PART 2 Understanding Financial Statements and Cash Flow LO 2 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $43,000 in cash dividends. What is the addition to retained earnings? Question 8 1 pts Chapter 2 - End of Chapter Questions and Problems - Question 3 $86,050 $100,500 $150,500 $215,450 $350.750 CHAPTER 2 Financial Statements. Tawes and Cash Flow 27 2.2 THE INCOME STATEMENT The income statement measures performance over some period of time, usually a quarter Income statement or a year. The income statement equation is: Financial statement summarizing a firm's Revenues - Expenses Income [2.2] performance over a period of time If you think of the balance sheet as a snapshot, then you can think of the income statement as a video recording covering the period between a before and an after picture. Table 2.2 gives a simplified income statement for U.S. Corporation. The first thing reported on an income statement is usually revenue and expenses from Excel the firm's principal operations. Subsequent parts include, among other things, financing Master coverage online expenses such as interest paid. Taxes paid are reported separately. The last item is net income (the so-called bottom line). Net income is often expressed on a pershare basis and called I THIN TA V sat (EPS). As indicated, U.S. paid cash dividends of $103. The difference between net income and cash dividends, $309. is the addition to retained earnings for the year. This amount is added to the cumulative retained earnings account on the balance sheet. If you look back at the two balance sheets for U.S. Corporation, you'll see that retained earnings did go up by this amount, S1.320 + 309 $1.629 EXAMPLE 2.3 Earnings and Dividends per Share Suppose US Corporation had 200 milion shares outstanding at the end of 2016. Based on the income statement in Table 2.2. what was EPS? What were dividends per shere? From the income statement. U.S. Corporation had a net income of $412 million for the year Total dividends were $103 million Because 200 million shares were outstanding, we can cakulate brings per share and dividends per share as follows: Earnings per share - Net Income Total shares outstanding $412/200-$206 per share Dividends per shore-Total dividends/Total share outstanding $103/200-5515 per spare When looking at an income statement, the financial manager needs to keep three things in mind: GAAP, cash versus noncash items, and time and costs U.S. CORPORATION 2016 Income Statement 15 in Millions TABLE 2.2 Income statement for U.S. Corporation Net sales Cost of goods sold Depreciation Earnings before interest and takes Interest paid Taxable income 51.509 750 65 $ 694 70 5.624 212 $ 412 Dividends Addition to retained earning 5103 309 In other circumstances, they might differ quite a bit. Moreover, for fixed assets, it would be purely a coincidence if the actual market value of an asset (what the asset could be sold for) were equal to its book value. For example, a railroad might own enormous tracts of land purchased a century of more ago, What the railroad paid for that land could be hundreds of Managers and investors will frequently be interested in knowing the market value of the firm. This information is not on the balance sheet. The fact that balance sheet assets are thousands of times less than what it is worth today. The balance sheet would nonetheless listed at cost means that there is no necessary connection between the total assets shown Understanding Financial Statements and Cash Bow PART 2 26 2.2 Their oray R show the historical cost. There are exceptions to this practice. If you av a sim theft exper (the and the market value of the firm. Indeed, many of the most valuable assets that a firm the balance sheet at all. To give one example, one of the most valuable assets for many well-known companies is their brand name. According to one source, the names "Coca-Cola" "Microsoft." and "IBM" are all worth in excess of SSO billion Similarly, the owners' equity figure on the balance sheet and the true market value of the equity need not be related. For financial managers, then, the accounting value of the equity is not an especially important concern: it is the market value that matters. Hence forth, whenever we speak of the value of an asset or the value of the firm, we will normally mean its market value. So, for example, when we say the goal of the financial manager is to increase the value of the stock, we mean the market value of the stock. and a added the this E Sus inc EXAMPLE 22 Market versus Book Values The Klingon Corporation has feed assets with a book value of $700 and an appraised market value of about 1000. Current assets are $400 on the books, but approadmately $600 would be realized they were quidated Klingon has $500 in long-term debt, both book value and market value and no current tabuities of any kind. What is the book value of the equity? What is the market value? We can construct two simplified balance sheets, one in accounting book value) terms and one in economic ket value tenis Tot ear KLINGON CORPORATION Balance Sheets Market Value versus Book Value $ 500 1,100 thing Book Market Book Market Assets Liabilities and Shareholders' Equity Current $400 $ 600 Long-term debt $ 500 700 1.000 Shareholders' equity 600 51.100 $1.600 $1,100 $1,600 the deer equity actually worth almost twice as much as what is shown on the book chion between book and market values is important precisely because book estan Desert from reconvales CONCEPT QUESTIONS 282 2.1 What is the balance sheet identity! 2.1 What is quity? Why is it important? 21 What do we mean by financial levere? 23 Explain the difference between accounting value and market value. Which is more import to the financial manager? Why? Ea In Ta Ne PART 2 Understanding Financial Statements and Cash Flow LO 2 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $43,000 in cash dividends. What is the addition to retained earnings? Question 8 1 pts Chapter 2 - End of Chapter Questions and Problems - Question 3 $86,050 $100,500 $150,500 $215,450 $350.750 CHAPTER 2 Financial Statements. Tawes and Cash Flow 27 2.2 THE INCOME STATEMENT The income statement measures performance over some period of time, usually a quarter Income statement or a year. The income statement equation is: Financial statement summarizing a firm's Revenues - Expenses Income [2.2] performance over a period of time If you think of the balance sheet as a snapshot, then you can think of the income statement as a video recording covering the period between a before and an after picture. Table 2.2 gives a simplified income statement for U.S. Corporation. The first thing reported on an income statement is usually revenue and expenses from Excel the firm's principal operations. Subsequent parts include, among other things, financing Master coverage online expenses such as interest paid. Taxes paid are reported separately. The last item is net income (the so-called bottom line). Net income is often expressed on a pershare basis and called I THIN TA V sat (EPS). As indicated, U.S. paid cash dividends of $103. The difference between net income and cash dividends, $309. is the addition to retained earnings for the year. This amount is added to the cumulative retained earnings account on the balance sheet. If you look back at the two balance sheets for U.S. Corporation, you'll see that retained earnings did go up by this amount, S1.320 + 309 $1.629 EXAMPLE 2.3 Earnings and Dividends per Share Suppose US Corporation had 200 milion shares outstanding at the end of 2016. Based on the income statement in Table 2.2. what was EPS? What were dividends per shere? From the income statement. U.S. Corporation had a net income of $412 million for the year Total dividends were $103 million Because 200 million shares were outstanding, we can cakulate brings per share and dividends per share as follows: Earnings per share - Net Income Total shares outstanding $412/200-$206 per share Dividends per shore-Total dividends/Total share outstanding $103/200-5515 per spare When looking at an income statement, the financial manager needs to keep three things in mind: GAAP, cash versus noncash items, and time and costs U.S. CORPORATION 2016 Income Statement 15 in Millions TABLE 2.2 Income statement for U.S. Corporation Net sales Cost of goods sold Depreciation Earnings before interest and takes Interest paid Taxable income 51.509 750 65 $ 694 70 5.624 212 $ 412 Dividends Addition to retained earning 5103 309 In other circumstances, they might differ quite a bit. Moreover, for fixed assets, it would be purely a coincidence if the actual market value of an asset (what the asset could be sold for) were equal to its book value. For example, a railroad might own enormous tracts of land purchased a century of more ago, What the railroad paid for that land could be hundreds of Managers and investors will frequently be interested in knowing the market value of the firm. This information is not on the balance sheet. The fact that balance sheet assets are thousands of times less than what it is worth today. The balance sheet would nonetheless listed at cost means that there is no necessary connection between the total assets shown Understanding Financial Statements and Cash Bow PART 2 26 2.2 Their oray R show the historical cost. There are exceptions to this practice. If you av a sim theft exper (the and the market value of the firm. Indeed, many of the most valuable assets that a firm the balance sheet at all. To give one example, one of the most valuable assets for many well-known companies is their brand name. According to one source, the names "Coca-Cola" "Microsoft." and "IBM" are all worth in excess of SSO billion Similarly, the owners' equity figure on the balance sheet and the true market value of the equity need not be related. For financial managers, then, the accounting value of the equity is not an especially important concern: it is the market value that matters. Hence forth, whenever we speak of the value of an asset or the value of the firm, we will normally mean its market value. So, for example, when we say the goal of the financial manager is to increase the value of the stock, we mean the market value of the stock. and a added the this E Sus inc EXAMPLE 22 Market versus Book Values The Klingon Corporation has feed assets with a book value of $700 and an appraised market value of about 1000. Current assets are $400 on the books, but approadmately $600 would be realized they were quidated Klingon has $500 in long-term debt, both book value and market value and no current tabuities of any kind. What is the book value of the equity? What is the market value? We can construct two simplified balance sheets, one in accounting book value) terms and one in economic ket value tenis Tot ear KLINGON CORPORATION Balance Sheets Market Value versus Book Value $ 500 1,100 thing Book Market Book Market Assets Liabilities and Shareholders' Equity Current $400 $ 600 Long-term debt $ 500 700 1.000 Shareholders' equity 600 51.100 $1.600 $1,100 $1,600 the deer equity actually worth almost twice as much as what is shown on the book chion between book and market values is important precisely because book estan Desert from reconvales CONCEPT QUESTIONS 282 2.1 What is the balance sheet identity! 2.1 What is quity? Why is it important? 21 What do we mean by financial levere? 23 Explain the difference between accounting value and market value. Which is more import to the financial manager? Why? Ea In Ta Ne