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Income Statement

Chapter 2


on 17 January 2013

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Transcript of Income Statement

Botox Facial Care had earnings after taxes of $280,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2010, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00
a. Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share.
b. Compute earnings per share and the P/E ratio for 2010.
c. Give a general explanation of why the P/E ratio changed P 2-18 Price/earning ratio Quantum Technology had $640,000 of retained earnings on December 31, 2010. The company paid common dividends of $30,000 in 2010 and had retained earnings of $500,000 on December 31, 2009. How much did Quantum Technology earn during 2010, and what would earnings per share be if 40,000 shares of common stock were outstanding? P 2-17: Earnings per share and retained earnings Okra Snack Delights, Inc., has an operating profit of $300,000. Interest expense for the year was $38,100; preferred dividends paid were $29,500; and common dividends paid were $36,700. The tax was $69,100. The firm has 16,400 shares of common stock outstanding.
Calculate the earnings per share and the common dividends per share
What was the increase in retained earnings for the year? Problem 2-16 Earnings per share and retained earnings Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 15 percent of sales, sales can be increased to $1,600,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales (There will be a larger markup in prices as a result of more aggressive selling). Depreciation expense will remain at $13,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $16,300. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers.
Will her ideas increase or decrease profitability? Lemon Auto Wholesalers had sales of $1,550,000 in 2010 and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 13 percent of sales. Depreciation expense was $13,000 and interest expense for the year was $9,000. The firm’s tax rate is 30 percent.
Compute earnings after taxes Problem 2-12 Determination of profitability Precision Systems had sales of $1,230,000, cost of goods sold of $700,000, selling and administrative expense of $61,000 and operating profit of $164,000.
What was the value of depreciation expense? Problem 2-10 Income statement Bettis Bus Company had earnings after taxes of $1’340,000 in the year 2009 with 303,000 shares of stock outstanding. On January 1, 2010, the firm issued 70,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 33 percent.

Compute earnings per share for the year 2009.
Compute earnings per share for the year 2010. Problem 2-2 Income statement Session 2 Exercises 3. Rockwell Paper has earnings after taxes of $580,000 on 2011 with 400,000 shares in circulation. On January 1st, 2012 the company put 35,000 new stocks on market. Because of this the earnings after taxes increased 25%.
a) Estimate the EPS on 2011
b) Estimate the EPS on 2012 2. LeBron Furniture Company has the following financial data. Prepare the income statement and calculate the EPS. 1. Prepare the Income Statement at December 31st, 2012 for the company “Holiday Inc” and calculate EPS. Income gained/lost during a given period is a function of verifiable transactions.

Stockholders, hence, may perceive only a much smaller gain/loss from actual day-to-day operations Limitations of the Income Statement Multiplier applied to earnings per share to determine current value of common stock.

Indicates expectations about the future of a company.

If the ratio is high, the market expects growth and high earnings in the future (tech co and risky)

Companies with low P/E ratio are more stables.

Stock Price / EPS
P/E = 10 (The investor is willing to pay 10 times the EPS amount) Price-Earnings (P/E) Ratio Example Beginning balance on retained earnings
+ Earnings available for common stocks
- Dividends paid to common and preferred shares
Ending balance on retained earnings Dividends or Reinvesting?

How much did I paid to the common stockholders?

Indicates disposition of earnings with:
- any adjustments to previously reported income
- any restrictions on cash dividends Statement of retained earnings Earnings per share (EPS)
Interpreted in terms of number of outstanding shares

May be paid out in dividends or retained by company for subsequent reinvestment Return to Capital Example (+) Beginning inventory
(+) Purchases
(-) Discounts and returns
(+) Importation taxes
(+) Transportation
(-) Final inventory
(=) Cost of sales Cost of goods sold Net sales (gross sales – discounts and returns)
Cost of goods sold
= Gross Profit
Operating Expenses
Selling and administration expenses
Depreciation expenses
= Operating Income (EBIT)
Financial Expenses
Interest Expenses
Financial income
=Income after interest
Other expenses and income
Other expenses
Other income
= Income after other expenses
Extraordinary expenses and income
= Earnings before taxes (EBT)
=Net income after tax (EAT) Sales – Cost of Goods Sold (COGS)
= Gross Profit (GP)

GP – Expenses = Earnings Before Interest and Taxes (EBIT) or Operating Income (OI)

EBIT – Interest = Earnings Before Taxes (EBT)

EBT – Taxes = Earnings After Taxes (EAT) or Net Income (NI) Income Statement (cont) Device to measure the profitability of a firm over a period of time
It covers a defined period of time
It is presented in a stair-step or progressive fashion to examine profit or loss after each type of expense item is deducted Income Statement Chapter 2 Income Statement Prepare an income statement for ATM Cards, Inc. (Input all amounts as positive values. Round EPS answer to 2 decimal places ) Problem 2-8 Determination of profitability
Bonds (interest)

Preferred Stock (dividends)

Common Stock (dividends)
(Depends on the number of shares in the market. The more shares… what happens with EPS?) Capital Sources http://www.investopedia.com/video/play/introduction-income-statement/#axzz2HiDuyvAF
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