Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
The Balance Sheet and Financial
Disclosures
3
3-2
Learning Objectives
Describe the purpose of the balance sheet and understand its usefulness and limitations.
3-3
The Balance Sheet
Limitations: The balance sheet does not
portray the market value of the entity as a going concern nor its liquidation value.
Resources such as employee skills and reputation are not recorded in the balance sheet.
Limitations: The balance sheet does not
portray the market value of the entity as a going concern nor its liquidation value.
Resources such as employee skills and reputation are not recorded in the balance sheet.
Usefulness: The balance sheet describes
many of the resources a company has available for generating future cash flows.
It provides liquidity information useful in assessing a company’s ability to pay its current obligations.
It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.
Usefulness: The balance sheet describes
many of the resources a company has available for generating future cash flows.
It provides liquidity information useful in assessing a company’s ability to pay its current obligations.
It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.
The purpose of the balance sheet is to report a company’s financial position on a particular date.
3-4
Resources (Assets)
Resources (Assets)
Claims against resources (Liabilities)
Claims against resources (Liabilities)
Remaining claims accruing to owners
(Owners’ Equity)
Remaining claims accruing to owners
(Owners’ Equity)
Balance Sheet
3-5
Learning Objectives
Distinguish between current and noncurrent assets and liabilities.
Identify and describe the various balance sheet asset classifications.
3-6
(In millions) 2004 2003Assets:Current assets: Cash and cash equivalents 1,046$ 538$ Receivables, less allowances 3,027 2,627 Spare parts, supplies, and fuel 249 228 Deferred income taxes 489 416 Prepaid expenses and other 159 132 Total current assets 4,970$ 3,941$ Property and equipment, at cost: Aircraft and related equipment 7,001$ 6,624$ Package handling & ground support equipment and vehicles 5,296 5,013 Computer & electronic equipment 3,537 3,180 Other 4,477 4,200
20,311 19,017 Less accumulated depreciation 11,274 10,317 Net property and equipment 9,037 8,700 Other long-term assets: Goodwill 2,802 1,063 Prepaid pension cost 1,127 1,269 Intangible and other assets 1,198 412 Total other long-term assets 5,127 2,744 Total Assets 19,134$ 15,385$
FedEx CorporationBalance Sheet
31-May
Assets are probable
future economic benefits
obtained or controlled by a particular entity as a
result of past transactions or events.
Assets are probable
future economic benefits
obtained or controlled by a particular entity as a
result of past transactions or events.
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CashCashCash EquivalentsCash Equivalents
Short-term InvestmentsShort-term InvestmentsReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
CashCashCash EquivalentsCash Equivalents
Short-term InvestmentsShort-term InvestmentsReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
Current Assets
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Current Current AssetsAssets
Current Current AssetsAssets
Cash equivalents include certain
negotiable items such as commercial paper, money market funds,
and U.S. treasury bills.
3-8
Current Assets
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Cash that is restricted for a special purpose and not available for current operations
should not be classified as a current
asset.
CashCashCash EquivalentsCash Equivalents
Short-term InvestmentsShort-term InvestmentsReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
CashCashCash EquivalentsCash Equivalents
Short-term InvestmentsShort-term InvestmentsReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
Current Current AssetsAssets
Current Current AssetsAssets
3-9Operating Cycle of a Typical Manufacturing Company
Use cash to acquire raw materials
Convert raw materials to finished product
Deliver product to customer
Collect cash from customer
3-10
Noncurrent AssetsInvestments and Investments and
FundsFundsProperty, Plant, & Property, Plant, &
EquipmentEquipmentIntangiblesIntangibles
OtherOther
Investments and Investments and FundsFunds
Property, Plant, & Property, Plant, & EquipmentEquipmentIntangiblesIntangibles
OtherOther
Not expected to Not expected to be converted to be converted to
cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longerlonger
Not expected to Not expected to be converted to be converted to
cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longerlonger
Noncurrent Noncurrent AssetsAssets
Noncurrent Noncurrent AssetsAssets
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Noncurrent Assets
Other Assets
1. Includes long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications
Investments and Funds
1. Not used in the operations of the business
2. Includes both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes
Property, Plant and Equipment
1. Are tangible, long-lived, and used in the operations of the business
2. Includes land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells
3. Reported at original cost less accumulated depreciation (or depletion for natural resources)
Intangible Assets
1. Used in the operations of the business but have no physical substance
2. Includes patents, copyrights, and franchises
3. Reported net of accumulated amortization
©
3-12
Learning Objectives
Identify and describe the two balance sheet liability classifications.
3-13
(In milions) 2004 2003Liabilities:Current liabilities: Current portion of long-term debt 750$ 308$ Accrued salaries & employee benefits 1,062 724 Accounts payable 1,615 1,168 Accrued expenses 1,305 1,135 Total current liabilities 4,732 3,335 Long-term debt, less current portion 2,837 1,709 Other long-term liabilities Deferred income taxes 1,181 882
768 657 Self-insurance accruals 591 536 Deferred lease obligations 503 466
426 455 Other liabilities 60 57 Total other long-term liabilities 3,529 3,053 Total liabilities 11,098 8,097
Deferred gains, principally related to aircraft transactions
FedEx CorporationBalance Sheet
31-May
Pension, postretirement healthcare and other benefit obligations
Liabilities are probable
future sacrifices of
economic benefits
arising from present
obligations of a particular
entity to transfer
assets or provide
services to other entities as a result of
past transactions
or events.
Liabilities are probable
future sacrifices of
economic benefits
arising from present
obligations of a particular
entity to transfer
assets or provide
services to other entities as a result of
past transactions
or events.
3-14
Current Liabilities
Accounts PayableNotes Payable
Accrued LiabilitiesCurrent Maturities of Long-Term Debt
Accounts PayableNotes Payable
Accrued LiabilitiesCurrent Maturities of Long-Term Debt
Obligations expected to be satisfied through current
assets or creation of other current liabilities within one year or the operating cycle,
whichever is longer
Obligations expected to be satisfied through current
assets or creation of other current liabilities within one year or the operating cycle,
whichever is longer
Current Liabilities
Current Liabilities
3-15
Long-term Liabilities
Notes PayableMortgages
Bonds PayablePension ObligationsLease Obligations
Notes PayableMortgages
Bonds PayablePension ObligationsLease Obligations
Obligations that will not be
satisfied within one year or
operating cycle, whichever is
longer
Obligations that will not be
satisfied within one year or
operating cycle, whichever is
longer
Long-Term Liabilities
Long-Term Liabilities
3-16
(In millions, except shares) 2004 2003Common Stockholders' Investment:Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares 30$ 30$ issued for 2003Additional paid-in capital 1,079 1,088 Retained earnings 7,001 6,250 Accumulated other comprehensive loss (46) (30)
8,064 7,338 Less deferred compensation and treasury stock at cost 28 50 Total common stockholders' investment 8,036$ 7,288$
FedEx CorporationBalance Sheet
31-May
Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting
liabilities.
Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting
liabilities.
3-17
Shareholders’ Equity
Capital Stock
Capital Stock
Retained Earnings
Retained Earnings
Treasury Stock
Treasury Stock
Deferred Compensation
Deferred Compensation
Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income
3-18
Learning Objectives
Explain the purpose of financial statement disclosures.
3-19
Disclosure Notes
Summary of Significant
Accounting Policies
Conveys valuable information about the company’s choices from
among various alternative accounting methods.
Subsequent EventsA significant development that takes place after the company’s
fiscal year-end but before the financial statements are issued.
Noteworthy Events and Transactions
Transactions or events that are potentially important to evaluating a company’s financial statements,
e.g., related parties, errors and irregularities, and illegal acts.
3-20
Learning Objectives
Explain the purpose of management’s discussion and analysis.
3-21
Management Discussion and Analysis
Provides a biased but Provides a biased but informed perspective of informed perspective of
a company’s a company’s operations, liquidity, operations, liquidity,
and capital resources.and capital resources.
Provides a biased but Provides a biased but informed perspective of informed perspective of
a company’s a company’s operations, liquidity, operations, liquidity,
and capital resources.and capital resources.
3-22
Management’s Responsibilities
Preparing the financial statements and other information in the annual report.
Maintaining and assessing the company’s internal control procedures.
3-23
Learning Objectives
Explain the purpose of an audit and describe the content of the audit report.
3-24
Auditors’ Report
Expresses the auditors’ opinion as to the fairness of
presentation of the financial statements in conformity with
generally accepted accounting principles
Must comply with specifications of the AICPA and the PCAOB
3-25
Auditors’ Opinions
Unqualified
Issued when the financial statements present fairly the financial position, results of
operations, and cash flows in conformity with GAAP
QualifiedIssued when there is an exception
that is not of sufficient seriousness to invalidate the financial
statements as a whole
AdverseIssued when the exceptions are so serious that a qualified opinion is
not justified
DisclaimerIssued when insufficient
information has been gathered to express an opinion
3-26Compensation of Directors & Top Executives
Proxy Statement Information Summary compensation table Table of options granted Table of options holdings
A proxy statement is sent each year to all shareholders, usually in the
same mailing with the annual report.
3-27
Learning Objectives
Describe the techniques used by financial analysts to transform financial information into
forms more useful for analysis.
3-28
Using Financial Statement Information
Comparative Financial Statements
Allow financial statement users to compare year-to-year financial
position, results of operations, and cash flows
Horizontal Analysis
Expresses each item in the financial statements as a
percentage of that same item in the financial statements of another
year (base amount)
Vertical Analysis
Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base
amount, within the same year.
Ratio AnalysisAllows analysts to control for size differences over time and among
firms
3-29
Learning Objectives
Identify and calculate the common liquidity and financing ratios used to assess risk.
3-30
Liquidity Ratios
=Current ratioCurrent assets
Current liabilities
Measures a company’s ability to satisfy its short-term liabilities
=Acid-test ratioQuick assets
Current liabilities
Provides a more stringent indication of a company’s ability to pay its current
liabilities
3-31
Liquidity Ratios—Federal Express
= 1.05 $4,970
$4,732
Current ratio
= .86$4,073
$4,732
Acid-test ratio
3-32
Financing Ratios
=Debt to equity ratio
Total liabilities
Shareholders’ equity
Indicates the extent of reliance on creditors, rather than owners, in providing
resources
=Times interest earned ratio
Net income + Interest expense + Taxes
Interest expense
Indicates the margin of safety provided to creditors
3-33
Financing Ratios—Federal Express
= 1.38$11,098
$8,036
Debt to equity ratio
Times interest earned ratio
= 10.70$1,455
$136
3-34
Appendix 3
Reporting Segment
Information
3-35
Reporting by Operating Segment
Reportable Operating Segment Characteristics
Engages in business activities from which it may earn revenues
and incur expenses
Many companies operate in several business segments as a strategy to achieve growth and to
reduce operating risk through diversification.
Segment reporting facilitates the financial statement analysis of diversified companies.
Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance
Discrete financial information is available
3-36What Amounts Are Reported By An Operating Segment
General information about the operating segment
Segment profit or loss, segment assets, and the basis of measurement
Reconciliations of the totals of segment
revenues, reported profit or loss, assets, and other
significant items
Interim period information
3-37
Segment Reporting
Reporting by Geographic Area
SFAS 131 requires an enterprise to report certain geographic
information unless it is impracticable to do so.
Information About Major Customers
Revenues from customers generating 10% or more of the
revenue of an enterprise must be disclosed.
3-38
End of Chapter 3