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