Professional Documents
Culture Documents
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Extraordinary Item
Accounting Changes
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Income Statement
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10/1/2007
1/1/2008
4/1/2008
7/1/2008
10/1/2008
1/1/2009
4/1/2009
Quarterly Results
Fiscal Year
FISCAL YEAR 10/1/2008 9/30/2008
10/1/2007
1/1/2008
4/1/2008
7/1/2008
10/1/2008
1/1/2009
4/1/2009
Quarterly Results
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Analyst need not worry about these items below the line
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Operating income is known as EBIT (Earnings before Interest expense and Tax expense)
How do you arrive at EBITDA (Earnings before interest, taxes, depreciation and taxes)?
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Hersheys Income Statement - Presentation Could Vary! Advanced Accounting E-Book part 1 of 12
Compare Hersheys Income Statement with G&K Services Income Statement
The Hershey Company Consolidated Income Statement For Fiscal year ended December 31st, (in thousands except per share data) Net Revenues Costs and Expenses Cost of Sales Sellng & administrative expenses Business realignment and impairment charges, net Total costs and expenses Income from Operations Interest Expenses Income before Income Taxes Provision for Income Taxes Net Income 2007 $4,946,716 $3,315,147 895,874 276,868 $4,487,889 $458,827 118,585 $340,242 126,088 $214,154 2006 $4,944,230 $3,076,718 860,378 14,576 $3,951,672 $992,558 116,056 $876,502 317,441 $559,061 2005 $4,819,827 $2,956,682 912,986 96,537 $3,966,205 $853,622 87,985 $765,637 277,090 $488,547
Can you list various difference in the presentation of the Income Statement?
Income Statement Reporting Cycle? Revenue breakup Depreciation and Amortization Business realignment and impairment charges
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Check points!
Service Agreement
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Check points!
Product Delivered Valid customer
Collectability
No further obligations
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Check points!
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Check points!
Depreciation and amortization are joined reported with Selling, Marketing and Administrative costs Salaries are included in both heads cost of sales as well as Selling, marketing and administrative costs
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Analysts view of Income Statement EBIT & EBITDA Advanced Accounting E-Book part 1 of 12
EBIT Earnings before interest and taxes
Also known as Operating Income from continuing operations Includes revenues from the continuing business of the firm less the costs and expenses used to generate those revenues
EBIT is important for analyst as this is considered to be one of indicators of future earnings Analyst should remove NON-RECURRING costs to normalize the EBIT
EBIT
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Operating income is known as EBIT (Earnings before Interest expense and Tax expense)
How do you arrive at EBITDA (Earnings before interest, taxes, depreciation and taxes)?
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Infrequency of occurrence
Underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future
Examples
Disposal of business segment Sale of assets or investment in subsidiaries Restructuring costs Impairments and write-offs
Integration expenses
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Example:
The sale by a diversified company of a major division that represented the companys only activities in the sports equipments
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Infrequency of occurrence : Underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future
Examples include
Infrequent
NO
Unusual
YES
Extraordinary Item
Infrequent
YES
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Prior-period income does not affect net income from continuing operations
Should understand the implication of accounting changes if it has some impact on future operation
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If Kartik delivers 200 parcels in December for $5 per delivery, he has technically earned fees totaling $1,000 for that month. He sends invoices to his clients for these fees and his terms require that his clients must pay by January 15
Even though Kartiks clients won't be paying FastTrack Inc until January 15, the accrual basis of accounting requires that the $1,000 be recorded as December revenues, since that is when the delivery work actually took place After expenses are matched with these revenues, the income statement for December will show just how profitable the company was in delivering parcels in December Cash Accounting
Revenues recognized when cash is received and expenses are recognized when the firm pays out cash Cash flow is measured as Cash Inflows LESS Cash Outflows Results in volatile and less predictable cash flows and income streams When operations of a company are complex, it adds to the volatility and difficulty of analyzing a business
Accrual Accounting
Allocate revenues and expenses related to accounting transactions and events to time period other than those in which the cash flows occurred Smooth earnings streams (depreciation expenses)
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K-Mart
Inflated revenue by improperly recognizing entire $42.3 million in revenue from a multiyear contract in 2nd quarter of 2001 Declared bankruptcy, January 2002 Two former VPs charged with earnings fraud
MicroStrategy
Improperly recognized revenue from sales of software as agreements were entered into rather than as services were provided Restated earnings for fiscal years 1998 and 1999, which caused revenues to be reduced by almost $66 million Former CEO, COO, and CFO each fined $350,000
Created $35 million in inappropriate restructuring reserves in 1996 that were reversed in 1997 to inflate income thus creating the illusion of a rapid turn around
Sunbeam Corp
In 1997, reported over $70 million of revenue from bill and hold sales, channel stuffing and other inappropriate accounting practices CEO charged with violating federal securities laws by misrepresenting material information about the company. CEO settled by paying a part of $141 million fine Former controller and chief accounting officer each agreed to pay $100,000 in fines
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Realized or Realizable
Realized means receipt of an asset (cash or claims to cash) by the seller Realizable means that although a buyer has not delivered an asset (cash or claims to cash) to the seller, the good or service offered by the seller is sold in established, active markets with quoted prices, and thus the seller can immediately realize the revenues at a known price (e.g., commodities like tea, rice, silver, copper etc)
Normally, revenue recognition criteria are satisfied at the point of sale However, sometimes revenue recognition is done before the delivery
During production (long term construction and service contracts)
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Exceptions
Sales with buyback agreements Sales when right of return exists (high rates that are not reliably estimable)
Advantage
Easily verified
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Percentage-of-Completion Method
Terms of contract must be certain, enforceable Certainty of performance by both parties Estimates of completion can be made reliably
To be used only when the percentage method is inapplicable [uncertain] For relatively shorter contracts
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Gross profit
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Cost to date Estimated cost to complete Progress during the year Cash collected during the year
What is the percent completion, revenues and gross profit recognized in each year
2007 % complete to date Revenue Recognized Gross Profit recognized 25.0% $225,000 $25,000
$200,000 / $800,000
$225,000 - $200,000
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Example: Completed Contract Method A real estate company is building a corporate park for $50 million, to be received in equal installment over four years However, it was found that no reliable estimate can be made for the total cost. It has spend $12 million in the first Year. How much revenue and expense will be recognized in the first year?
No revenues or expenses will be recognized until the last year under the completed contract method
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Example: Installment sales method KG Electronics uses the installment sales method to account for its sales. In 2007, the company sold goods costing $70 million for $100 million, representing a gross profit of $30 million. Following the schedule for its cash collection: Year Sales collection 2007 $50 2008 $25 2009 $25 How much did KG Electronics recognize as gross profit in 2007, 2008 and 2009?
Year 2007 2008 2009 Cost $35.0 $17.5 $17.5 Gross Profit $15.0 $7.5 $7.5
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Full cost not recovered; Gross profit = $0 Full cost recovered; Gross profit = $50 + $25 - $70 = $5
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YES
NO YES
Cost recovery
Cost recovery Percentage of completion
NO
YES NO
Completed contract
Completed contract Completed contract
Infrastructure
Software programming company Merchandise firms
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Sum Up..
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