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2PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning
7/e
FinancialStatements and
the Annual Report
Primary Objective of Financial Reporting
Invest??
Borrow $$?? Sell stocks or bonds??
Start new business??
Loan $$??Extend credit $$??
LO1
Provide information for decision making
Secondary Objectives of Financial Reporting
Reflect prospective cash receipts to
investors and creditors
Reflect prospective cash flows tothe company
Reflect the company’s resources
and claims to its resources
Assets = Liabilities + OE
Qualitative CharacteristicsUnderstandability –
Relevance –
Reliability –
LO2
Represents what it purports
Has capacity tomake a difference
To those willing to takethe time to understand it
Qualitative Characteristics
From one period to the next
Consistency
between companies
Comparability
Qualitative Characteristics
Materiality
Conservatism
Will it make a differenceTo the decision maker?
All else equal, choose Least optimistic estimate
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
LO3
The Operating Cycle
Inventory
Accounts Receivable
Cash
Dixon Sporting GoodsBalance Sheet
Assets A
A = L + SE Realized, sold, or consumed in
one year or operating cycle Current assets
Cash $ 5,000Marketable securities 11,000Accounts receivable 23,000
Merchandise inventory 73,500Prepaid insurance 4,800Supplies 700
Total current assets $118,000Investments Land held for future office site 150,000Property, plant, and equipment Land $100,000 Buildings $150,000
Less: Accumulated depreciation (60,000) 90,000 Store furniture and fixtures $ 42,000 Less: Accumulated depreciation (12,600) 29,400 Total property, plant and equipment 219,400Intangible assets Franchise agreement 55,000
Total assets $542,400
Current liabilitiesAccounts payable $ 15,700 Salaries and wages payable 9,500
Income taxes payable 7,200
Interest payable 2,500 Bank loan payable 25,000 Total current liabilities $ 59,900 Long-term debt Notes payable $ 120,000 Total liabilities $179,900
Liabilities and Stockholders’ Equity
Contributed capital Capital stock, $10 par, 5,000 shares issued and outstanding $ 50,000 Paid-in capital in excess of par value 25,000 Total contributed capital $ 75,000 Retained earnings 287,500 Total stockholders' equity $ 362,500
Total liabilities and stockholders’ equity $542,400
= L
+ SE
A = L + SEDixon Sporting GoodsBalance Sheet
Satisfied within one
year or operating cycle
Analysis of Liquidity
Of particular interest to bankers and other
creditors
Working Capital
Ability of company to pay debts as they
become due
LO4
Dixon Sporting Good’s Liquidity
Current assets $2,000Current liabilities 1,600
Working = Current Assets Capital (Current Liabilities) $58,100
Current = Current Assets Ratio Current Liabilities 1.97:1
What's the trend??
Single-Step Income Statement
Revenues $$Less: expenses ($$)Net income $$
LO5
Sales– Cost of Goods Sold= Gross Profit Operating expenses:– General and
administrative expenses– Selling expenses= Income from operations+/– Other revenues and expenses= Income before taxes– Income tax expense= Net income
Fourimportantsubtotals
Multiple-Step Income Statement
Sales $357,500Cost of Goods Sold 218,300Gross Profit $139,200Operating expenses: Selling expenses Depreciation on store furniture and fixtures $ 4,200 Advertising 13,750 Salaries and wages 22,000 Total selling expenses $ 39,950 General and administrative expenses
Depreciation of buildings and amortization of trademark $ 6,000 Salaries and wages 15,000
Insurance 3,600 Supplies 1,050 Total general and administrative expenses 25,650
Total operating expenses 65,600 Income from operations $ 73,600 Other revenues and expenses: Interest revenue $ 1,500 Interest expense 16,900Excess of other revenues over other expenses 15,400Income before taxes $ 58,200 Income tax expense 17,200 Net income $ 41,000
Dixon Sporting Goods Multiple Step Income Statement
For the Year Ended December 31, 2010
Analysis of Profitability
Profit Margin %
Of particular interest
to current and potentialinvestors
LO6
Dixon Sporting Goods Profit Margin
Profit Margin % = Net Income Operating Revenues Profit Margin % = $41,000 = 11% $357,500 (The amount of every sales dollar that results in income)
Statement of Retained Earnings
Explains changes in the components of owners’ equity during a period
Net income (net loss) and Dividends Provides an important link between the income statement and the balance sheet
LO7
Statement of Retained Earnings Beginning retained earningsAdd: Net incomeDeduct: DividendsEqual Ending retained earnings
Dixon Sporting GoodsStatement of Retained Earnings
For the year ended December 31, 2010
Retained Earnings, Jan 1, 2010 $271,500Add: Net Income for 2010 41,000 $312,500Less: Dividends declared and paid in 2010 (25,500)Retained Earnings, Dec 31, 2010 $287,500
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 the Statement of Cash Flows
Reconciles change
in cash for
the period
LO8
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 the Statement of Cash Flows
Involves the purchase and sale of products or services
Involves the acquisition and saleof long-term or noncurrent assets
Involves the issuance and repaymentof long-term liabilities and stock
Financial Statements for a Real Company: General Mills
LO9
Current = Current Assets Ratio Current Liabilities
(How many $ of current assets for every $ of current liabilities)
General Mills’s Liquidity(in millions) 2009 2008
Current assets $ 3,534.9 $ 3,620.0
Current liabilities 3,606.0 4,856.3
Working capital $ ( 71.1) $(1,236.3)
Current ratio = 0.98:1 0.75:1
Profit Margin % = Net Income Sales
(How many cents on every dollar of sales are left over after covering all expenses)
(in million’s) 2009 2008 2007
Net sales $ 14,691.3 $13,652.1 $12,441.5
Net income $ 1,304.4 $ 1,294.7 $ 1,143.9
General Mills’s Profitability
Profit margin % = 8.9% 9.5% 9.2%
Letter to stockholdersDescription of company’s products and marketsFinancial statementsNotes to financial statementsReport of independent accountants Management discussion and analysisSummary of significant accounting policies
Other Elements of an Annual Report
End of Chapter 2