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201Lec02.PPTX

More
More on
on Financial
Financial statements
statements Chapter
Chapter
A BALANCE SHEET:
i - changes constantly (every time an
activity occurs)
ii - shows assets, liabilities and equities as of a
specific date. Prepared at least once per year.
iii - uses original cost (historical cost principle) for
most items.
Current Fair Market Value (FMV) used for some assets like
marketable securities since daily price is readily available.
iv - Only shows items that can be expressed in
monetary units ($) Which assets or liabilities can’t be
expressed in $$$?

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Accounting Mathematics
Formula of Balance sheet:
Assets = Liabilities + Stockholders’ Equity
Known as the “Accounting Equation”

An equivalent common view is “Net Worth”

If you have a million
dollars are you a
millionaire?
Net worth = Assets – Liabilities

Net worth + Liabilities = Assets

Assets = Liabilities + Net Worth
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The
The Classified
Classified Balance
Balance Sheet
Sheet
Generally contains the following standard
classifications:
Current Assets A
S
Long-Term Investments S
E
Property, Plant, and Equipment T
S
Intangible Assets
Current Liabilities LIABILITIES
Long-Term Liabilities
Stockholders' Equity

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Current
Current Assets
Assets
Assets that are expected to be converted to
cash or used in the business within a short
period of time, usually one year.
Current assets are listed in order of liquidity
(convert them to cash).
Examples:
 Cash
 Short-term investments
 Receivables
 Inventories
 Supplies on hand
 Prepaid expenses
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Assets That
CHUCK A Company
CORPORATION
Balance Sheet
Depreciates...
December 31, 2017
Subtotals are usually made for current items:
Assets
Current Assets:
Cash $ 2,000
Accounts receivable 4,000
Total Current Assets $ 6,000
Long-term investments:
Stocks 5,000
Real estate 90,000 95,000
Property, plant & equipment:
Equipment 24,000
Less: Accumulated Depreciation - 8,000 16,000
Intangible assets
Patents 50,000
Total assets $167,000

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Long-Term
Long-Term Investments
Investments
Assets whose conversion to cash is not expected
within one year.
Assets not intended for use within the business.
Examples:
 Investments of stocks, notes and bonds of other
corporations.
 Land held for speculation
 Rental buildings

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Property,
Property, Plant
Plant &
& Equipment
Equipment (PP&E)
(PP&E)
Assets with relatively long
useful lives.
Assets used in operating
the business.
Examples:
 land
 buildings
 machinery
 delivery equipment
 furniture and fixtures

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 PP&E recording rules . . .
Record and keep on balance sheet the COST of
the asset (NOT value).
Expense a portion of asset cost over a number
of years.
Depreciation expense is recorded each
year on most long lived assets used in a
business.
Accumulated Depreciation appears on the
balance sheet as a negative adjustment to PP&E
It is the total amount of depreciation expense
taken over the life of the asset.
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Assets That
CHUCK A Company
CORPORATION
Balance Sheet
Depreciates...
December 31, 2017
PP&E is shown at cost less accumulated depreciation
Assets
Current Assets:
Cash $ 2,000
Accounts receivable 4,000
Total Current Assets $ 6,000
Long-term investments:
Stocks 5,000
Real estate 90,000 95,000
Property, plant & equipment:
Equipment 24,000
Less: Accumulated Depreciation - 8,000 16,000
Intangible assets
Patents 50,000
Total assets $167,000

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Intangible
Intangible Assets
Assets
Like PP&E, usually have long useful life
Have no physical substance
Examples:
 patents
 copyrights
 trademarks or trade names
 Franchise
 Goodwill

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Current
Current Liabilities
Liabilities
Obligations that are supposed to be paid
within the coming year.
Examples:
 notes payable
 accounts payable
 wages payable
 interest payable
 taxes payable
 current maturities of
long-term debt payable
 Utilities payable
 Unearned revenues

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Long-term
Long-term (non-current)
(non-current) Liabilities
Liabilities
Debts expected to be paid after one year
Examples…
 bonds payable
 mortgages payable
 long-term notes payable
 obligations under employee pension plans

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Stockholder’s
Stockholder’s Equity
Equity
Remember equity is similar to Net worth.
 How do people get net worth?
 Two primary ways:
1. Inherit or gift (Not earned by them)
2. Earn it (work or investing) but live on less (save).
On a corporation’s balance sheet, similar items:
1. Common stock - investments in the business by the
stockholders (Not revenues or earnings)
2. Retained earnings - earnings kept for use in the
business (Portion of net income not paid out to
stockholders)

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 Ratio Analysis...
Uses relationships on
statements to evaluate a
company.
3 groups of ratios are
intended to indicate
different things.

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1. Profitability Ratios - Measures the success
of a company’s ability to generate a profit.

Ratio discussed: Earnings Per Share (EPS)

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 Earnings Per Share (EPS)

...measures the net income earned on

each share of common stock.
Higher value = improved
performance
Compare trend for a single company.
Not good for comparing one company to
another.

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 Profitability
Illustration:
Illustration: (EPS)
(EPS) Ratio

BBY FYE February 1 EPS: 2017 = 3.81, 2016 = $2.56, 2015 = $3.49,

2012 = ($3.27), 2011 = $3.14, 2010 = $3.16

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2. Liquidity Ratios - Measures short-
term ability of company to pay its
debts.
Ratios discussed: Working capital
Current Ratio

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 Working capital equals:
current
current assets
assets –– current
current liabilities
liabilities

Current ratio formula

current
current assets
assets
current
current liabilities
liabilities
Express
Expressas asx:1
x:1

•The more working capital and higher current ratio, the

more likely current liabilities will be paid when due.
•Lenders often require that the company maintain a 2:1
ratio at all times.

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Classified Balance Sheet of

Illustration:
Working Capital 2014 =
$10,485 million
– 7,436 million
$ 3,049 million

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 Liquidity
Illustration:
Illustration: Current
Current Ratio
Ratio Ratio

For every dollar of current liabilities, Best Buy has $1.41 of current assets.

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3. Solvency Ratios - measures of the
ability of a company to survive
over a long period of time
 Ratios discussed:
Debt to Asset percentage
Free cash flow

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Debt to Total Assets Ratio formula
Total
Total liabilities
liabilities
Total
Total assets
assets
Multiply
Multiply by
by100
100to
to create
create %
%

...measures % of assets financed by

Often usedcreditors.
in risk analysis.
The greater the debt to
asset ratio, the greater the
risk.

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 Solvency
Illustration:
Illustration: Debt
Debt to
to Assets
Assets Ratio

See Best Buy balance sheet on slide 20 for amounts.

The 2014 ratio means that every dollar of assets was financed by 72 cents of debt.

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 Free Cash Flow Ratio
Cash
Cash Provided
Provided ByBy Operations
Operations
–– Capital
Capital Expenditures
Expenditures
–– Dividends
Dividends Paid
Paid
Free
Free Cash
Cash Flow
Flow

Considered as excess cash

available after spending to
maintain operations and
satisfy shareholders.

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