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Chapter 3 Statements

and Ratios

© 2012 Pearson Prentice Hall. All rights reserved. 1-1


The Stockholders’ Report

• Generally accepted accounting principles (GAAP) are

the practice and procedure guidelines used to prepare and

maintain financial records and reports;

• The Sarbanes-Oxley Act of 2002, passed to eliminate the

many disclosure and conflict of interest problems of

corporations

• More Countries Adopt International Financial Reporting

Standards

– International Financial Reporting Standards (IFRS) are

established by the International Accounting Standards Board

(IASB).


Focus on Ethics

Take Earnings Reports at Face Value

– Near the end of each quarter, many companies unveil their quarterly

performance.

– Firms that beat analyst estimates often see their share prices jump, while

those that miss estimates by even a small amount, tend to suffer price

declines.

– The practice of manipulating earnings in order to mislead investors is known

as earnings management.

• Why might financial managers be tempted to manage earnings?

• Is it unethical for managers to manage earnings if they disclose their

activities to investors?


The Four Key Financial Statements:

The Income Statement

• The income statement provides a financial summary of a

company’s operating results during a specified period.

• Although they are prepared quarterly for reporting

purposes, they are generally computed monthly by

management and quarterly for tax purposes.


Table 3.1 Bartlett Company Income Statements ($000)

Concentrate on control issue

• Gross profit – control

expenses of production

• Operating profit – control

of the expenses of

“running” the company

• Net income – remaining

profits after all expenses

paid


Personal Finance Example


The Four Key Financial Statements: The Balance Sheet

• The balance sheet presents a summary of a firm’s

financial position at a given point in time.

• The statement balances the firm’s assets (what it owns)

against its financing, which can be either debt (what it

owes) or equity (what was provided by owners).


Table 3.2a Bartlett Company Balance Sheets ($000)

Represents the assets that management has purchased

and uses to achieve it’s mission and goals.


Table 3.2b Bartlett Company Balance Sheets ($000)

Represents how

management

gets the $$ to

purchase the

assets of the

firm.


Personal Finance Example

Personal Finance: Cash Management

Identify all cash inflows and outflows.

Breakdown into specific areas of spending.

Discretionary Spending

– after all revenues and expenses are accounted for this is the

amount that should be left in the checkbook at the end.

– What should you do with a surplus (+)?; a deficit (-)?

Under worksheet Personal Finance go to Cash Management

area.

– Use macros CTRL + SHIFT + F

– Select Cash Management

Copyright © 2009 Pearson Prentice Hall. All rights reserved.

Cash Management

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Cash Management and Budget

•This part of the worksheet is used to identify major

levels of revenue and expenditure.

• Debts include only loans, not utilities etc.

•Individual personal expenses are considered in

the next slide.

•In this application, Living Expenses identifies

remaining cash for other monthly expenses.

Living Expenses

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Cash Management and Budget

In this part of the worksheet, expenses can be averaged by listing the past 3 months expenses or annual numbers can be analyzed by inputting the data in column 3. Discretionary income here represents the

amount of cash left over at the end of the period! This should be in the checkbook!!!!

Personal Finance: Net Worth

Balance sheet looks very similar to a corporate

balance sheet.

Net worth = Total Assets – Total Liabilities

– If you retired and sold everything you owned and

paid off everyone you owed; this is what you

would have to live off the rest of your life.

– When we are young this number is frequently

negative. Especially if you have a student loan.

– Why?


Personal Finance: Net Worth

Identify all Assets and Liabilities

Breakdown into proper categories

Under worksheet Personal Finance go to Cash

Management area.

– Use macros CTRL + SHIFT + F

– Select Personal Net Worth


Copyright © 2009 Pearson Prentice Hall. All rights reserved. Personal Net Worth



Statement of Retained Earnings

The statement of retained earnings reconciles the net

income earned during a given year, and any cash dividends

paid, with the change in retained earnings between the start

and the end of that year.



Statement of Cash Flows

• The statement of cash flows provides a summary of the

firm’s operating, investment, and financing cash flows and

reconciles them with changes in its cash and marketable

securities during the period.

• This statement not only provides insight into a company’s

investment, financing and operating activities, but also ties

together the income statement and previous and current

balance sheets.


Table 3.4 Bartlett Company Statement of

Cash Flows ($000) for the Year Ended

December 31, 2012

The cash flow statement

illustrates the primary

decisions that managers

make.

• Managers make decisions

on how to run the

business (operations)

• Managers decide what

kinds of assets to buy

(investment)

• Managers decide where

to get the $$ to run the

business (financing)

Documents

Chapter 3 Statements and Ratios - TMC Businesstmcbusinessfaculty.weebly.com/uploads/7/8/7/6/7876424/bua321_ch03... · Chapter 3 Statements and Ratios © 2012 Pearson Prentice Hall