R. G. QUINTERO & CO. CFA LEVEL I Q-NOTES STUDY SESSION 8 (EXCERPT) FINANCIAL STATEMENT ANALYSIS:...

R. G. QUINTERO & CO. R. G. QUINTERO & CO. CFA LEVEL I Q-NOTESCFA LEVEL I Q-NOTES

STUDY SESSION 8 (ESTUDY SESSION 8 (EXCERPT)XCERPT)

FINANCIAL STATEMENT ANALYSIS:FINANCIAL STATEMENT ANALYSIS: UNDERSTANDING THEUNDERSTANDING THE

FINANCIAL STATEMENTSFINANCIAL STATEMENTSwww.rgquintero.com

Level I - Session 8Level I - Session 8 ©R. G. Quintero & Co.©R. G. Quintero & Co. 22

SESSION 8 OVERVIEWSESSION 8 OVERVIEW

Understanding the Income StatementUnderstanding the Income Statement Understanding the Balance SheetUnderstanding the Balance Sheet Understanding the Cash Flow StatementUnderstanding the Cash Flow Statement

UNDERSTANDING THEUNDERSTANDING THEINCOME STATEMENTINCOME STATEMENT

by Thomas R. Robinson, Hennie van Greuning, by Thomas R. Robinson, Hennie van Greuning, Elaine Henry, and Michael A. BroihahnElaine Henry, and Michael A. Broihahn

©R. G. Quintero & Co.©R. G. Quintero & Co. 33Level I - Session 8Level I - Session 8


Net sales $100,000 Revenues:Cost of goods sold (75,000) Net sales $100,000

Gross profit 25,000 Other income, net 1,000Selling, general & admin. (15,000) 101,000

Operating income 10,000 Expenses:Other income, net 1,000 Labor costs (30,750)Interest (3,000) Materials (26,250)

Income before taxes 8,000 Overhead (18,000)Income tax expense (3,000) Depreciation (2,000)

Net income $5,000 Other costs (13,000)

Interest (3,000)Income taxes (3,000)

(96,000)Net income $5,000

MULTI-STEP FORMAT SINGLE-STEP FORMAT

Expenses are grouped by nature

EXAMPLES OF INCOME STATEMENT PRESENTATION FORMATS

WHEN TO RECOGNIZE REVENUES*WHEN TO RECOGNIZE REVENUES*

Evidence of arrangement between buyer and Evidence of arrangement between buyer and sellerseller

Product has been delivered or services Product has been delivered or services renderedrendered

Price has been determined or is determinablePrice has been determined or is determinable Seller has reasonable assurance of paymentSeller has reasonable assurance of payment

*SAB 101*SAB 101


SPECIAL SITUATIONS AFFECTING SPECIAL SITUATIONS AFFECTING REVENUE RECOGNITIONREVENUE RECOGNITION

Long-term contractsLong-term contracts Pct. of completion vs. completed contract A/CPct. of completion vs. completed contract A/C

Installment salesInstallment sales Barter T/A’sBarter T/A’s Gross and net reportingGross and net reporting



$0

$100

$200

$300

$400

$500

$600

$700

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

POC Rev POC NI C/C Rev C/C NI

% OF COMPLETION (POC) vs. COMPLETED CONTRACT (C/C) REVENUES AND NET INCOME (NI)


Facts Year 1 Year 2Contract size $200,000 (a)

Projected expense 160,000Annual billings 85,000 115,000 (b)

Annual collections 80,000 120,000 (c)

Costs incurred 70,400 89,600 (d)

Annual disbursements 65,000 95,000 (e)

% of total job costs 44.00% 56.00% (f)

Year 1 Year 2 Year 1 Year 2Income StatementRevenues $88,000 112,000 (a) x (f) 0 200,000 ∑(b)

Cost of goods sold (70,400) (89,600) (d) 0 (160,000) ∑(d)

Gross profit $17,600 22,400 (g) 0 40,000 (h)

Balance SheetCash $15,000 40,000 (c) – (e) 15,000 40,000 (c) – (e)

Accounts receivable 5,000 0 (b) – (c) 5,000 0 (b) – (c)

Contracts in progress (asset) 3,000 0 (d)+(g)–(b) 0 0Payables and accruals 5,400 0 (d) – (e) 5,400 0 (d) – (e)

Contracts in progress (liability) 0 0 14,600 0 (d) – (b)

Retained earnings 17,600 40,000 ∑(g) 0 40,000 ∑(h)

Note: difference between contract in progress of 2 methods = pct. of completion gross profitCash Flow StatementCollections $80,000 120,000 (c) 80,000 120,000 (c)

Disbursements (65,000) (95,000) (e) (65,000) (95,000) (e)

$15,000 25,000 (c) – (e) 15,000 25,000 (c) – (e)

PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACT ACCOUNTING

Percentage ofCompletion

CompletedContract


PERCENTAGE OF COMPLETION vs. PERCENTAGE OF COMPLETION vs. COMPLETED CONTRACTCOMPLETED CONTRACT

Income statement and balance sheet differ Income statement and balance sheet differ during project; identical at endduring project; identical at end

Cash flows are identicalCash flows are identical Pct of completion can result in errors or Pct of completion can result in errors or

manipulationmanipulation Completed contract can causeCompleted contract can cause

Sales and earnings volatilitySales and earnings volatility Erroneous view of earnings during periodErroneous view of earnings during period


1.1. Rudlen Company had an $80 million contract with a 20% gross Rudlen Company had an $80 million contract with a 20% gross margin that was completed during the 4margin that was completed during the 4thth quarter of 2007. It quarter of 2007. It incurred costs of $10 million on the contract during that incurred costs of $10 million on the contract during that quarter. Its 4quarter. Its 4thth quarter revenues under percentage of quarter revenues under percentage of completion and completed contract accounting would be completion and completed contract accounting would be reported as:reported as:

a.a. $10 million and $16 million, respectively.$10 million and $16 million, respectively.b.b. $12 million and $80 million, respectively.$12 million and $80 million, respectively.c.c. $12.5 million and $80 million, respectively.$12.5 million and $80 million, respectively.d.d. $16 million and $80 million, respectively.$16 million and $80 million, respectively.

Excludes pages 12 – 119Excludes pages 12 – 119for Study Session 8for Study Session 8


R. G. QUINTERO & CO. CFA LEVEL I Q-NOTES STUDY SESSION 8 (EXCERPT) FINANCIAL STATEMENT ANALYSIS:...

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