Chapter 13 Notes

13-113-2
FINANCIAL ANALYSIS:
THE BIG PICTURE
Accounting, Fourth Edition
1313-3
1. Understand the concept of sustainable income.
2. Indicate how irregular items are presented.
3. Explain the concept of comprehensive income.
4. Describe and apply horizontal analysis.
5. Describe and apply vertical analysis.
6. Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability.
7. Understand the concept of quality of earnings.
Study Objectives13-4
Sustainable
Income
Irregular items
Changes in accounting principles
Comprehensive
income
Alternative
accounting methods Pro forma income Improper recognition Price-earnings ratio Liquidity ratios
Solvency ratios
Profitability
ratios
Horizontal
analysis
Vertical
analysis
Comparative
Analysis Ratio Analysis Quality of
Earnings
Financial Analysis: The Big Picture13-5 SO 2 Indicate how irregular items are presented.
Sustainable Income
Sustainable Income - Net income adjusted for irregular items. Irregular items are separately identified on the income statement. Two types are:
1. Discontinued operations.
2. Extraordinary items.
These “irregular” items are reported net of income taxes. SO 1 Understand the concept of sustainable income.13-6 SO 2 Indicate how irregular items are presented.
Sustainable Income
Components of the income statement Illustration 13-113-7
Discontinued Operations
(a) Disposal of a significant component of a business.
(b) Income statement should report a gain (or loss) from discontinued operations, net of tax.
Sustainable Income
SO 2 Indicate how irregular items are presented.13-8
Illustration: Rozek Inc. has revenues of $2.5 million and expenses of $1.7 million from continuing operations in 2012. The company therefore has income before income taxes of
$800,000. During 2012 the company discontinued and sold its unprofitable chemical division at a loss of $210,000 (net of
$90,000 tax