Chapter 14 Financial Analysis and Reporting for a Corporation
Terms:
Amortization: Recognizing a portion of an expense in each of several years.
Earnings Per Share: The amount of net income belonging to a single share of stock.
Market Value: The price at which a share of stock may be sold on the stock market.
Price-Earnings Ratio: The relationship between the market value per share and earnings per share of a stock.
Rate Earned on Average Stockholders Equity: The relationship between net income and average stockholders' equity.
Rate Earned on Average Total Assets: The relationship between net income and average total assets.
Steps in Calculating Federal Income Tax Expense:
1. Complete the work sheet's Adjustments columns except for the federal income tax expense adjustment. Do not total the Adjustments columns at this time.
2. Extend all amounts, except the balance of Federal Income Tax Expense, to the work sheet's Income Statement columns.
3. Total the work sheet's Income Statement column totals using a calculator: Do not record the column totals on the work sheet. Calculate the difference between the two totals. The difference is the net income before federal income tax.
4. Calculate the amount of federal income tax using a tax rate table furnished by the Internal Revenue Service. A tax rate table will be provided for your use.
5. Calculate the amount of accrued federal income tax expense(Total Federal Income Tax Expense - Estimated Federal Income Tax Already Paid = Accrued Federal Income Tax Expense.
6. Record the federal Income Tax Expense adjustment in the work sheet's adjustment columns. (Federal Income Tax Expense debit and Federal Income Tax Payable).
7. Extend the balances of the affected accounts to the Balance Sheet and Income Statement Columns respectively.
Financial Statements:
Three important statements are prepared:
1. Income Statement, 2. Statement of Stockholders Equity, 3 Balance Sheet.
Income Statement:
Unlike sole partnerships and proprietorships, a corporation has to pay federal income tax. Net income before tax and after tax is shown on the income statement.
Component Percentage Analysis:
Usually Component Percentage is based upon sales or net sales.
To calculate divide Net Sales into your component you are trying to determine. What this number represents is the percentage or amount of every dollar or net sales.
Earnings per Share: Calculating the amount of net income that represents each share of stock.
To calculate:
Step 1: Total Par Value x Dividend Rate = Preferred Stock's Share of Net Income.
Step 2: Total Net Income - Preferred Stock's Share of Net Income = Common Stock's Share of Net Income.
Step 3: Share of Net Income / Shares of Stock Outstanding = Earnings per share.
Statement of Stockholder's Equity:
Two major sections are included on this statement:
Paid-in Capital and Retained Earnings.
Analyzing Stockholders' Equity
To calculate Equity per Share:
Total Stockholders' Equity divided by Shares of Capital Stock Outstanding = Equity per Share.
Market Value: price sold on the stockmarket.
Price-Earnings Ratio: Market Price per Share divided by Earnings per share = Price-Earnings Ratio. This tells you how many times the price compared to earnings would be. Every business will have acceptable ratios as guides.
Balance Sheet:
A corporate balance sheet reports assets, liabilities, and stockholders' equity on a specific date.
Analyzing a Balance Sheet:
Three ratios are calculated:
1. Accounts Receivable turnover ratio, 2. Rate earned on average stockholder's equity, 3. Rate earned on average total assets.
To calculate Accounts Receivable Turnover Ratio:
1.Accts. Rec. Beg Balance. - Allow for Uncoll. Accts = Beginning Book Value.
2.Accts Rec. Ending Balance - Allow for Uncoll Accts. = Ending Book Value
3. Beg. Book Value + Ending Book Value divided by 2 = Average Accts. Rec.
4.Net Sales on Account divided by Average Book Value of Accts. Rec. = Accts. Rec. Turnover Ratio.
5.Days in year(365) divided by Accts. Rec. Turnover Ratio = Average Number of Days for Payment.
Companies will have specific guidelines on acceptable rates
Rate Earned on Average Stockholders' Equity:
To Calculate:
1.Stockholders' equity on January 1 + Stockholders' equity on December 31 divided by 2 = Average Stockholder's equity.
2.Net Income after Federal Income Tax divided by Average Stockholders' equity = Rate Earned on Average Stockholders' Equity.
Rate Earned on Average Total Assets:
To Calculate:
1.January 1 Total Assets + December 31 Total Assets divided by 2 = Average Total Assets.
2. Net Income after Federal Income Tax divided by Average Total Assets = Rate Earned on Average Total Assets
In addition to analyzing the accounting information you must still perform adjusting entries, closing entries, post-closing trial balance, and reversing entries.
Closing entries consist of
1. Closing entry for income statement accounts with credit balances(revenue and contra cost accounts).
2. Closing entry for income statement accounts with debit balances(cost, contra revenue, and expense accounts)
3. Closing entry to record net income or net loss in the retained earnings account and close the income summary account.
4. Closing entry for the dividends account.
Joint Projects: Problem 14-1, 14-2, 14-3, 14-4, 14-5, 14-6
Individual Projects: Problems 14-M, 14-C