FIN42030

Financial Analysis
The Income Statement

Dr. Tiffany Thng

tiffany.thng@ucd.ie
Overview
 Review of Topic 1

 Part a The Income Statement

• Hipstergift Example – record events [Download the example!]

 Part b
• Hisptergift Example – creating Income Statement
• Stock Markets and Financial Information
Review of Lecture 1

 Understand the nature of accounting

 Understand the balance sheet as a list of assets and claims upon those assets

 Two types of claim

 Owners
 Non-owners (liabilities)
Income Statement

A User Orientation - Implications

 Concern with future performance (other than tax)

• Forecasts of future performance (esp. cash flows)
• Regular reports that explain the difference actual and forecast
Income Statement Paid in Capital
(Contributed Capital)
Assets = Liabilities + Owners’ Equity
Retained Earnings
Ownership Interest – 2 types
 Arising from capital contributed by owners  Paid in Capital
 Arising from the sale of goods and services OR the payment of dividends  Retained Earnings

Retained Earnings
 Changes arising from sale of goods and services (G + S)
• Revenue = increases in owners’ interest from the delivery of goods and services Income/
Profit/
• Expenses = decreases in owner’s interest because of the delivery of goods and services
Earnings
 Changes arising from dividends – not an expense and does not reduce PIC. It’s a liability
Income Statement?

 Terminology
 Inventory = Stock
 Accounts Receivable = A/R = Debtors
 Accounts Payable = A/P = Creditors
 Cost of Goods Sold Expense = COGS
 Gross Margin = Gross Profit = Revenue less COGS
Income Statement

Hipstergift Corp.
Example
Hipstergift Corp.
Hipstergift is an online retailer and wholesaler of great gifts. During January 2022, the following transactions took place:
1. Goods carried in inventory at 40 were sold for 120; 60 was received in cash, the remainder was on open account;
2. Accounts receivable of 80 were collected;
3. Mr. Cyrus Depp has sued the firm for irreversible beard damage arising from the use of a protector mask.
Hipstergift’s lawyers concluded that the probability of a successful case is remote.  Mr. Depp is seeking $10M;
4. Depreciation expense of 5 was recognized;
5. Prepaid expenses related to 1000 deliveries from a courier service. During the month, 100 deliveries were used;
6. Dividends were paid in cash on January 18;
7. 500 iTypewriters were purchased on open account at a cost of 50;
8. Cash in the amount of 10 was used to settle 5 of other liabilities and 5 of accounts payable;
9. A telephone bill was received for January in the amount of 20;
10. Salaries of 15 for the month of January were paid in cash;
11. Dividends of 10 for the month of January were declared.

Required:
 Using the worksheet provided, record the impact of each of these events on assets and claims upon assets.
 Prepare a balance sheet for Hipstergift as of Jan 31, 2022 (after all events occurred).
 Prepare statements of income, cash flow and retained earnings for the month ended Jan 31, 2022.

Next topic
Hipstergift
  Assets Liabilities + Owners’ Equity
Event Cash A/R Inventory Prepaid PP&E A/P D/P Other PIC Ret. Earn
BOP 40 60 100 10 170 15 5 20 100 240
1              

2              
3              
4              
5              
6              
7              
8              
9              
10              
11
Total
 Balance Sheet for HSC At 31 Jan 2022
Hipstergift Assets
Cash 150
Accounts Receivable
40
Inventory
Prepayments 110
PP&E 9
165
Claims against Assets 474
Liabilities
Accounts Payable
Dividends Payable
Other 60
Equity 10
Paid in Capital 35
Retained Earnings

100
269
474
Next session: Hipstergift Example (part b)
 There are some extra questions in the Worksheets
 By Thursday, you should be familiar with the basics of the Balance Sheet and Income
Statement!

 Part b
• Hisptergift Example – creating Income Statement [use the same worksheet & template]
• Stock Markets and Financial Information