Will The Income Statement Include Profits Or Losses?

Q1will The Income Statement Include The Profits Or Losses From The Pur

Will the income statement include the profits or losses from the purchase and sale of treasury stock? Yes or No? Include an example of a journal entry to purchase treasury stock.

Explain the effect on Cash Received and Interest Expense Recognized when:

• A. Bonds are issued at Face Value
• B. Bonds are issued at a discount
• C. Bonds are issued at a premium

(Hint: your answer for each independent situation [A, B, and C] should include the phrases “Credit to Bonds Payable” and “Contract Interest Rate”.)

Describe each of the methods used for accounting for investments in common stock and the situations in which each method would be employed. Explain why these investments are accounted for differently.

Explain the relationship between the balance sheet, income statement, and statement of cash flows using the indirect method. Include how the statement of cash flows is prepared in terms of the mathematical calculations and line items, without using numbers.

What insights are gained by applying vertical analysis to a company’s income statement and balance sheet? How would you explain to someone what vertical analysis reveals about a company's financial health based on its SEC 10-K filing?

Paper For Above instruction

The financial statements of a company, particularly the income statement, are designed to provide a comprehensive view of its operational performance and financial position. One important aspect is understanding whether certain transactions, such as the purchase and sale of treasury stock, are included in the income statement. Typically, the profits or losses from buying and selling treasury stock are not recorded on the income statement. Instead, these transactions are accounted for directly within shareholders’ equity on the balance sheet, as treasury stock is a contra-equity account. For instance, when a company purchases its own stock, the journal entry would involve debiting treasury stock and crediting cash, reflecting a reduction in assets and a contra-equity adjustment.

Regarding bonds issuance, the nature of the bonds—whether issued at face value, at a discount, or at a premium—significantly influences the cash received and interest expense recognition. When bonds are issued at face value, the cash received equals the bond principal, and the company credits Bonds Payable with the same amount at the contract interest rate. In this scenario, there is no discount or premium to account for. When bonds are issued at a discount, the cash received is less than the face value; thus, the company credits Bonds Payable at the face amount but recognizes a discount on bonds payable, increasing interest expense over the bond's life. Conversely, bonds issued at a premium result in cash received exceeding the face value; the company credits Bonds Payable at the face amount and records a premium, decreasing the overall interest expense recognized. These adjustments reflect the contractual interest rate and the bond's market rate, which impact the interest expense recognized over time.

Investments in common stock can be accounted for using two primary methods: the cost method and the equity method. The cost method is employed when the investor has little influence over the investee, typically holding less than 20% of voting stock. Under this approach, investments are recorded at purchase cost, and dividends received are recognized as income. The equity method, however, is applicable when the investor has significant influence, usually evidenced by ownership of 20% to 50%. Under this method, the initial investment is recorded at cost, and subsequently, the investor adjusts the carrying amount for their share of the investee's net income or loss, and dividends are recognized as reductions to the investment. The differing accounting treatments reflect the level of influence exerted over the investee’s operations, with the equity method providing a more accurate reflection of the economic relationship.

The relationship between the balance sheet, income statement, and statement of cash flows is interconnected, especially when preparing a statement of cash flows using the indirect method. The indirect method starts with net income from the income statement, then adjusts for non-cash items such as depreciation and amortization. It also accounts for changes in working capital—such as increases or decreases in accounts receivable, inventory, and accounts payable—to reconcile net income to net cash provided or used by operating activities. These adjustments convert accrual-based net income into cash-based cash flows. The balance sheet’s assets and liabilities provide the basis for these adjustments, illustrating how operational activities impact cash position over the period.

Vertical analysis enhances understanding by expressing each line item as a percentage of total sales (for income statements) or total assets (for balance sheets). This technique allows analysts to identify the relative proportions of expenses, revenues, and assets, facilitating comparisons over time and between companies of different sizes. By examining these percentages, one can assess cost structures, profitability ratios, and asset composition, revealing trends, strengths, and weaknesses in a company’s financial health. For example, a high percentage of cost of goods sold relative to sales may indicate pricing pressures, while deviations in asset composition could signal shifts in operational strategies. Overall, vertical analysis provides a normalized view of financial statements, making fundamental insights accessible regardless of company scale or industry sector.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Slickandmodern.com. (2021). The Impact of Vertical Analysis on Financial Statement Analysis. Retrieved from https://www.slickandmodern.com/vertical-analysis-financial-statement-analysis
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Higgins, R. C. (2018). Financial Management: Theory & Practice. McGraw-Hill Education.
• Gibson, C. H. (2019). Financial Reporting & Analysis (14th ed.). Cengage Learning.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
• Penman, S. H. (2018). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.