base Amount × 100 Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues © The Mc. Graw-Hill Companies, Inc. , 2008

P 2 13 -28 CLOVER CORPORATION Comparative (Partial) Balance Sheet December 31, 2007 Common-size Percents* 2007 2006 Assets Current assets: Cash and equivalents $ 12, 000 $ 23, 500 3. 8% 8. 1% Accounts receivable, net 60, 000 40, 000 Inventory 80, 000 100, 000 Prepaid expenses 3, 000 1, 200 ($12, 000 ÷ $315, 000) = 3. 8% Total current assets $ 155, 000 ×$100 164, 700 Property and equipment: Land 40, 000 ($23, 500 ÷ $289, 700) × 10012. 7% = 8. 1% Buildings and equipment, net 120, 000 85, 000 Total property and equipment $ 160, 000 $ 125, 000 Total assets $ 315, 000 $ 289, 700 * Percent rounded to first decimal point. © The Mc. Graw-Hill Companies, Inc. , 2008 Mc. Graw-Hill/Irwin

P 2 13 -29 CLOVER CORPORATION Comparative (Partial) Balance Sheet December 31, 2007 Common-size Percents* 2007 2006 Assets Current assets: Cash and equivalents $ 12, 000 Accounts receivable, net 60, 000 Inventory 80, 000 Prepaid expenses 3, 000 Total current assets $ 155, 000 Property and equipment: Land 40, 000 Buildings and equipment, net 120, 000 Total property and equipment $ 160, 000 Total assets $ 315, 000 *Mc. Graw-Hill/Irwin Percent rounded to first decimal point. $ 23, 500 40, 000 100, 000 1, 200 $ 164, 700 3. 8% 19. 0% 25. 4% 1. 0% 49. 2% 8. 1% 13. 8% 34. 5% 0. 4% 56. 9% 40, 000 85, 000 $ 125, 000 $ 289, 700 12. 7% 38. 1% 50. 8% 100. 0% 13. 8% 29. 3% 43. 1% 100. 0% © The Mc. Graw-Hill Companies, Inc. , 2008

P 2 2007 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Total current liabilities Long-term liabilities: Bonds payable, 8% Total liabilities Shareholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity * Percent rounded Mc. Graw-Hill/Irwin 13 -30 CLOVER CORPORATION Comparative (Partial) Balance Sheets December 31, 2007 to first decimal point. $ 2006 44, 000 6, 000 50, 000 21. 3% 1. 0% 22. 2% 15. 2% 2. 1% 17. 3% 80, 000 $ 130, 000 23. 8% 46. 0% 27. 6% 44. 9% 20, 000 60, 000 10, 000 $ 90, 000 80, 000 69, 700 $ 170, 000 $ 159, 700 $ 315, 000 $ 289, 700 6. 3% 19. 0% 3. 2% 28. 6% 25. 4% 54. 0% 100. 0% 6. 9% 20. 7% 3. 5% 31. 1% 24. 1% 55. 1% 100. 0% $ 67, 000 $ 3, 000 70, 000 $ Common-size Percents* 2007 2006 75, 000 $ 145, 000 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -31 CLOVER CORPORATION P 2 Comparative Income Statements For the Years Ended December 31, 2007 Common-size Percents* 2007 2006 Revenues $ 520, 000 $ 480, 000 100. 0% Costs and expenses: Cost of sales 360, 000 315, 000 69. 2% 65. 6% Selling and admin. 128, 600 126, 000 24. 7% 26. 3% Interest expense 6, 400 7, 000 1. 2% 1. 5% Income before taxes $ 25, 000 $ 32, 000 4. 8% 6. 7% Income taxes (30%) 7, 500 9, 600 1. 4% 2. 0% Net income $ 17, 500 $ 22, 400 3. 4% 4. 7% Net income per share $ 0. 79 $ 1. 01 Avg. # common shares 22, 200 * Rounded to first decimal point. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -32 P 2 Common-Size Graphics This is a graphical analysis of Clover Corporation’s common-size income statement for 2007. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -33 Ratio Analysis P 3 Liquidity and Efficiency Solvency Profitability Market Prospects Let’s use the following financial statements for Norton Corporation for our ratio analysis. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

P 3 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets Mc. Graw-Hill/Irwin 13 -34 NORTON CORPORATION Balance Sheet December 31, 2007 2006 $ 30, 000 20, 000 12, 000 3, 000 $ 65, 000 $ 20, 000 17, 000 10, 000 2, 000 $ 49, 000 165, 000 116, 390 $ 281, 390 $ 346, 390 123, 000 128, 000 $ 251, 000 $ 300, 000 © The Mc. Graw-Hill Companies, Inc. , 2008

P 3 NORTON CORPORATION Balance Sheet December 31, 2007 13 -35 2007 2006 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable, short-term Total current liabilities Long-term liabilities: Notes payable, long-term Total liabilities Shareholders' equity: Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Total shareholders' equity 70, 000 $ 112, 000 78, 000 $ 120, 000 27, 400 158, 100 $ 185, 500 48, 890 $ 234, 390 17, 000 113, 000 $ 130, 000 50, 000 $ 180, 000 Total liabilities and shareholders' equity $ 346, 390 $ 300, 000 Mc. Graw-Hill/Irwin $ $ 39, 000 3, 000 42, 000 $ $ 40, 000 2, 000 42, 000 © The Mc. Graw-Hill Companies, Inc. , 2008

P 3 NORTON CORPORATION Income Statement For the Years Ended December 31 Revenues Cost of sales Gross margin Operating expenses Net operating income Interest expense Net income before taxes Less income taxes (30%) Net income Mc. Graw-Hill/Irwin 13 -36 $ $ $ 2007 494, 000 140, 000 354, 000 270, 000 84, 000 7, 300 76, 700 23, 010 53, 690 $ $ $ 2006 450, 000 127, 000 323, 000 249, 000 74, 000 8, 000 66, 000 19, 800 46, 200 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -37 P 3 Liquidity and Efficiency Inventory Turnover Current Ratio Days’ Sales Uncollected Acid-test Ratio Accounts Receivable Turnover Days’ Sales in Inventory Total Asset Turnover Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -38 P 3 Liquidity and Efficiency Use this information to calculate the liquidity and efficiency ratios for Norton Corporation. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -39 P 3 Working Capital Working capital represents current assets financed from long-term capital sources that do not require near-term repayment. Dec. 31, 2007 Current assets $ Current liabilities Working capital Mc. Graw-Hill/Irwin 65, 000 (42, 000) $ 23, 000 © The Mc. Graw-Hill Companies, Inc. , 2008

13 -40 P 3 Current Ratio Current Assets = Ratio Current Liabilities Current = Ratio $65, 000 = 1. 55 : 1 $42, 000 This ratio measures the short-term debt-paying ability of the company. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -41 P 3 Acid-Test Ratio Quick Assets Acid-Test = Current Liabilities Ratio Quick assets are Cash, Short-Term Investments, and Current Receivables. Acid-Test = $50, 000 = 1. 19 : 1 $42, 000 Ratio This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -42 P 3 Accounts Receivable Turnover Accounts Sales on Account Receivable = Average Accounts Receivable Turnover Accounts $494, 000 Receivable = ($17, 000 + $20, 000) ÷ 2 = 26. 7 times Turnover This ratio measures how many times a company converts its receivables into cash each year. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -43 P 3 Inventory Turnover Cost of Goods Sold = Average Inventory $140, 000 = = 12. 73 times ($10, 000 + $12, 000) ÷ 2 This ratio measures the number of times merchandise is sold and replaced during the year. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -44 P 3 Days’ Sales Uncollected Days’ Sales = Uncollected Ending Accounts Receivable Net Sales ´ 365 Days’ Sales $20, 000 = ´ 365 = 14. 8 days Uncollected $494, 000 This ratio measures the liquidity of receivables. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -45 P 3 Days’ Sales in Inventory Days’ Sales = in Inventory Ending Inventory Cost of Goods Sold ´ 365 Days’ Sales $12, 000 = ´ 365 = 31. 29 days in Inventory $140, 000 This ratio measures the liquidity of inventory. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -46 P 3 Total Asset Turnover Total Asset Net Sales = Turnover Average Total Assets Total Asset $494, 000 = = 1. 53 times Turnover ($300, 000 + $346, 390) ÷ 2 This ratio measures the efficiency of assets in producing sales. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -47 P 3 Solvency Debt Ratio Equity Ratio Pledged Assets to Secured Liabilities Times Interest Earned Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -48 P 3 Solvency Use this information to calculate the solvency ratios for Norton Corporation. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -49 P 3 Debt Ratio Total Liabilities Debt = Ratio Total Assets Debt = Ratio $112, 000 $346, 390 = 32. 3% This ratio measures what portion of a company’s assets are contributed by creditors. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -50 P 3 Equity Ratio Total Equity = Ratio Total Assets Equity = Ratio $234, 390 $346, 390 = 67. 7% This ratio measures what portion of a company’s assets are contributed by owners. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -51 P 3 Debt-to-Equity Ratio Debt-to. Equity. Ratio = Total Liabilities Total Equity This ratio measures the solvency of companies. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -52 P 3 Times Interest Earned Times Interest = Earned Net Income before Interest Expense and Income Taxes Interest Expense Times $84, 000 Interest = = 11. 51 $7, 300 Earned This is the most common measure of the ability of a firm’s operations to provide protection to the long-term creditor. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -53 P 3 Profitability Basic Earnings per Share Profit Margin Gross Margin Return on Total Assets Mc. Graw-Hill/Irwin Book Value per Common Share Return on Common Stockholders’ Equity © The Mc. Graw-Hill Companies, Inc. , 2008

13 -54 P 3 Profitability Use this information to calculate the profitability ratios for Norton Corporation. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -55 P 3 Profit Margin Profit = Margin Net Income Net Sales $53, 690 Profit = 10. 87% = Margin $494, 000 This ratio describes a company’s ability to earn a net income from sales. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -56 P 3 Gross Margin Gross Net Sales - Cost of Sales = Margin Net Sales Gross $494, 000 - $140, 000 = 71. 66% = Margin $494, 000 This ratio measures the amount remaining from $1 in sales that is left to cover operating expenses and a profit after considering cost of sales. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -57 P 3 Return on Total Assets Return on = Net Income Total Assets Average Total Assets Return on $53, 690 = = 16. 61% Total Assets ($300, 000 + $346, 390) ÷ 2 This ratio is generally considered the best overall measure of a company’s profitability. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

P 3 Return on Common Stockholders’ Equity 13 -58 Return on Common Net Income - Preferred Dividends = Stockholders’ Average Common Stockholders’ Equity Return on $53, 690 - 0 Common = = 25. 9% Stockholders’ ($180, 000 + $234, 390) ÷ 2 Equity This measure indicates how well the company employed the owners’ investments to earn income. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -59 P 3 Book Value per Common Share Book Value Shareholders’ Equity Applicable to per Common Shares = Common Number of Common Shares Share Outstanding This ratio measures liquidation at reported amounts. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -60 P 3 Basic Earnings per Share Basic Earnings Net Income - Preferred Dividends = per Weighted-Average Common Shares Outstanding Basic Earnings $53, 690 - 0 = = $1. 96 per share per 27, 400 Share This measure indicates how much income was earned for each share of common stock outstanding. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -61 P 3 Market Prospects Price. Earnings Ratio Dividend Yield Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -62 P 3 Market Prospects Use this information to calculate the market ratios for Norton Corporation. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -63 P 3 Price-Earnings Ratio Price-Earnings Market Price Per Share = Ratio Earnings Per Share Price-Earnings $15. 00 = = 7. 65 times Ratio $1. 96 This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -64 P 3 Dividend Yield Dividend Annual Dividends Per Share = Yield Market Price Per Share Dividend $2. 00 = = 13. 3% Yield $15. 00 This ratio identifies the return, in terms of cash dividends, on the current market price of the stock. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -65 A 2 Reporting Income and Equity Extraordinary Items Discontinued Segments Continuing Operations Mc. Graw-Hill/Irwin Changes in Accounting Principles Net Income © The Mc. Graw-Hill Companies, Inc. , 2008

13 -66 A 2 Continuing Operations Revenues, expenses and income generated by the company’s continuing operations. Continuing Operations Mc. Graw-Hill/Irwin Net Income © The Mc. Graw-Hill Companies, Inc. , 2008

13 -67 A 2 Discontinued Segments Income from operating the discontinued segment prior to its disposal and gain or loss on the sale of the net assets of the segment. Discontinued Segments Net Income Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -68 A 2 Extraordinary Items A gain or loss that is unusual in nature and infrequent in occurrence. Mc. Graw-Hill/Irwin Net Income © The Mc. Graw-Hill Companies, Inc. , 2008

13 -69 A 2 Changes in Accounting Principles The increase or decrease in income when changing from one generally accepted accounting principle to another. Changes in Accounting Principles Net Income Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

13 -70 A 2 Mc. Graw-Hill/Irwin Income Statement © The Mc. Graw-Hill Companies, Inc. , 2008

13 -71 End of Chapter 13 Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008