chapter 2
DESCRIPTION
TRANSCRIPT
©© Kimberly Lyons Kimberly Lyons 11
Chapter 2Chapter 2Financial StatementsFinancial Statements
© Kimberly Lyons© Kimberly Lyons 22September 2008September 2008
Primary Financial StatementsPrimary Financial Statements
Balance Sheet: statement of financial Balance Sheet: statement of financial positionposition
Income Statement: the statement of Income Statement: the statement of earnings earnings
Statement of Cash FlowsStatement of Cash FlowsStatement of Retained EarningsStatement of Retained Earnings
© Kimberly Lyons© Kimberly Lyons 33September 2008September 2008
Balance SheetBalance Sheet
The statement of financial position The statement of financial position reports on the company’s resources reports on the company’s resources (assets) and claims to resources (assets) and claims to resources (liabilities and equity) at the end of (liabilities and equity) at the end of the accounting periodthe accounting period
Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity
© Kimberly Lyons© Kimberly Lyons 44September 2008September 2008
Assets: resources owned or Assets: resources owned or controlled by a business that controlled by a business that bring current or future benefitbring current or future benefit
In order of In order of decreasing liquiditydecreasing liquidity
Cash & equivalentsCash & equivalents Accounts receivableAccounts receivable ““Other” receivablesOther” receivables SuppliesSupplies
PrepaidsPrepaids InventoryInventory InvestmentsInvestments Property, plant, Property, plant,
EquipEquip Natural resourcesNatural resources IntangiblesIntangibles
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Liabilities: current and future Liabilities: current and future obligations to lenders and obligations to lenders and
creditorscreditorsAccounts payableAccounts payableAccrued liabilitiesAccrued liabilitiesUnearned revenuesUnearned revenuesNotes payable (IOU’s)Notes payable (IOU’s)Lease LiabilitiesLease LiabilitiesMortgages payableMortgages payableBonds payableBonds payable
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Owner’s EquityOwner’s Equity
Owner’s claims to resources (net assets Owner’s claims to resources (net assets or residual) includes two components:or residual) includes two components:
Contributed Capital: investment by owners Contributed Capital: investment by owners in exchange for ownership interestin exchange for ownership interest
Retained Earnings: accumulated earnings Retained Earnings: accumulated earnings that have not been paid back to that have not been paid back to shareholders in the form of dividendsshareholders in the form of dividends
© Kimberly Lyons© Kimberly Lyons 77September 2008September 2008
Classified Balance SheetClassified Balance Sheet
Assets and liabilities categorized as Assets and liabilities categorized as current or long-termcurrent or long-term
Current: converted to cash, sold, used or Current: converted to cash, sold, used or expired within one year or the operating expired within one year or the operating cycle, whichever is longercycle, whichever is longer
Includes: cash and equivalents, accounts Includes: cash and equivalents, accounts receivable, ST notes receivable, supplies, receivable, ST notes receivable, supplies, prepaids, inventories, etc.prepaids, inventories, etc.
© Kimberly Lyons© Kimberly Lyons 88September 2008September 2008
Classified Balance SheetClassified Balance SheetContinuedContinued
Long term assetsLong term assetsProperty, plant, and equipmentProperty, plant, and equipmentLong-term investmentsLong-term investmentsNatural resourcesNatural resourcesIntangiblesIntangibles
© Kimberly Lyons© Kimberly Lyons 99September 2008September 2008
Income StatementIncome Statement
Reports on the results of operations Reports on the results of operations for the entire accounting periodfor the entire accounting period
Measures profitabilityMeasures profitability
++ RevenuesRevenues- - ExpensesExpenses
+/- Gains/Losses+/- Gains/Losses= = Net incomeNet income
© Kimberly Lyons© Kimberly Lyons 1010September 2008September 2008
RevenuesRevenues
IncreasesIncreases in resources that result in resources that result from sales of goods and services as from sales of goods and services as well as other business operationswell as other business operationsSales revenueSales revenueCommissionsCommissionsFee incomeFee incomeRental incomeRental incomeInterest and dividend incomeInterest and dividend income
© Kimberly Lyons© Kimberly Lyons 1111September 2008September 2008
ExpensesExpenses
Resources Resources usedused to generate revenues to generate revenues
Cost of goods soldCost of goods soldWages expenseWages expenseUtilities expenseUtilities expenseRent expenseRent expenseInterest expenseInterest expenseIncome tax expenseIncome tax expense
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Gains and LossesGains and Losses
Gains and losses result from peripheral Gains and losses result from peripheral transactions: sales of long-term assets at transactions: sales of long-term assets at greater (less than) their net book valuegreater (less than) their net book value
These transactions are outside of a These transactions are outside of a company’s normal, day-to-day operationscompany’s normal, day-to-day operations
Recovering more than book value = gainsRecovering more than book value = gainsFailure to recover book value = lossesFailure to recover book value = losses
© Kimberly Lyons© Kimberly Lyons 1313September 2008September 2008
Earnings Per ShareEarnings Per Share
Net Income Net Income
Common Shares OutstandingCommon Shares Outstanding
Provides each shareholder Provides each shareholder information on their respective information on their respective increase (decrease) in claims to increase (decrease) in claims to equity as a result of operations for equity as a result of operations for the yearthe year
© Kimberly Lyons© Kimberly Lyons 1414September 2008September 2008
Multi-step Income StatementMulti-step Income Statement
Sales revenueSales revenue- Cost of goods soldCost of goods sold
==Gross marginGross margin- Operating expensesOperating expenses
= Operating income= Operating income
+/- “Other” (non-operating) +/- “Other” (non-operating)
revenues, expenses, gains, & lossesrevenues, expenses, gains, & losses
= Income before tax= Income before tax- Income tax expenseIncome tax expense
= Net income= Net income
Earnings Per ShareEarnings Per Share
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Statement of Retained Statement of Retained EarningsEarnings
Reports on changes to retained Reports on changes to retained earnings for the entire periodearnings for the entire period
Retained Earnings Retained Earnings 1/1/20081/1/2008
+ + Net Income 2008Net Income 2008
-- Dividends 2008Dividends 2008
= = Retained Earnings Retained Earnings 12/31/200812/31/2008
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DividendsDividends
Return of capital to the shareholders Return of capital to the shareholders Paid out of retained earningsPaid out of retained earningsPaid as a return in exchange for riskPaid as a return in exchange for riskNot to be confused with expensesNot to be confused with expensesNot deductible on the income Not deductible on the income
statementstatement
© Kimberly Lyons© Kimberly Lyons 1717September 2008September 2008
Statement of Cash FlowsStatement of Cash Flows
Reports on changes in cash for the Reports on changes in cash for the entire periodentire period
Sources and uses of cash are Sources and uses of cash are categorized by functional categorycategorized by functional categoryOperating activities – day-to-day Operating activities – day-to-day
operations of the business (cash earnings)operations of the business (cash earnings)Investing activities – purchases and sales Investing activities – purchases and sales
of long-term assetsof long-term assetsFinancing activities – Borrowing and Financing activities – Borrowing and
repayments to lenders and ownersrepayments to lenders and owners
© Kimberly Lyons© Kimberly Lyons 1818September 2008September 2008
ArticulationArticulation
How a change in one financial How a change in one financial statement explains the change in statement explains the change in othersothers
IncomeIncome Retained Retained Balance Balance
StatementStatement Earnings Earnings Sheet SheetAssets=
Liabilities +
Owner’s Equity
Ret. Earn. 1/1+ Net Income- DividendsRet. Earn. 12/31
Revenues- Expenses= Net Income
© Kimberly Lyons© Kimberly Lyons 1919September 2008September 2008
Notes to the Financial Notes to the Financial StatementsStatements
Summary of significant accounting Summary of significant accounting policiespolicies
Assumptions, estimates, and judgmentsAssumptions, estimates, and judgments Information about summary totalsInformation about summary totals
Details of specific account balancesDetails of specific account balancesDisclosure of contingencies and Disclosure of contingencies and
uncertaintiesuncertaintiesPending lawsuitsPending lawsuits
Supplementary informationSupplementary informationSegment and quarterly disclosuresSegment and quarterly disclosures
© Kimberly Lyons© Kimberly Lyons 2020September 2008September 2008
Concepts & AssumptionsConcepts & Assumptions
Separate entitySeparate entityAssumption of arm’s lengthAssumption of arm’s lengthCost principleCost principleMonetary measurement conceptMonetary measurement conceptGoing concern assumptionGoing concern assumption
© Kimberly Lyons© Kimberly Lyons 2121September 2008September 2008
Audit ReportAudit Report
Issued by the Certified Public Issued by the Certified Public Accountant (CPA)Accountant (CPA)
Independence is keyIndependence is keyFinancial statements present “fairly, Financial statements present “fairly,
in all material respects, the financial in all material respects, the financial position, results of operations, and position, results of operations, and cash flows, for the years ended . . . in cash flows, for the years ended . . . in accordance with U.S. generally accordance with U.S. generally accepted accounting principles”accepted accounting principles”
© Kimberly Lyons© Kimberly Lyons 2222September 2008September 2008
Exam ReviewExam Review
What are the components of each of What are the components of each of the following financial statements?the following financial statements?Income statementIncome statementBalance sheetBalance sheetStatement of retained earningsStatement of retained earningsStatement of cash flowsStatement of cash flows
Define “articulation” in terms of the Define “articulation” in terms of the above financial statementsabove financial statements
© Kimberly Lyons© Kimberly Lyons 2323September 2008September 2008
Exam ReviewExam ReviewContinuedContinued
Define each of the following:Define each of the following:AssetsAssets RevenuesRevenues
LiabilitiesLiabilities ExpensesExpenses
Owner’s equityOwner’s equity DividendsDividendsWhat are the two components of What are the two components of
owner’s equity?owner’s equity?Explain the difference between net Explain the difference between net
income (earnings) and retained income (earnings) and retained earnings.earnings.
© Kimberly Lyons© Kimberly Lyons 2424September 2008September 2008
Exam ReviewExam ReviewContinuedContinued
What information does a balance What information does a balance sheet provide?sheet provide?
What information does an income What information does an income statement provide?statement provide?
Specifically, how do the two differ?Specifically, how do the two differ?Why do we need a statement of cash Why do we need a statement of cash
flows when we have balance sheets flows when we have balance sheets and income statements?and income statements?
© Kimberly Lyons© Kimberly Lyons 2525September 2008September 2008
Exam ReviewExam ReviewContinuedContinued
What information does a classified What information does a classified balance sheet provide that an balance sheet provide that an unclassified balance sheet does not?unclassified balance sheet does not?
What makes comparative financial What makes comparative financial statements more useful than those statements more useful than those not presented in comparative not presented in comparative format?format?