AFM101 Chapter Notes - Chapter 3: Operating Expense, Income Tax, Financial Statement

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raspberrygnu289

21 Feb 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

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AFM101 Full Course Notes

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Non-operating activity transactions are also called peripheral transactions. Finance costs ( interest on borrowed money - is not operating expense) When decision is made to dis-continue the operations of a company the net earnings or loss + gain or loss from subsequent disposal will be disclosed separately from the results of continuing operations. Records revenue when cash is earned and expenses when cash is paid. Under cash based accounting recognition of revenue can be accelerated or delayed. They do(cid:374)"t (cid:374)ecessarily reflect the assets and liabilities at a particular date. While accrual based accounting, revenue when they are earned and expenses when they are incurred. Risks and rewards of ownership of that good have been transferred to the buyer by that entity. Entity contains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. Economic benefits of associated with the transaction will flow to the entity.

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EXHIBIT 5

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	Year Ended December 31,
	2014			2013			2012
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	$	8,658		$	8,084		$	5,269
OPERATING ACTIVITIES:
Net income (loss)	(241		)	274			(39		)
Adjustments to reconcile net income (loss) to net cash fromoperating activities:
Depreciation of property and equipment, including internal-usesoftware and website development, and other amortization	4,746			3,253			2,159
Stock-based compensation	1,497			1,134			833
Other operating expense (income), net	129			114			154
Losses (gains) on sales of marketable securities, net	(3		)	1			(9		)
Other expense (income), net	62			166			253
Deferred income taxes	(316		)	(156		)	(265		)
Excess tax benefits from stock-based compensation	(6		)	(78		)	(429		)
Changes in operating assets and liabilities:
Inventories	(1,193		)	(1,410		)	(999		)
Accounts receivable, net and other	(1,039		)	(846		)	(861		)
Accounts payable	1,759			1,888			2,070
Accrued expenses and other	706			736			1,038
Additions to unearned revenue	4,433			2,691			1,796
Amortization of previously unearned revenue	(3,692		)	(2,292		)	(1,521		)
Net cash provided by (used in) operating activities	6,842			5,475			4,180
INVESTING ACTIVITIES:
Purchases of property and equipment, including internal-usesoftware and website development	(4,893		)	(3,444		)	(3,785		)
Acquisitions, net of cash acquired, and other	(979		)	(312		)	(745		)
Sales and maturities of marketable securities and otherinvestments	3,349			2,306			4,237
Purchases of marketable securities and other investments	(2,542		)	(2,826		)	(3,302		)
Net cash provided by (used in) investing activities	(5,065		)	(4,276		)	(3,595		)
FINANCING ACTIVITIES:
Excess tax benefits from stock-based compensation	6			78			429
Common stock repurchased	â			â			(960		)
Proceeds from long-term debt and other	6,359			394			3,378
Repayments of long-term debt	(513		)	(231		)	(82		)
Principal repayments of capital lease obligations	(1,285		)	(775		)	(486		)
Principal repayments of finance lease obligations	(135		)	(5		)	(20		)
Net cash provided by (used in) financing activities	4,432			(539		)	2,259
Foreign-currency effect on cash and cash equivalents	(310		)	(86		)	(29		)
Net increase (decrease) in cash and cash equivalents	5,899			574			2,815
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,557		$	8,658		$	8,084

EXHIBIT 6

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

	Year Ended December 31,
	2014			2013			2012
Net product sales	$	70,080		$	60,903		$	51,733
Net service sales	18,908			13,549			9,360
Total net sales	88,988			74,452			61,093
Operating expenses:
Cost of sales	62,752			54,181			45,971
Fulfillment	10,766			8,585			6,419
Marketing	4,332			3,133			2,408
Technology and content	9,275			6,565			4,564
General and administrative	1,552			1,129			896
Other operating expense (income), net	133			114			159
Total operating expenses	88,810			73,707			60,417
Income from operations	178			745			676
Interest income	39			38			40
Interest expense	(210		)	(141		)	(92		)
Other income (expense), net	(118		)	(136		)	(80		)
Total non-operating income (expense)	(289		)	(239		)	(132		)
Income (loss) before income taxes	(111		)	506			544
Provision for income taxes	(167		)	(161		)	(428		)
Equity-method investment activity, net of tax	37			(71		)	(155		)
Net income (loss)	$	(241	)	$	274		$	(39	)
Basic earnings per share	$	(0.52	)	$	0.60		$	(0.09	)
Diluted earnings per share	$	(0.52	)	$	0.59		$	(0.09	)
Weighted average shares used in computation of earnings pershare:
Basic	462			457			453
Diluted	462			465			453

Cash Flows at Amazon.com

Case Questions:

Graph the financial statement items in Exhibit 1. Graph revenueand COGS separate from the other items in Exhibit 1 because oftheir magnitude (i.e., make two graphs).

Using the graphs above, identify time periods of similarcharacteristics and classify them using the following life cycleterms: introduction, growth, maturity, or decline (see Exhibit 4for definitions). For each period labeled, provide support for yourclassification. Specifically, briefly discuss the patterns observed(e.g., in revenue, income, operating cash flow, investing cashflow, and financing cash flow) and how they indicate whereAmazon.com is in the life cycle.

What is the general trend in cash flows from investingactivities in Exhibit 3 from 1995 to 2010? Discuss both the netcash flows from investing activities (CFI) and the components ofCFI.

Why did Amazon.com invest in marketable securities (Exhibit 3,net change in securities)?

Analyze Amazon.comâs performance for fiscal year ended December31, 2014 using its Consolidated Statements of Cash Flows (Exhibit5) and Consolidated Statement of Operations (Exhibit 6).Specifically, answer the following questions:

(a) What are Amazon.comâs net incomeor loss over the three years? Comment on the companyâsprofitability.

(b) Comment on Amazon.comâsperformance using cash flows from operating, investing andfinancing activities over the three-year period.

(c) How do you reconcile the largediscrepancy between a net loss of $241 million and net cash fromoperating activities of $6,842 million for fiscal year endedDecember 31, 2014?

I need all of these answeredthouroughly!!! Like as best as possible with as much explanation! Icould not fit intoi one post so the others 2 post before this arerelated!!! Thank you!

magentalouse253

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

orchidfrog938

1. Use the attached balance sheet and income statement to compute the required financial ratios for 2012. Use 360 for the number of days in a year. The computations for 2011 are already done for you.

Current ratio_________________________

Quick ratio__________________________

Inventor turnover____________________

Average Collection Period_____________

Total asset turnover__________________

Net profit margin____________________

Operating profit margin_______________

Times Interest Earned_________________

Debt/Net Worth Ratio_________________

Return on Equity ratio__________________

2. Using the computed financial ratios from question 1, compare Grounds Keeperâs performance from 2011 to 2012. Address what areas the company has improved and what areas it has not

A.)Liquidity

B.) Activity / turnover / efficiency

C.) Profitability

D.) Leverage / use of debt / solvency

3. If you were the CEO of Grounds Keeper, what area(s) would you concentrate on to improve the performance of the company?

4. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.

5. Determine Grounds Keeperâs capital structure and working capital.

6. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.

7. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?

8. Explain what Grounds Keeper should consider when deciding whether to issue stocks or bonds? Answer using at least 3 different characteristics comparing and contrasting stocks and bonds.

9. Define money market instruments; list at least one type of security that would be considered a money market instrument. What are the advantages to Grounds Keeper in using money market instruments as financing? What are the disadvantages?

	Grounds Keeper
	Consolidated Balance Sheets
	(Dollars in thousands)
	2012	2011
Assets
Current assets:
Cash and cash equivalents	78,240	44,395
Receivables	399,891	340,062
Inventories	844,737	736,677
Total current assets	1,322,868	1,121,133

Fixed assets, net	1,244,384	889,613
Other long-term assets	1,048,537	1,187,141
Total assets	3,615,789	3,197,887

Liabilities and Stockholdersâ Equity
Current liabilities:
Accounts payable	309,222	319,465
Accruals	201,017	145,240
Notes payable	9,748	6,669
Total current liabilities	519987	471374
Long-term debt	834574	814298
Total liabilities	1,354,561	1,285,672
Stockholdersâ equity:
Common stock, $0.10 par value:	15,268	15,447
Additional paid-in capital	1,464,560	1,499,616
Retained earnings	781400	397152
Total stockholdersâ equity	2,261,228	1,912,215
Total liabilities and stockholdersâ equity	3,615,789	3,197,887

Grounds Keeper

Consolidated Statements of Operations

(Dollars in thousands except per share data)

2012

2011

Net sales

3,889,426

2,642,390

Cost of sales

2,589,799

1,746,274

Gross profit

1,299,627

896,116

Selling and operating expenses

481,493

348,696

General and administrative expenses

219,010

187,016

Operating income

599,124

360,404

Interest expense

22,983

57,657

Income before income taxes

576,141

302,747

Income tax expense

212,641

101,699

Net Income

363,500

201,048

Basic income per share:

Average shares outstanding

154,933,948

146,214,860

Earnings per common share

2.35

1.38

Current Ratio	Current assets/ Current liabilities
Quick Ratio	Current assets â inventory/ Current liabilities
Inventory Turnover	Cost of goods sold/ Inventory
Receivables Turnover	Sales/ Accounts receivables
Average Collection Period	Receivables/ Sales per day
Fixed Asset Turnover	Sales/ Fixed assets
Total Asset Turnover	Sales/ Total Assets
Gross Profit Margin	Revenues - Cost of goods sold/ Sales
Operating Profit Margin	Earnings before interest and taxes/ Sales
Net Profit Margin	Net income/ Sales
Return on Total Assets	Net income/ Total assets
Debt/Net Worth Ratio	Total Debt/ Total Equity
Times-Interest-Earned	Operating Income/ Interest expense
Return on Equity	Net income/ Total equity

magentalouse290

AFM101 Chapter Notes - Chapter 3: Operating Expense, Income Tax, Financial Statement

AFM101 Full Course Notes

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