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FSA-Tutorial 3-Fall 2023 With Solutions

This document discusses key concepts related to analyzing income statements, including: - Comprehensive income can be higher or lower than net income depending on other comprehensive income items. - Net income is generally preferred over comprehensive income for profitability ratio analysis because other comprehensive income items are often unrealized and volatile. - The document provides examples of calculating earnings per share, effective tax rates, and recurring earnings from income statement information. - It also discusses the impact of stock dividends and stock splits on financial statements.

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chtiouirayyen
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71 views

FSA-Tutorial 3-Fall 2023 With Solutions

This document discusses key concepts related to analyzing income statements, including: - Comprehensive income can be higher or lower than net income depending on other comprehensive income items. - Net income is generally preferred over comprehensive income for profitability ratio analysis because other comprehensive income items are often unrealized and volatile. - The document provides examples of calculating earnings per share, effective tax rates, and recurring earnings from income statement information. - It also discusses the impact of stock dividends and stock splits on financial statements.

Uploaded by

chtiouirayyen
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Statements Analysis Fall term 2023-2024

Tutorial 3

Income Statement

Questions

1. Comprehensive income is always higher than net income. Is this statement true? Why?

This statement is false. In fact, Comprehensive income=Net income+ Other comprehensive


income items

The component Other comprehensive income items could correspond to profits or losses. So,
depending on the sign of the other comprehensive income items, the comprehensive income
could be higher or lower than net income.

2. For profitability ratio analysis, it is preferred to use net income rather than comprehensive
income. Is this statement true? Why?

In profitability analysis, it is usually preferred to use net income because the other
comprehensive income items are typically unrealized and volatile elements. However, some
analysts are proponents of the use of the comprehensive income for the analysis of long-term
profitability.

Problems

1The accounts of Jones Company contain the following information (in dollars) on December 31, N:

Sales revenues 490 000


Discounts on sales 10 000
Income taxes 9 300
Cost of products sold 410 000
Net income-noncontrolling interest 1 000
Gain on sale of assets 1 600
Interest expense 8 700
Selling and general expenses 42 000
Retained earnings January 1, N 270 000
Dividends distributed in N 3 000
Required:

a. Present a multiple-step income statement based on the information given.


b. Calculate the earnings per share knowing that 10 000 shares of common stock were
outstanding for the entire year N.
c. What earnings relate to the minority shareholders of the subsidiary that was consolidated?
d. Calculate the effective tax rate of the company.
e. Prepare a reconciliation of retained earnings for the year ended December 31, N.
f. Determine the amount of recurring earnings.
g. The financial analyst finds out that the cost of products sold includes a casualty loss of
$20 000. For financial analysis purposes, this amount is considered non-recurring.
Recalculate the amount of recurring earnings.

1
Financial Statements Analysis Fall term 2023-2024

Answer:

a.

Multiple-step income statement

Net sales (490000-10000) 480 000


Cost of products sold (410 000)
Gross profit 70 000
Operating expenses
Selling and general expenses (42 000)
Operating income 28 000
Other income
Gain on sale of assets 1 600
Other expenses
Interest expense (8 700)
Income before taxes 20 900
Income taxes (9 300)
Net income before noncontrolling interest 11 600
Net income-noncontrolling interest (1 000)
Net income 10 600

b. Earnings per share=10600/10000=$1.06 per share


c. 1 000
d. Effective tax rate=Income taxes/Income before taxes=9300/20900=44.5%
e. Beginning retained earnings: 270 000
+ Net income: 10 600
-Dividends: (3 000)
=Ending retained earnings: 277 600
f. Recurring earnings= net income=10 600
g. Recurring earnings= Net income – Non-recurring item net of tax
=10600 + 20000x(1-0.445)=21 700

2 The income statement of Leen Company for the year ended December 31, N, shows the following:

Revenue from sales $790 000


Cost of products sold (410 000)
Gross profit 380 000
Operating expenses
Selling expenses 40 000
General expenses 80 000 (120 000)
Operating income 260 000
Equity on earnings of nonconsolidated subsidiary (20 000)
Income from continuing operations before income taxes 240 000
Taxes related to continuing operations (94 000)
Net income from continuing operations 146 000

Discontinued operations
Loss from operations of discontinued segment (less applicable (70 000)
income tax credit of $30 000)

2
Financial Statements Analysis Fall term 2023-2024

Loss on disposal of segment (less applicable income tax credit of (100 000) (170 000)
$50 000)
Income before cumulative effect of change in accounting principle (24 000)
Cumulative effect of change in accounting principle (less 50 000
applicable income taxes of $25 000) $26 000
Net income

Required:

a. Determine the earnings from the nonconsolidated subsidiary.


b. Determine the recurring earnings.
c. Determine the total tax amount.
Answer:

a. (20 000)
b. 146 000
c. 94000-30000-50000+25000= 39 000

3 The stockholders’ equity of Bell company on November 30, N shows the following items:

- Common stock at par (50 000 shares issued and outstanding, par value $10): $500 000
- Paid-in capital in excess of par: $400 000
- Retained earnings: $600 000

On December 1, N, the board of directors declared a 10% stock dividend, to be distributed on


December 20. The market price of the common share was $16 on December 1 and $18 on December
20.

Required:

a. Present the equity section of Bell company after the distribution of the stock dividend.
b. Assume that Bell company declares a 2-for-1 stock split on December 30. What is the impact
of this operation on equity?

Answer:

a. Amount of stock dividend=5000 shares x $16= $80 000

Equity after stock dividend:

Common stock at par 500000+50000= 550 000


Paid-in capital in excess of par 400000+30000= 430 000
Retained earnings 600000-80000= 520 000
Total equity 1 500 000
b. Equity accounts won’t change after the declaration of the stock split. However, the number
of shares is doubled (110 000 shares) and the par value per share is halved ($5).

4* The financial statements of La Société de Production Agricole de TEBOULBA « SOPAT » on


December 31, 2022 are available on the following link:

https://www.cmf.tn/sites/default/files/pdfs/emetteurs/informations/rapports-societes/
sopat_efd_2022.pdf

3
Financial Statements Analysis Fall term 2023-2024

Required: On the income statement what does the item Effet des modifications comptables en
capitaux propres refer to? Is the item presented before taxes or net of taxes?

Answer:

The item represents the cumulative effect of change in accounting principles and corrections of
misstatements of prior periods.

The amount is presented net of taxes.

Actually, the detailed explanation of this item wasn’t presented in the related income statement
note but in the note pertaining to equity.

5* The consolidated financial statements of the company on December 31, 2022 are available on the
following link:

https://www.cmf.tn/sites/default/files/pdfs/emetteurs/informations/rapports-societes/
alkimia_efc311221_0.pdf

Required:

a. Determine the earnings that relate to the minority shareholders of the consolidated
subsidiaries for the year ended December 31, 2022.
b. What is the amount of the earnings per share for the year ended December 31, 2022?

Answer:

a. Part (du résultat) revenant aux intérêts minoritaires 117


b. The earnings per share were presented within the statement of stockholder equity (which is
a note to the balance sheet) under Note10:Tableau de variation des capitaux propres
The earnings per share amount to (12,690) loss

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