CHAPTER 4

REVIEW OF
ACCOUNTING

ÔN CHAP NÀY NHỚ XEM VỞ

1
Basic financial statements
2

ÔN CHAP NÀY NHỚ XEM VỞ

The income statement

The balance sheet

The statement of cash flow

THE INCOME STATEMENT
3
ÔN CHAP NÀY NHỚ XEM VỞ
The income statement measures a firm’s profitability over a period
of time. The firm can choose the length of the reporting time
period (a month, a quarter or a year).

The elements of the Income statement include

• Revenues represent gross income the firm earned during a particular period of
time (usually from sales).
• Expenses represents the cost of providing goods and services during a given
period of time.
• Net income is what is left after expenses are subtracted from revenues.

Net Income = Revenues – Expenses

 Acme Corporation Income Statement for the year Ended
December 31, 1999 4

Net Sales/ Revenue $15,000,000

Cost of Goods Sold 5,000,000
Gross Profit 10,000,000
Selling and Administrative Expenses 800,000
Expense Depreciation 2,000,000
Operating Income (EBIT) 7,200,000
Interest expense 1,710,000
Earning before Taxes (EBT) 5,490,000
Income Taxes (40%) 2,196,000
Net Income (NI) $3,294,000
từ giờ chỉ dùng format này thôi
The Income Statement
5

• Cost of Goods Sold The first expense subtracted from sales is cost of
goods sold, which consists of the labor, materials, and overhead
expenses allocated to those goods and services sold during the year.
Subtracting cost of goods sold of $5 million from sales of $15
million gives Acme’s gross profit, which equals $10 million.

• Selling and Administrative Expenses From gross profit, we next

subtract Acme’s selling and administrative expenses ($800,000).
Selling expenses include marketing and salespeople’s salaries.
Administrative expenses include office support, insurance, and
security.
The Income Statement
6

• Depreciation Expense Depreciation expense is subtracted next—$2

million for Acme in 1999. Depreciation expense is the year’s allocation of
the cost of plant and equipment that have been purchased this year and
in previous years. Because assets provide their benefits to the firm over
several years, accountants subtract the cost of long-lived assets a little at
a time over a number of years. The allocated portion of the cost of a
firm’s assets for the income statement’s period of time is the
depreciation expense.

• Operating Income When we subtract selling and administrative

expenses and depreciation expense from gross profit, we are left with
Acme’s earnings before interest and taxes (EBIT), also known as
operating income.
The Income Statement
7

• Interest expense associated with any debts of the company.

• Earning before taxes we then subtract interest expense to arrive at

Acme’s earnings before taxes (EBT).

• Income Taxes

• Net Income Finally, after we subtract all operating expenses,

financing expenses, and taxes from revenues, we arrive at the firm’s
net income (NI).
Exercise 1
8

Byron Books Inc. recently reported $13 million of net income.

Its EBIT was $20.8 million, and its tax rate was 35%. What was
its interest expense?

EBIT: 20.8
Interest: 0.8
EBT: 20
Tax: 35%
Net income: 13
 9

Depreciation —> tk hữu hình

Amortization —> tk vô hình
Exercise 2
10

Shattuck Corporation had operating income (EBIT) of

$2,500,000 in 1999, depreciation expense of $500,000, and
dividends paid of $400,000. What is Shattuck’s operating cash
flow (EBITDA) for 1999? Dividens paid: không thuộc income này
Về sau sẽ có bt đưa dữ liệu n ko dùng —> để lừa

EBITDA: 3,000,000 (=2,500,000 + 500,000)

Depreciation: 500,000
EBIT: 2,500,000
Exercise 3
11

Patterson Brothers recently reported an EBITDA of $7.5 million

and net income of $2.1 million. It had $2.0 million of interest
expense, and its corporate tax rate was 30%. What was its
charge for depreciation and amortization?

EBITDA: 7,5
D&A: 2,5
EBIT: 5
I: 2,0
EBT: 3
T: 30%
Net income: 2,1 (70%)

Đầu tiên tính ra EBT —> Tình ra EBIT —> Tính ra D&A (Ngược từ dưới lên)
 Exercise 4
12

Bubba’s Sporting Goods Company had retained earnings of $3

million at the end of 1998. During 1999, the company had net
income of $500,000 and of this paid out $100,000 in dividends.
What is the retained earnings figure for the end of 1999?
Retained earning: lợi nhuận giữ lại
1998: total RE: 3,000,000
—> Xem ảnh (lý thuyết) 1999:
Net income: 500,000
Dividend: 100,000
Addition to RE: 400,000
=> Total: 3,400,000
 Exercise 5
13

Ron’s In-Line Skating Corporation had retained earnings at the

end of 1999 of $120,000. At the end of 1998, this figure was
$90,000. If the company paid $5,000 in dividends to common
stockholders during 1999, what was the amount of earnings
available to common stockholders?
1998:
E available for Common St: 35,000
Common Dividen: 5,000
Addition to RE: 30,000 (120,000 - 90,000) => Đề bài sai vì con số 30k này là Addition to RE của năm 1999 chứ ko phải 1998
RE: 90,000
1999: total RE: 120,000
Exercise 6
14

In its most recent financial statements, Nessler Inc. reported

$75 million of net income and $825 million of retained
earnings. The previous retained earnings were $784 million.
How much in dividends were paid to shareholders during the
year? Assume that all dividends declared were actually paid.
Net income: 75
Dividend: 34 (=75-41)
Addition RE: 41 (=825-784)
Previous RE: 784
Total RE: 825

(Mấy bài này thường phải tính ngược từ dưới lên)

Ending RE = Previous RE + Net income - Dividend
=> Dividend = Previous RE - Ending RE + Net income
Exercise 7
15

Electronics World Inc. paid out $22.4 million in total common

dividends and reported $144.7 million of retained earnings at
year-end. The prior year’s retained earnings were $95.5
million. What was the net income? Assume that all dividends
declared were actually paid.
Net income: 71.6
Common dividend: 22.4
Addition to RE: 49.2 (144.7 - 95.5)
Previous RE: 95.5
Total RE: 144.7
Depreciation Expense
16
Những gì liên quan depreciation expense = TAX SAVING
—> ĐƯỢC HOÀN THUẾ
• Depreciation expense for a given period is determined by
calculating the total amount to be depreciated (the depreciation
basis) and then calculating the percentage of that total to be
allocated to a given time period (the depreciation rules).

• The total amount to be depreciated over the accounting life of

the asset is known as the depreciation basis. It is equal to the
cost of the asset plus any setup or delivery costs that may be
incurred.
Depreciation expense
17

Straight-line method: The simplest method of depreciation is the

straight-line depreciation (SL) method. To use the straight-line
depreciation method, you divide the cost of the asset by the number
of years of life for the asset.

Asset’s initial cost: $5,000,000

Divided by length of service: 7 years
Equal depreciation expense each year:

$5,000,000
= = $714,286
7
MACRS (modified accelerated cost recovery system)
18

Asset x % = De expense
Năm 2 con số cao hơn năm 1 = “Half year convention”
- Coi các Asset được mua trg năm: đc mua chính giữa năm
—> Chi phí khấu hao năm 1: chỉ bằng 6 tháng thôi
—> Phần 6 tháng còn lại được cộng vào năm cuối cùng
- Các năm ở giữa vẫn được tính full cả năm
- Vì thế nên, năm 2 cao hơn năm 1 và thường thừa ra 1 năm
(VD: Asset vòng đời 5 năm —> khấu hao ghi 6 năm)
MACRS (modified accelerated cost recovery system)
19

MACRS specifies that some percentage of the cost of assets will be

charged each year as depreciation expense during the assets’ life.

So, under the MACRS, Acme’s $5 million, seven-year asset would be

depreciated 14.29 percent during its first year of life, 24.49 percent
during the second year, and so on.
Exercise 1
20

Hayes Company recently bought a new computer system. The

total cost, including setup, was $8,000. If this is five-year asset-
class equipment, what would be the amount of depreciation
taken on this system in year 2 using MACRS rules?
TOTAL COST: 8,000
Depreciation expense = Asset x % in the related year = 8,000 x 32% = 2,560
Exercise 2
21

Chi phí khấu hao cộng dồn (cộng dồn qua các năm)

Adams Computer Store had accumulated depreciation of

$75,000 at the end of 1999, and at the end of 1998 this figure
was $60,000. Earnings before interest and taxes for 1999 were
$850,000. Assuming that no assets were sold in 1999, what was
the amount of depreciation expense for 1999?
1998:
Depreciation: 60,000
1999:
Depreciation: 75,000
EBIT: 850,000 ==> Distracted infomation —> not use

75,000 - 60,000 = 15,000

Exercise 3
22

CPKH cộng dồn Cuối năm 2012 - cuối năm 2011 = đáp án
70,000 - 60,000 = 10,000
Exercise 4
23

Mortenson has purchased new equipment that initially costs

$1,000,000. Setup costs are $100,000 and delivery costs are $50,000.
Calculate the year 3 MACRS depreciation of this equipment, which falls
into the three-year asset class.
Total cost: 1,150,000 (Add the initially cost, setup costs and delivery costs)
De ex = 1,150,000 x 14,81% = 170,315

NOTE (Không liên quan đến bt này):

Những gì liên quan depreciation expense = TAX SAVING
—> ĐƯỢC HOÀN THUẾ
The balance sheet
24

The balance sheet shows the firm’s assets, liabilities, and equity at
a given point in time. This snapshot of a company’s financial
position tells us nothing about the firm’s financial position before
or after that point in time.

The balance sheet consists of three elements:

• Assets are the resources controlled by the firm
• Liabilities are amounts owed to lenders and other creditors
• Owners’ equity is the residual interest in the net assets of an equity that
remains after deducting its liabilities

Assets = Liabilities + Owners’ equity

Acme Corporation Balance sheet for the year Ended
December 31, 1999 25

Assets:
Cash $10,000,000
Marketable Securities 8,000,000
Account Receivable 1,000,000
Inventory 10,000,000
Prepaid Expenses 1,000,000
Total Current Assets $30,000,000
Fixed Assets, Gross 28,000,000
Less Accumulated Depreciation (8,000,000)
Fixed Assets, Net 20,000,000
Total Assets 50,000,000
Acme Corporation Balance sheet for the year Ended
December 31, 1999 26
Liabilities and Equity
Account Payable $4,000,000
Notes Payable 3,000,000
Accrued Expenses 2,000,000
Total current liabilities 9,000,000
Long - term debt 15,000,000
Total liabilities 24,000,000
Preferred stock 1,000,000
Common stock (3 million shares) 3,000,000
Capital in excess of Par 12,000,000
Retained Earnings 10,000,000
Total Equity 26,000,000
Total Liabilities and Equity $50,000,000
The Asset Accounts
27

- Current assets (Working capital) provide short-term benefits to the

firm. Current assets are items listed on a company’s balance
sheet that are expected to be converted into cash within one fiscal
year.
- Noncurrent assets (Fixed assets) provide long-term benefits to the
firm. Noncurrent Assets are long - term assets that a company
expects to hold over one fiscal year that cannot readily be converted
to cash within a year.
Current Assets
28

- Cash
- Marketable securities are securities that can quickly and easily be
converted into extra cash
- Account receivable is the amount that customers owe the company
- Inventory is the amount of raw materials and good produced, but not
yet sold to customers
- Prepaid expense are goods and services that have been paid for in
advance but not yet received or used. For example: premium paid on
an insurance policy
Fixed assets (Noncurrent assets)
29

- Gross plant and equipment

- Accumulated depreciation is the sum of all the depreciation expenses
ever taken on the firm’s income statements.
- Intangible assets are nonphysical assets, such as patents and
copyrights. They are considered to be noncurrent assets because they
provide value to a company but cannot be readily converted to cash
within a year.
- Long-term investments, such as bonds and notes, are considered
noncurrent assets because a company usually holds these assets on
its balance sheet for more than one fiscal year.
The Liabilities and Equity Accounts
30

- The liability and equity section shows how the company’s assets are
financed.

- The funds come from those who have liability (debt) claims against
the firm or from those who have equity (ownership) claims against
the firm.
Liabilities
31

- Account payable is the amount of money a business owes to

suppliers that have sold the firm material on account.
- Note payable is legal IOUs that represent the debt of borrower and
the claim the lender has against that borrower.
- Accrued expenses are business expenses that have not been paid yet.
For examples: employee’s wages
- Long - term debts are debt that are not due within one year.
Equity
32
- Preferred Stock preferred stockholders have a greater claim to a
company's assets and earnings.
- Common Stock
- Capital in excess of Par is the original market price per share value of
the stock sold minus that stock’s par value times the number of shares
issued.
- Retained Earnings represents the sum of all the earnings available to
common stockholders of a business during its entire history, minus the
sum of all the common stock dividends that it has ever paid. Those
earnings are not paid out, but retained.
The statement of cash flows
33

The statement of cash flows reports the company’s cash receipts

and payment over a given period of time.

These cash flows are classified as follows:

1 Operating CF
include the cash effects of transactions that involve the normal business of the firm

Investing CF
2 are those resulting from the acquisition or sale of property, plant, and equipment;
of a subsidiary or segment; of securities; and of investments in other firms

Financing CF
3 are those resulting from issuance or retirement of the firm’s debt and
equity securities and include dividend paid to stockholder
Acme Corporation Statement of Cash FLows for the year
Ended December 31, 1999 34

Cash received from (Used in) Operations

Net Income $3,294,000
Depreciation 2,000,000
Decrease (Increase) Marketable Securities 1,000,000
Decrease (Increase) Account Receivable (300,000)
Decrease (Increase) Inventory 7,300,000
Decrease (Increase) Prepaid Expenses 0
Decrease (Increase) Account Payable (3,000,000)
Decrease (Increase) Accrued Expenses (1,000,000)
Total Cash from Operations $9,294,000
Acme Corporation Statement of Cash FLows for the year
Ended December 31, 1999 35

Cash received from (Used in) Investments

New Fixed Asset purchases ($14,000,000)
Total cash From Investments ($14,000,000)
Cash received from (Used in) Financing Activities
Proceeds from New Long - Term Debt Issue $4,216,000
Proceeds from New Common Stock Issue 4,000,000
Short - term notes Paid Off (1,000,000)
Preferred Stock Repurchases (1,000,000)
Preferred Dividends (110,000)
Common Dividends (400,000)
Total Cash From Financing Activities $5,706,000
Acme Corporation Statement of Cash FLows for the year
Ended December 31, 1999 36

Thông thường

Total Cash from Operations + $9,294,000

- —> dùng tiền
Total cash From Investments để đầu tư ($14,000,000)
Total Cash From Financing +/- —> đề bài sẽ nói rõ
(thường là +)
$5,706,000
Net Change in Cash Balance (Profit/Loss) $1,000,000
Beginning Cash Balance $9,000,000
Ending Cash Balance $10,000,000
Exercise 1
37

Hampton Industries had $39,000 in cash at year-end 2017 and $11,000

in cash at year-end 2018. The firm invested in property, plant, and
equipment totaling $210,000. Cash flow from financing activities
totaled 1$120,000. What was the cash flow from operating activities?
Investing: 210,000
financing: 120,000
Operating: ???
=> -28 = O - 210 + 120 => 62,000
Netchange in cash balance: -28,000
Beginning cash balance (2017): 39,000
Ending cash balance (2018): 11,000
INCOME TAXES
38

Federal tax rates are set by Congress. The Internal Revenue

Service (IRS) determines the amount of federal income tax a
firm owes. Federal tax rules dictate that different rates apply to
different blocks of income.

For instance, the first $50,000 of taxable income is taxed at a 15

percent rate, whereas the next $25,000 of taxable income is
taxed at a 25 percent rate.
INCOME TAXES
39

Cần nhớ bảng này

INCOME TAXES
40

The tax rate that applies to the next dollar of taxable income
Mức thuế cận biên
earned, the marginal tax rate, changes as the level of taxable
income changes. This pattern—tax rate increases as taxable
income increases—reflects the progressive tax rate structure
imposed by the federal government.
INCOME TAXES
41

Acme’s EBT is $5,490,000, so its marginal tax bracket is 34 percent. The

federal income tax bill in 2012 would be:

block of income

The marginal tax rate

INCOME TAXES
42

Financial managers use marginal tax rates to estimate the future

after-tax cash flow from investments. Often managers want to
know how dollars generated by a new investment will affect tax
rates. If a new investment results in a huge jump in the
company’s tax rate, the project will be less desirable.
Marginal tax rate ở ví dụ trên chỉ 34%
(335-1tr: 34%)

Nhưng nếu revenue khiến cái total income too high —> bị nhảy lên 1 mức tax rate cao hơn
thì chưa chắc net income sẽ cao
AVERAGE TAX RATES
43

Mức thuế trung bình mà dn bị đánh

—> Effective/Average tax rate
AVERAGE TAX RATES
44

Often the marginal tax rate will be greater than the average tax
rate. Sometimes, however, the marginal and average tax rates
are the same, as is the case for Acme.

Taxes are paid with cash. Because cash flow affects the value of a
business, taxes are an important financial consideration.
Financial managers need to understand marginal tax rates to see
the marginal impact of taxes on cash flows.
EXERCISE 1
45

Thunder, Inc. has earnings before taxes of $150,000.

a. Using the tax rate schedule from Table 4-2, calculate the tax obligation for
Thunder, Inc.

b. What is Thunder’s average (effective) tax rate?

EXCEL - CHAPTER 4
EXERCISE 2
46

If Badeusz Quarry Corporation has taxable income of $4 million, what is the

EBT
average tax rate for this company?
EXERCISE 3
47

This year the Simon and Pieman Corporation had $10 million in sales, $5.2
million in operating costs, and $200,000 in interest expense. It also paid 40
percent of its pre-tax income to the government as income tax expense.
What was Simon’s net after-tax income for the year?
EXERCISE 4
48
cost of equipment —> just used to calculate the depre ex
In 2012, Goodwill Construction Company purchased $130,000 worth of
Sales
construction equipment. Goodwill’s taxable income for 2012 without
considering the new construction equipment would have been $400,000.
The new equipment falls into the MACRS five-year class. Assume the
applicable income tax rate is 34 percent.
a. What is the company’s 2012 taxable income?
b. How much income tax will Goodwill pay?
EXERCISE 5
49

Wet Dog Perfume Company (WDPC), a profit-making company, purchased a

process line for $131,000 and spent another $12,000 on its installation. The
line was commissioned in January 2011, and it falls into the MACRS
seven-year class life. Applicable income tax rate for WDPC is 40 percent, and
there is no investment tax credit. Calculate the following:
a. 2012 depreciation expense for this process line
b. Amount of tax savings due to this investment

NOTE (Không liên quan đến bt này):

Những gì liên quan depreciation expense = TAX SAVING
—> ĐƯỢC HOÀN THUẾ