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MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

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Page 1: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

MGT 497 Financial Statements

Prof. Rick Hayes, Ph.D., CPA

Page 2: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Balance SheetBalance Sheet

Assets:CashReceivablesInventoryFixed AssetsOther Assets

Liabilities & Equity:

Liabilities

Equity

Income StatementIncome Statement

Revenues Expenses Net Income

Statement of Cash Flows

Statement of Cash Flows

Page 3: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Balance SheetBalance Sheet

Assets:CashReceivablesInventoryFixed AssetsOther Assets

Liabilities & Equity:

Liabilities

Equity

Statement of Stock-holders’ Equity

Statement of Stock-holders’ Equity

Page 4: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Rockyfellow, Inc.Income Statement

For the Year Ended December 31, 2001

The heading.The heading.

The Income StatementThe Income Statement The Income StatementThe Income Statement

Page 5: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Income StatementThe Income Statement The Income StatementThe Income Statement

Sales revenue $186,230Cost of goods sold 73,350Gross profit 112,880Operating expenses:

Wages $42,700Utilities 6,430Depreciation 9,650Insurance 3,420Supplies 8,390Advertising 7,120Patent 3,000

Total operating expenses 80,710

Page 6: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Income StatementThe Income Statement The Income StatementThe Income Statement

Sales revenue $186,230Cost of goods sold 73,350Gross profit 112,880Total operating expenses 80,710Operating income 32,170Interest expense 10,300Pretax income 21,870Income tax expense 5,600Net income $ 16,270

Page 7: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Income StatementThe Income Statement The Income StatementThe Income Statement

Sales revenue $186,230Cost of goods sold 73,350Gross profit 112,880Total operating expenses 80,710Operating income 32,170Interest expense 10,300Pretax income 21,870Income tax expense 5,600Net income $ 16,270Earnings per share of common stock $1.30

($16,270 12,500 shares)

Page 8: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Income StatementThe Income Statement The Income StatementThe Income Statement

Earnings per Share (Net Income Shares of Stock) =

Net Income =

Page 9: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Rockyfellow, Inc.Balance Sheet

December 31, 2001

The Balance SheetThe Balance SheetThe Balance SheetThe Balance Sheet

The heading.The heading.

Page 10: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Balance SheetThe Balance SheetThe Balance SheetThe Balance Sheet

Rockyfellow, Inc.Balance Sheet

December 31, 2001

2001 2000

AssetsCurrent assets:

Cash$ 15,600 $ 11,700Accounts receivable 22,430

13,850Merchandise inventory 43,500

44,450Supplies 12,670

9,920Prepaid insurance 8,290

5,950 Total current assets $102,490

$ 85,870

Page 11: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

2001 2000Property, plant, and equipment:

Equipment $ 93,070$ 79,570

Building 275,000235,000

368,070314,570

Less: Accumulated depreciation 105,860 96,210

262,210218,360

Land 36,810 45,000Total property, plant, and equipment 299,020263,360

Other assets:Patents 32,000

35,000 Total assets $433,510$384,230

Page 12: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

2001 2000LiabilitiesCurrent liabilities:

Accounts payable $ 24,790$ 22,630

Wages payable 4,1005,510

Interest payable 11,2509,920

Income taxes payable 2,4003,000

Notes payable, current portion 14,400 9,320Total current liabilities 56,94050,380

Long-term liabilities:Notes payable, long-term 177,600

171,150 Total liabilities 234,540

221,530

Page 13: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

2001 2000Stockholders’ Equity

Contributed capital $125,000$100,000

Retained earnings 73,970 62,700Total stockholders’ equity 198,970162,700 Total liabilities and stockholders’ equity $433,510$384,230

Page 14: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity

Rockyfellow, Inc.Statement of Stockholders’ Equity

For the Year Ended December 31, 2001

Contributed RetainedCapital Earnings Total

Balance, December 31, 2000 $100,000 $62,700 $162,700

Common stock issued 25,00025,000 Net income 16,270 16,270 Dividends declared (5,000)(5,000)

Balance, December 31, 2001 $125,000 $73,970 $198,970

Contributed capitalContributed capital is the is the amount of direct investment by amount of direct investment by

owners in a corporation.owners in a corporation.

Contributed capitalContributed capital is the is the amount of direct investment by amount of direct investment by

owners in a corporation.owners in a corporation.

Retained earningsRetained earnings is the is the cumulative amount of net cumulative amount of net

income earned that has been income earned that has been reinvested in the corporation.reinvested in the corporation.

Retained earningsRetained earnings is the is the cumulative amount of net cumulative amount of net

income earned that has been income earned that has been reinvested in the corporation.reinvested in the corporation.

Dividends are not Dividends are not reported on the income reported on the income statement because they statement because they

are notare not expenses. expenses.

Dividends are not Dividends are not reported on the income reported on the income statement because they statement because they

are notare not expenses. expenses.

Page 15: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ EquityThe Statement of Stockholders’ Equity

Income Statement

Net income

Income Statement

Net income

Statement of Stockholders’ Equity

Beginning stockholders’Equity

+ Net income- Dividends+ Stock issued- Stock repurchased

Ending stockholders’ equity

Statement of Stockholders’ Equity

Beginning stockholders’Equity

+ Net income- Dividends+ Stock issued- Stock repurchased

Ending stockholders’ equity

Balance Sheet

Stockholders’ equity

Balance Sheet

Stockholders’ equity

The “link”

Page 16: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

This statement reports events that resulted

in cash inflows and

outflows for a fiscal period.

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

Page 17: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

In other words, this statement explains the changes in a company’s cash balance during the fiscal period.

In other words, this statement explains the changes in a company’s cash balance during the fiscal period.

Page 18: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Operating ActivitiesOperating Activities

Operating activities involve the use of resources to design,

produce, distribute, and market goods and services.

Operating activities involve the use of resources to design,

produce, distribute, and market goods and services.

Page 19: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Cash Received from Operating Activities

Cash Paid for Operating Activities-

Net Cash from (for) Operating Activities=

Direct FormatDirect Format Direct FormatDirect Format

Page 20: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Cash flow from operating activities:Receipts:

Collections from customers $177,550 Payments:

To suppliers of inventory $(70,240)To employees (44,110)For utilities (6,430)For insurance (5,760)For supplies (11,140)For interest (8,970)For advertising (7,120)For income taxes (6,200)

Total cash payments (159,170) Net cash flow from operating activities 17,680

Rockyfellow, Inc.Statement of Cash Flows

For the Year Ended December 31, 2001(Direct Method)

Page 21: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Investing ActivitiesInvesting Activities

Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

Page 22: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

How much financing does an organization need?

Where should an organization obtain its financing?

When should an organization obtain funding?

What effect will financing have on profitability and survival?

Financing DecisionsFinancing DecisionsFinancing DecisionsFinancing Decisions

Page 23: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Cash flow from investing activities:Purchase of plant assets $(53,500)Sale of plant assets 8,190 Net cash flow from investing activities $(45,310)

Cash flow for financing activities:Proceeds from issuing common stock $25,000 Proceeds from issuing long-term debt 32,000 Payment of long-term debt (20,470)Payment of dividends (5,000)

Net cash flow from financing activities 31,530 Net increase in cash 3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001 $ 15,600

Page 24: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Indirect FormatIndirect FormatIndirect FormatIndirect Format

The indirect format reconciles net income on an accrual basis with

cash flow from operating activities on a cash basis.

The indirect format reconciles net income on an accrual basis with

cash flow from operating activities on a cash basis.

Page 25: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Cash flow from operating activities:Net income $ 16,270 Adjusted for:

Depreciation and amortization 12,650 Increase in receivables (8,580)Decrease in merchandise 950 Increase in supplies (2,750)Increase in prepaid insurance (2,340)Increase in accounts payable 2,160 Decrease in wages payable (1,410)Increase in interest payable 1,330 Decrease in income tax payable (600)

Net cash from operating activities 17,680

Rockyfellow, Inc.Statement of Cash Flows

For the Year Ended December 31, 2001(Indirect Method)

2001 2000 Change$22,430 $13,850 $8,580

From Income

Statement

From Balance Sheet

Page 26: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Summary of Adjustments for Summary of Adjustments for the Indirect Formatthe Indirect Format

Summary of Adjustments for Summary of Adjustments for the Indirect Formatthe Indirect Format

Noncash expenses, such as depreciation and amortization, are added to net income in computing cash flow from operating activities.

Increases in current asset balances are subtracted from net income. Decreases in current asset balances are added to net income.

Increases in current liability balances are added to net income. Decreases in current liability balances are subtracted from net income.

The following adjustments are made to net income using the

indirect format in computing cash flow from operating activities.

The following adjustments are made to net income using the

indirect format in computing cash flow from operating activities.

Page 27: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Indirect FormatIndirect FormatIndirect FormatIndirect Format

Net income+ Depreciation and Amortization Expense- Increases in Current Asset Accounts+ Decreases in Current Asset Accounts+ Increases in Current Liability Accounts- Decreases in Current Liability Accounts= Cash Flow from Operating Activities

Page 28: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Cash flow from investing activities:Purchase of plant assets $(53,500)Sale of plant assets 8,190 Net cash flow from investing activities $(45,310)

Cash flow for financing activities:Proceeds from issuing common stock $25,000 Proceeds from issuing long-term debt 32,000 Payment of long-term debt (20,470)Payment of dividends (5,000)

Net cash flow from financing activities 31,530 Net increase in cash 3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001 $ 15,600

The investing and financing sections are

identical for the direct and indirect formats.

The investing and financing sections are

identical for the direct and indirect formats.

Page 29: MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements

Interrelationships Among Interrelationships Among Financial StatementsFinancial Statements

Amounts on the Balance Sheet

Beginning of Fiscal Period

Amounts on the Balance Sheet

Beginning of Fiscal Period

Changes Reported on the Income Statement and Statement of Cash Flows

Changes Reported on the Income Statement and Statement of Cash Flows

+-

Amount on the Balance Sheet

End of Fiscal Period

Amount on the Balance Sheet

End of Fiscal Period

=