Value versus Cost Market value and book value are often very different.Why? Which is more important to the decision- making process? 10
10 Value versus Cost n Market value and book value are often very different. Why? n Which is more important to the decision- making process?
Klingon Corporation KLINGON CORPORATION Balance Sheets Market Value versus Book Value Book Market Book Market Assets Liabilities and Shareholders' Equity NWC $400 $600 LTD $500 $500 NFA 700 1,000 Equity 600 1,100 1,100 1,600 1,100 1,600 11
11 Klingon Corporation KLINGON CORPORATION Balance Sheets Market Value versus Book Value Book Market Book Market Assets Liabilities and Shareholders’ Equity NWC $ 400 $ 600 LTD $ 500 $ 500 NFA 700 1,000 Equity 600 1,100 1,100 1,600 1,100 1,600
The Income Statement Measures financial performance over a specific period of time The accounting definition of income is: Revenue -Expenses Income 12
12 The Income Statement n Measures financial performance over a specific period of time n The accounting definition of income is: Revenue – Expenses ≡ Income
Income Statement The income statement is more like a video of the firm's operations for a specified period of time n You generally report revenues first and then deduct any expenses for the period ■ Matching principle-GAAP says to recognize revenue when it is fully earned and match expenses required to generate revenue to the period of recognition 13
13 Income Statement n The income statement is more like a video of the firm’s operations for a specified period of time n You generally report revenues first and then deduct any expenses for the period n Matching principle – GAAP says to recognize revenue when it is fully earned and match expenses required to generate revenue to the period of recognition
U.S.Corporation Income Statement- Table 2.2 U.S.CORPORATION 2008 Income Statement (in Millions) Net sales $1,509 Cost of goods sold 750 Depreciation 65 Earnings before interest and taxes $694 Interest paid 70 Taxable income $624 Taxes 212 Net income $412 Dividends $103 Addition to retained earnings 309 14
14 U.S. Corporation Income Statement - Table 2.2