Chapter 9The Income Statement and the
Statement of Cash Flows
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
LO9
Statement of Cash Flows
(p.335)
Provides relevant information about the cash
receipts and cash payments of an enterprise
during a period. This statement shows why cash
and cash equivalents changed during the period
by reporting net cash provided or (used by) . . .
Operating
Activities
Investing
Activities
Financing
Activities
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LO9
Cash Inflows and Outflows
Operating Activities
Investing Activities
Financing Activities
Cash received
from revenues
Sale of operational assets
Sale of investments
Collections of loans
Issuance of stock
Issuance of bonds
and notes
Enterprise
Cash paid for
expenses
Purchase of operational assets
Purchase of investments
Loans to others
Payment of dividends
Repurchase of stock
Repayment of debt
Cash Outflows
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L O 10
Cash Flows from
Operating Activities
1. Operating activities relate primarily to the receipt
of cash for general sales or operating revenues
(what the entity is in business to sell)
2. Operating activities also relate primarily to the
disbursement of cash for general operating
expenses (day to day business expenses)
3. Transactions: ST Assets & ST Liabilities (accounts
receivable, inventory, supplies, ST investments,
accounts payable, wages payable, interest payable,
taxes payable, ST notes payable, etc.)
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L O 10
Cash Flows from
Investing Activities
1. Investing activities relate primarily to the purchase
and sale of noncurrent assets (land, buildings,
equipment, etc)
2. Investments in debt or equity securities of other
entities & lending of money and subsequent
collection of loans are considered investing
activities as well (LT Investments, LT Notes Rec)
3. Transactions: LT Assets (land, building, equipment,
furniture, software, computers, vehicles, intangible
assets, natural resources, LT investments, etc)
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L O 10
Cash Flows from
Financing Activities
1. Financing activities relate to the issuance of stock
(common stock preferred stock, treasury stock)
2. Financing activities also relate to the issuance of
long-term debt (bonds payable or notes payable)
3. Transactions: LT Liabilities & Stockholders Equity
(LT debt, LT notes payable, LT bond payable,
common stock, preferred stock, dividends, treasury
stock, etc.)
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Cash Flows from
Operating Activities:
◼ Start with Net income (add)
◼ Add back non-cash items:
◼ Depreciation/amortization/depletion expense
◼ Increase in ST assets
◼ Increase in inventory, accounts receivable
◼ Decrease in ST assets
◼ Decrease in inventory, accounts receivable
(cont’d→)
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1-8
Cash Flows from Operating
Activities (cont’d):
◼ Increase in ST liabilities
◼ Increase in accounts payable, wages payable
◼ Decrease in ST liabilities
◼ Decrease in accounts payable, wages payable
◼ Net cash provided by (used in) operating
activities
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Cash Flows from Investing
Activities:
◼ Increase in LT assets
◼ Purchase of land, buildings, equipment, etc.
◼ Decrease in LT assets
◼ Proceeds from sale of land, buildings, etc.
◼ Net cash provided by (used in) investing
activities
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Cash Flows from
Financing Activities:
Increase in LT liabilities
◼ Proceeds from issuance of LT debt, bonds pay
◼ Decrease in LT liabilities
◼ Payment on LT debt, bonds payable
◼ Increase in equity
◼ Proceeds from issuance of common stock
◼ Decrease in equity
◼ Purchase of treasury stock
◼ Payment of dividends on common stock
◼ Net cash provided by (used in) financing activities
◼
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Cash Flow Statement
◼ For each item listed on the Cash Flow
Statement, ask yourself:
◼ How does this transaction affect my cash?
◼ Change in assets have the opposite effect
on cash
◼ Change in liabilities have the same effect
on cash
◼ Change in equity has the same effect on
cash
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Cash Flow Statement
◼ Assets:
◼ Increase in assets → decrease in cash
◼ Decrease in assets → increase in cash
◼ Change in assets → opposite effect on cash
◼ Examples:
◼ Increase in inventory → decrease in cash
◼ Decrease in inventory →increase in cash
◼ Increase in ST investment → decrease in cash
◼ Decrease in Accts. Rec. → increase in cash
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Cash Flow Statement
Liabilities:
◼ Increase in liabilities → increase in cash
◼ Decrease in liabilities → decrease in cash
◼ Change in liabilities → same effect on cash
◼ Examples:
◼ Increase in ST notes pay → increase in cash
◼ Decrease in Accts Pay → decrease in cash
◼ Increase in ST bonds pay → increase in cash
◼ Decrease in wages pay → decrease in cash
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Cash Flow Statement
Equity:
◼ Increase in equity → increase in cash
◼ Decrease in equity → decrease in cash
◼ Change in equity → same effect on cash
◼ Examples:
◼ Issuance/sale of common or preferred stock
(increase in equity)→ increase in cash
◼ Purchase of treasury stock (decrease of common
stock)→ decrease in cash
◼ Payment of dividends (decrease of retained
earnings & equity) → decrease in cash
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CFS Summary:
◼ Operating Activities – increase/decrease in
◼ ST Assets – opposite effect on cash
◼ ST Liabilities – same effect on cash
◼ Investing Activities – increase/decrease in
◼ LT Assets – opposite effect on cash
◼ Financing Activities – increase/decrease in
◼ LT Liabilities – same effect on cash
◼ Equity – same effect on cash
◼ See example on p. 335 – indirect method
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L O 11
Interpreting the Statement
of Cash Flows
A business entity should have positive cash flows
from Operating Activities. If operating activities do
not generate cash, the entity must look to outside
parties for funds to meet its day-to-day activities.
This could include selling off assets (Investing
Activities) or issuing new debt or issuing new
stock (Financing Activities) to obtain cash to pay
for day to day activities of the organization.
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End of Chapter 9
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 9
The Income Statement and the
Statement of Cash Flows
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
LO1
Income Statement
Answers important questions for users of F/S:
• What were financial results from operations?
• How much profit / (loss) did they have?
• Are sales increasing relative to COGS & expenses?
Might also be called “Statement of Earnings”,
“Statement of Operations”, “Profit & Loss
Statement”, or “P&L”
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LO1
Income Statement
Revenue is generated when a firm sells a product or
provides a service to a client or customer and
receives cash, creates an account receivable, or
satisfies an obligation.
Revenue is generally measured by the amount
of cash received or expected to be received
from a transaction.
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LO1
Revenue
Revenue is realized when the product or service has
been exchanged for cash, claims to cash, or an
asset that is readily convertible to a known
amount of cash.
Revenue is earned when the firm has completed, or
substantially completed, the activities it must
perform to be entitled to the revenue benefits.
Revenue should only be recognized when it is both
earned and realized, and should be matched with
the related expenses in the same period.
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Revenue
◼ Net Sales = Gross Sales less:
◼ Sales Returns & Allowances (if any), and
◼ Sales Discounts (if any)
◼ Net Sales are the result of selling the core
product or service the company is in
business to sell (general operations)
◼ Other Revenue: interest income, dividend
income, gains from selling assets
◼ Not from sale of core product/service
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Expenses
◼ Cost of Goods Sold (COGS) = what it cost
to build/manufacture the goods (products)
the company sold to its customers
◼ (see next slides for more details on COGS)
◼ Operating expenses = expenses incurred
to run the day to day operations of the
company (salaries, utilities, rent,
insurance, supplies, travel, etc – many!)
◼ Other expenses: Interest expense, income
tax expense, losses from selling assets
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Cost of Goods Sold
(COGS)
◼ Cost of Goods Sold (COGS) = what it cost
to build/manufacture the goods (products)
the company sold to its customers
◼ Most significant expense for most
manufacturing & merchandising companies
◼ Includes direct (raw) materials + direct labor
+ overhead (DM + DL + MOH = COGS)
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Cost of Goods Sold
(COGS)
◼ Beg Inventory + Purchases = COGAS –
End Inventory = COGS
◼ You either sell it (COGS) or you don’t
(ending inventory)
◼ Once inventory is sold, it’s removed from
balance sheet (asset) and transferred to
income statement in the form of COGS
(expense)
◼ Inventory shrinkage is included in COGS
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Gross Margin (Profit)
◼ Net Sales – COGS = Gross Margin (Profit)
◼ Gross Margin % = Gross Margin / Net Sales
◼ Gross Profit % = Gross Profit / Net Sales
◼ Gross Margin (or Gross Profit) =
◼ Net Sales less COGS
◼ $$$$$
◼ Gross Margin Ratio (or Gross Profit Ratio)
= Gross Margin (or Profit) / Sales
◼ %%%%
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Income Statement
Net Sales
$1,000,000
– COGS
– 600,000
Gross Margin (Profit)
400,000 Gross Margin Ratio = 400,000 /
– Operating Expenses – 100,000
1,000,000 = 40%
Operating Income
300,000
Other Income and Expenses:
+ Interest Income
+20,000
+ Gain on sale
+ 25,000
Interest Expense
– 15,000
Loss on sale
– 5,000
Income before Taxes
325,000
– Income Tax Expense – 75,000
Net Income
$250,000
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Operating Expenses
◼ Selling expenses
◼ Selling, advertising, marketing
◼ General and administrative expenses
◼ Utilities, rent, payroll, depreciation, insurance,
lease, office supplies, travel, lodging, meals,
conferences, dues, repairs, maintenance, etc.
◼ Research & development expenses
◼
Operating Expense section can be very detailed
or summarized (SG&A Exp); varies by company
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1-12
Income Statement
Net Sales
$1,000,000
– COGS
– 600,000
Gross Margin (Profit)
400,000
– Operating Expenses – 100,000
Operating Income
300,000
Other Income and Expenses:
+ Interest Income
+20,000
+ Gain on sale
+ 25,000
Interest Expense
– 15,000
Loss on sale
– 5,000
Income before Taxes
325,000
– Income Tax Expense – 75,000
Net Income
$250,000
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1-13
Operating Income
◼ aka “Income from Operations”
◼ aka “Earnings before Interest & Taxes”
◼ Net Sales – COGS = Gross Profit
◼ Gross Profit – Operating Expenses =
Operating Income
◼ Operating Income excludes: interest,
taxes, gains, losses, & other nonoperating activities
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1-14
Income Statement
Net Sales
$1,000,000
– COGS
– 600,000
Gross Margin (Profit)
400,000
– Operating Expenses – 100,000
Operating Income
300,000
Other Income and Expenses:
+ Interest Income
+20,000
+ Gain on sale
+ 25,000
Interest Expense
– 15,000
Loss on sale
– 5,000
Income before Taxes
325,000
– Income Tax Expense – 75,000
Net Income
$250,000
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1-15
Other Income and
Expenses
◼ Reported after Operating Income
◼ Includes:
◼ Interest Income (positive, addition)
◼ Interest Expense (negative, subtraction)
◼ Gains (positive, addition)
◼ Losses (negative, subtraction)
◼ Subtotal is called “Income before Income
Taxes” (or pre-tax income)
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1-16
Income Statement
Net Sales
$1,000,000
– COGS
– 600,000
Gross Margin (Profit)
400,000
– Operating Expenses – 100,000
Operating Income
300,000
Other Income and Expenses:
+ Interest Income
+20,000
+ Gain on sale
+ 25,000
Interest Expense
– 15,000
Loss on sale
– 5,000
Income before Taxes
325,000
– Income Tax Expense – 75,000
Net Income
$250,000
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Net Income
◼ Income before Income Taxes less Income
Taxes (due to IRS) = Net Income
◼ Income taxes aka Provision for income taxes
◼ Net Income aka “bottom line”, or “profit /
(loss)”
◼ Sum total of all revenues and gains less all
expenses and losses
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1-18
Income Statement
Net Sales
$1,000,000
– COGS
– 600,000
Gross Margin (Profit)
400,000
– Operating Expenses – 100,000
Operating Income
300,000
Other Income and Expenses:
+ Interest Income
+20,000
+ Gain on sale
+ 25,000
Interest Expense
– 15,000
Loss on sale
– 5,000
Income before Taxes
325,000
– Income Tax Expense – 75,000
Net Income
$250,000
McGraw-Hill/Irwin
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1-19
Income Statement
Formats (p. 330)
LO7
Single-Step
Multiple-Step
(best)
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Matrix, Inc.
Income Statement
For the Year Ended December 31, 20xx
Revenues and gains:
Sales, net
Interest income
Gain on sale of plant assets
Total revenues and gains
Expenses and losses:
Cost of goods sold
$
Selling expenses
General and administrative exp.
Depreciation expense
Interest expense
Income tax expense
Loss on sale of investments
Total expenses and losses
Net income
McGraw-Hill/Irwin
$
785,250
62,187
24,600
872,037
351,800
197,350
78,500
17,500
27,000
62,500
9,000
$
743,650
128,387
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
$
General and admin istrative
Depreciation expense
Income from operations
Other revenues and gains:
Interest income
Gain on sale of plant assets
Other expenses and losses:
Interest expense
Loss on sale of investments
Income before taxes
Income tax expense
Net income
$ 785,250
351,800
433,450
197,350
78,500
17,500
62,187
24,600
27,000
9,000
293,350
140,100
86,787
(36,000)
190,887
62,500
$ 128,387
19 9-19
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1-20
EPS (Earnings per Share)
◼ EPS = Net Income / Avg. # of Common
Shares Outstanding
◼ Avg. # common shares outstanding:
◼ (Shares outstanding on day 1 + shares
outstanding on day 365) / 2 = avg. shs o/s
◼ 200,000 shs o/s on Jan 1
◼ 300,000 shs o/s on Dec 31
◼ (200,000 + 300,000) / 2 = 250,000 avg. shs.
◼ $500,000 net income / 250,000 = $2 EPS
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1-21
Unusual Items
◼ Unusual items include:
◼ Gains & losses from extraordinary items
◼ Natural disasters (tornados, hurricanes,
earthquakes, fires, floods)
◼ Pension plan terminations
◼ Lawsuit litigations
◼ Gains & losses from discontinued operations
◼ Segment is closed (major portion of business)
◼ Report financial effects of unusual items
separately from regular profit/loss
McGraw-Hill/Irwin
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1-22
LO2
Shipping Terms
Buyer
Seller
FOB Shipping
Point
Ownership
transfers to
buyer when
merchandise is
passed to
carrier, and the
buyer pays the
shipping costs.
McGraw-Hill/Irwin
Merchandise
Carrier
FOB Destination
Destination
Ownership
transfers to
buyer when
merchandise is
passed to
buyer, and the
seller pays the
shipping costs.
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1-23
END OF SECTION ON
INCOME STATEMENT
McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Name _________________________________________
ACCT 223 – Ch 9 – Income Statement
*Helpful Tip: Use the F/S 2-Yr Example in Canvas Modules for proper formatting.
1. Using the following revenues and expenses, create an income statement in proper format.
Calculate the Gross Profit (Margin) Ratio.
Net Sales
Gain on Sale of Assets
Income Tax Expense
Interest Expense
Interest Income
Loss on Sale of Assets
COGS
Selling, General, & Admin Expenses
$
$
$
$
$
$
$
$
16,000,000
15,000
330,000
540,000
290,000
26,000
11,000,000
2,500,000
2. Using the following revenues and expenses, create an income statement in proper format.
Calculate the Gross Profit (Margin) Ratio.
Operating Expenses
Gain on Sale of Assets
Income Tax Expense
Interest Expense
Interest Income
Net Sales
COGS
$
$
$
$
$
$
$
1,950,000
55,000
115,000
65,000
90,000
8,800,000
6,520,000
3. Using the following revenues and expenses, create an income statement in proper format.
Calculate the Gross Profit (Margin) Ratio.
Loss on Sale of Assets
Gain on Sale of Assets
Income Tax Expense
Interest Income
Interest Expense
COGS
Net Sales
Selling, General, & Admin Expenses
$
$
$
$
$
$
$
$
7,000
60,000
25,000
45,000
85,000
4,500,000
7,000,000
1,700,000
4. Using the following revenues and expenses, create an income statement in proper format.
Calculate the Gross Profit (Margin) Ratio.
COGS
Loss on Sale of Assets
Income Tax Expense
Interest Expense
Interest Income
Gain on Sale of Assets
Net Sales
General & Admin Expense
Wages Expense
Utilities & Insurance Expense
Depreciation Expense
Lease & Rent Expense
Supplies & Materials Expense
Dues & Subscriptions Expense
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,100,000
15,000
105,000
55,000
10,000
30,000
3,500,000
285,000
455,000
110,000
95,000
40,000
55,000
15,000
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