1

Chapter 2

Financial Statements and the Annual Report

Financial Accounting, Alternate 4e by Porter and Norton

2

Primary Objective of Financial Reporting

Invest??

Borrow $$??

Sell stocks or bonds??Start new business??

Loan $$??

Extend credit $$??

Provide informationfor decision making

3

Secondary Objectives of Financial Reporting

Assess investor/creditor cash

receipts

AFE

DER

AL R

ESER

VE N

OTE

THE

UNIT

ED S

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AMER

ICA

THE

UNIT

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OTE IS

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AL T

ENDER

FOR

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BTS,

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IVAT

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85

H 2

93

Assess cash flows to

company

A

FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

Assets = Liabilities + OE

Reflect resources and

claims tothem

4

Qualitative Characteristics

Understandability -

Relevance -

Reliability -

To those willing to take the time to understand it

Represents what

it purports to

Has capacity to

make a difference

5

Qualitative Characteristics

between companies

Comparability

from one period to the next

Consistency

6

Qualitative Characteristics

Materiality

Conservatism

All else equal, choose least optimistic alternative

Will it make a difference to the decision maker?

7

Typical Operating Cycle

CASH

Time it takes to go from cash back to cash

A

FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

INVENTORY

A

FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

ACCTS. RECEIVABLE

A

FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

8

Basic Structure of a Classified Balance Sheet

Current assets+ Noncurrent (long-term) assets Total assets

Current liabilities+ Noncurrent (long-term) liabilities+ Stockholders’ equity Total liabilities and stockholders’ equity

9

Monaco Coach CorporationConsolidated Balance SheetsAssets Dec. 29, Dec. 28,

2001 2002A

A = L + SE

(in thousands)

Realized, sold or consumed in

one year or operating cycleCurrent assets:Trade receivables, net $ 82,885 $ 116,647Inventories 127,075 175,609Resort lot inventory 0 26,883Prepaid expenses 2,063 3,612Deferred income taxes 27,327 33,379

Total current assets 239,350 356,130

Notes receivable 8,157 0Property, plant and equipment, net 122,795 135,350Debt issuance costs, net 940 683Goodwill, net 55,856 55,254

$ 427,098 $ 547,417

Current liabilities:Book overdraft $ 5,889 $ 3,518Line of credit 26,004 51,413Current portion of long-term note payable 10,000 21,667Accounts payable 66,859 78,055Product liability reserve 19,856 21,322 Product warranty reserve 27,799 31,745Income taxes payable 0 4,536Accrued expenses and other liabilities 19,249 29,633

Total current liabilities 175,656 241,889Long-term note payable 30,000 30,333Deferred income taxes 8,312 14,568

Total liabilities 213,968 286,790

Liabilities and Stockholders' Equity

Stockholders' equity:Common stock 286 289Additional paid-in capital 48,522 51,501Retained earnings 164,322 208,837

Total stockholders' equity 213,130 260,627 $ 427,098 $ 547,417

= L

+ SE

A = L + SEMonarch Coach CorporationConsolidated Balance Sheets

Satisfied within one

year or operating cycle

10

11

Analysis of Liquidity

Of particularinterest to bankers andother creditors

CurrentRatio

Working Capital

Ability of company to pay debts as they

come due

12

Monaco Coach's Liquidity

Current assets $239,350 $356,130Current liabilities 175,656 241,889

2001 2002

(in 000’s)

Working Capital = C.A. less C.L. $ 63,694 $ 114,241

Current = Current Assets 1.36:1 1.47:1 Ratio Current Liabilities

What's the trend??

13

Comparison of Liquidity

Some 2002 current ratios: Gap, Inc. 2.11:1 Sprint 0.78:1 McDonald's 0.71:1

Can you comparethe ratios?

Consider compositionof current assets and

frequency of turnover

14

Income Statement

Revenues $$$

Less: expenses ($$)

Net income $$

SingleStep

15

Sales– Cost of goods sold= Gross profit Operating expenses:– Selling expenses– General and

administrative expenses= Income from operations+/– Other revenues and expenses= Income before income taxes– Income tax expense= Net income

Fourimportantsubtotals

Multiple-Step Income Statement

16

Net Sales $ 937,073 $1,222,689Cost of sales 823,083 1,059,560

Gross profit 113,990 163,129Selling, general and administrative

expenses 70,687 87,202Amortization of goodwill 645 0

Operating income 42,658 75,927Other income, net 334 105Interest expense (2,357) (2,752) Income before income taxes 40,635 73,280Provision for income taxes 15,716 28,765

Net income $ 24,919 $ 44,515

Monaco Coach Corporation Consolidated Statements of Operations

For the Years Ended 2001 2002

17

Analysis of Profitability

Gross

Profit %

Profit

Margin %

Of particular

interest to current and

potentialinvestors

18

Gross Profit (Margin) % = Gross Profit Sales

(How many cents on every $ of sales are left over after covering the cost of the product)

Monaco Coach Corporation's Profitability(in 000’s) 2000 2001 2002

Net sales $901,890 $937,073 $1,222,689Cost of sales 772,240 823,083 1,059,560Gross profit $129,650 $113,990 $ 163,129

Gross profit % = 14.4% 12.2% 13.3%

19

Profit Margin % = Net Income Sales

(How many cents on every $ of sales are left over after covering all expenses)

(in 000’s) 2000 2001 2002

Net sales $ 901,890 $937,073 $1,222,689

Net income $ 42,521 $ 24,919 $ 44,515

Profit margin % = 4.7% 2.7% 3.6%

Monaco Coach Corporation's Profitability

20

Statement of Stockholders’ Equity

Shows changes in all equity accounts including:» Sales and purchases of capital stock

Statement of Retained Earnings

Beginning retained earningsAdd: net incomeDeduct: dividends= Ending retained earnings

•Includes:

21

Cash flows from operating activities: $$

Cash flows from investing activities: $$

Cash flows from financing activities: $$

Net increase in cash $$Cash at beginning of year $$Cash at end of year $$

Basic Format of theStatement of Cash Flows

Reconciles change

in cash for

the period

22

Cash flows from operating activities: $$

Cash flows from investing activities: $$

Cash flows from financing activities: $$

Net increase in cash $$Cash at beginning of year $$Cash at end of year $$

Basic Format for theStatement of Cash Flows

Involve the purchase and sale of products or services

Involve the acquisition and saleof long-term assets

Involve the issuance and repaymentof long-term liabilities and stock

23

Report of independent accountants Management discussion & analysis Summary of financial data Letter to stockholders Financial statements Notes to financial

statements

Elements of an Annual Report

24

End of Chapter 2