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Lecture Financial accounting: Tools for business decision making - Chapter 13: Financial analysis: The big picture

This chapter’s objectives are to: Apply the concepts of sustainable income and quality of earnings, apply horizontal analysis and vertical analysis, analyze a company’s performance using ratio analysis. | Financial Analysis: The Big Picture Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 13 CHAPTER OUTLINE Apply the concepts of sustainable income and quality of earnings. 1 Apply horizontal analysis and vertical analysis. 2 LEARNING OBJECTIVES Analyze a company’s performance using ratio analysis. 3 The most likely level of income to be obtained by a company in the future. Unusual Items Separately identified on the income statement. Discontinued operations. Other comprehensive income. These “irregular” items are reported net of income tax. LO 1 LEARNING OBJECTIVE Apply the concepts of sustainable income and quality of earnings. 1 SUSTAINABLE INCOME SUSTAINABLE INCOME ILLUSTRATION 13-1 Statement of comprehensive income LO 1 Discontinued Operations Disposal of a significant component of a business. Income statement should report a gain (or loss) from discontinued operations, net of tax. SUSTAINABLE INCOME LO 1 Illustration: Assume that during 2017 Acro Energy Inc. has income | Financial Analysis: The Big Picture Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 13 CHAPTER OUTLINE Apply the concepts of sustainable income and quality of earnings. 1 Apply horizontal analysis and vertical analysis. 2 LEARNING OBJECTIVES Analyze a company’s performance using ratio analysis. 3 The most likely level of income to be obtained by a company in the future. Unusual Items Separately identified on the income statement. Discontinued operations. Other comprehensive income. These “irregular” items are reported net of income tax. LO 1 LEARNING OBJECTIVE Apply the concepts of sustainable income and quality of earnings. 1 SUSTAINABLE INCOME SUSTAINABLE INCOME ILLUSTRATION 13-1 Statement of comprehensive income LO 1 Discontinued Operations Disposal of a significant component of a business. Income statement should report a gain (or loss) from discontinued operations, net of tax. SUSTAINABLE INCOME LO 1 Illustration: Assume that during 2017 Acro Energy Inc. has income before income taxes of $800,000. During 2017, Acro discontinued and sold its unprofitable chemical division. The loss in 2017 from chemical operations (net of $60,000 taxes) was $140,000. The loss on disposal of the chemical division (net of $30,000 taxes) was $70,000. Assuming a 30% tax rate on income. Prepare Acro’s statement of comprehensive income for the year ended December 31, 2017. Discontinued Operations LO 1 Discontinued Operations ILLUSTRATION 13-2 Statement presentation of discontinued operations LO 1 INVESTOR INSIGHT What Does “Non-Recurring” Really Mean Many companies incur restructuring charges as they attempt to reduce costs. They often label these items in the income statement as “non-recurring” charges, to suggest that they are isolated events, unlikely to occur in future periods. The question for analysts is, are these costs really one-time, “nonrecurring events” or do they reflect problems that the company will be facing for many periods in the future? If they are .