Introduction to Financial

Accounting Information, 7/e

Financial
Statements and
the Annual Report

Curtis L. Norton and Gary

2 A. Porter
PowerPoint Author: Catherine Lumbattis

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 Primary Objective of
Financial Reporting
Provide information for decision making

Extend credit $$?? Loan $$??

Borrow $$?? Sell stocks or bonds??
Invest?? Start new business??
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO1
 Secondary Objectives of
Financial Reporting
Reflect the
company’s
resources Reflect prospective
and claims to its cash receipts to
resources investors and creditors
Reflect prospective
cash flows to
the company

Assets = Liabilities + OE
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
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 Qualitative Characteristics
Understandability –
To those willing to take
the time to understand it

Relevance – Has capacity to

make a difference

Reliability – Represents what

it purports

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO2
 Qualitative Characteristics
Comparability
between companies

Consistency
From one period to the next

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Qualitative Characteristics
Materiality
Will it make a difference
To the decision maker?

Conservatism
All else equal, choose
Least optimistic estimate

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 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
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LO3
 The Operating Cycle

Cash Inventory

Accounts
Receivable
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 Dixon Sporting Goods A = L + SE
Balance Sheet
A
Assets
Current assets
Cash $ 5,000
Marketable securities 11,000
Accounts receivable 23,000
Merchandise inventory 73,500
Prepaid insurance 4,800
Supplies 700
Total current assets $118,000
Investments
Land held for future office site 150,000
Property, 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 219,400
Intangible assets
Franchise agreement 55,000
Total assets $542,400

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Dixon Sporting Goods
Balance Sheet A = L + SE
Liabilities and Stockholders’ Equity
=L
Current liabilities
Accounts 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

+ SE
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

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Analysis of Liquidity

Ability of
Of particular interest
company to
to bankers and other pay debts
creditors as they
become due
Working
Capital
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO4
 Dixon Sporting Good’s Liquidity

Current assets What's the $2,000

Current liabilities 1,600
trend??

Working = Current Assets

Capital (Current Liabilities) $58,100

Current = Current Assets

Ratio Current Liabilities 1.97:1

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Single-Step
Income Statement
Revenues $$
Less: expenses ($$)
Net income $$

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
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LO5
 Multiple-Step
Income Statement
Sales
– Cost of Goods Sold
= Gross Profit
Operating expenses:
– General and Four
administrative expenses important
– Selling expenses subtotals
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Dixon Sporting Goods Multiple Step Income Statement
For the Year Ended December 31, 2010
Sales $357,500
Cost of Goods Sold 218,300
Gross Profit $139,200
Operating 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 16,900
Excess of other revenues over other expenses 15,400
Income before taxes $ 58,200
Income tax expense 17,200
Net income $ 41,000

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Analysis of Profitability

Of
particular
interest
Profit
to current and
Margin %
potential
investors
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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)
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 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
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Deduct: Dividends
Equal Ending retained earnings
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO7
 Dixon Sporting Goods
Statement of Retained Earnings
For the year ended December 31, 2010

Retained Earnings, Jan 1, 2010 $271,500

Add: Net Income for 2010 41,000
$312,500
Less: Dividends declared and paid
in 2010 (25,500)
Retained Earnings, Dec 31, 2010 $287,500

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Basic Format of the
Statement of Cash Flows
Cash flows from operating activities:
$$
Cash flows from investing activities:
$$
Cash flows from financing activities:
$$

Net increase in cash $$

Cash at beginning of year $$
Cash at end of year $$
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO8
 Basic Format for the
Statement of Cash Flows
Cash flows from operating activities:
Involves the purchase and sale $$
of products or services
Cash flows from investing activities:
Involves the acquisition and sale $$
of long-term or noncurrent assets
Cash flows from financing activities:
Involves the issuance and repayment $$
of long-term liabilities and stock
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Financial Statements
for a Real Company:

General Mills

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LO9
 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 = Current Assets
Current
Ratio ratio = Liabilities
Current 0.98:1 0.75:1

(How many $ of current assets for

every $ of current liabilities)
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 General Mills’s Profitability
(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

Profit margin % = 8.9% 9.5% 9.2%

Profit Margin % = Net Income
Sales
(How many cents on every dollar of sales are left
over after covering all expenses)
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Other Elements of an
Annual Report
 Letter to stockholders
 Description of company’s products and
markets
 Financial statements
 Notes to financial statements
 Report of independent accountants
 Management discussion and analysis
 Summary of significant accounting policies
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 End of Chapter 2

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.