Week2-Understanding Basic FS

Understanding Basic Financial Statements
Chapter 16
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 16 - 1
The Balance Sheet
Assets
Liabilities Current Liabilities Non-current Liabilities
Current Assets
Non-current Assets
Equity
Assets Example Nike, Inc. Balance sheet (in millions)

Current assets: Cash and equivalents Accounts receivable, net Inventories Prepaid expenses Other current assets Total current assets Noncurrent assets: Property, plant, and equipment, net Identifiable intangible assets Goodwill Other assets Total noncurrent assets Total assets
May 31 2003 $ 634.0 2,101.1 1.514.9 266.2 163.7 $4,679.9 1,620.8 118.2 65.6 229.4 $2,034.0 $6,713.9 2002 $ 575.5 1,804.1 1,373.8 260.5 140.8 $4,154.7 1,614.5 206.0 232.7 232.1 $2,285.3 $6,440.0
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
Operating Cycle
Cash $100,000
Buy Merchandise Sell inventory $100,000
Accounts receivable $160,000
$160,000
Cash Equivalents
Cash equivalents are short-term investments that can easily be converted into cash with little delay. What are some examples? Money market funds Treasury bills
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Non-current assets
Land, buildings, machinery & equipment Leasehold improvements Construction-in-progress Accumulated depreciation
Natural Resources
Natural resources such as mineral deposits are typically grouped with plant assets. Their original cost is written off in the form of depletion as the natural resource is used.
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Intangible Assets
Intangible assets are a class of long-lived assets that are not physical in nature. What are some examples? Patents Copyrights Goodwill
Franchises
Trademarks
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Liabilities Liabilities are the entitys economic obligations to nonowners.

Current Liabilities: Creditors, Rent payable, Accrued Salaries Noncurrent Liabilities: Term loan, Hire purchase, Lease
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Liabilities Example Nike, Inc.

Balance sheet (in millions) Current liabilities: Notes payable (short term debt) Accounts payable Accrued liabilities Income taxes payable Current portion of long-term debt Total current liabilities Noncurrent liabilities: Long-term debt Deferred income taxes and other liabilities Total noncurrent liabilities Total liabilities $ 2003 75.4 572.7 1,054.2 107.2 205.7 $2,015.2 551.6 156.1 $ 707.7 $2,722.9
May 31 2002 $ 425.2 504.4 765.3 83.0 55.3 $1,833.2 625.9 141.6 $ 767.5 $2,600.7
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Shareholders Equity Example Nike, Inc.

May 31 Balance sheet (in millions) Shareholders equity: Redeemable preference shares Ordinary shares at par value Revaluation reserve Retained earnings Other Total shareholders equity Total liabilities and shareholders equity $ 2003 0.3 2.8 589.0 3,639.2 (240.3) $3,991.0 $6,713.9 $ 2002 0.3 2.8 538.7 3,495.0 (197.5) $3,839.3 $6,440.0
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Shareholders Equity
The main elements of shareholders equity arise from 2 sources: Paid-up capital Retained earnings
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Ordinary shares
Ordinary shares has no predetermined rate of dividends and is the last to obtain a share in the assets when the company is dissolved. Ordinary shares usually have voting power to elect the board of directors of the company.
Preference Shares
Preference shares have some priority over other shares regarding dividends or the distribution of assets upon liquidation.
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Income Statement, Example

May 31 Income Statement (in millions) Revenue Cost of sales Gross profit Selling & admin expenses Income from operations Interest expense Other income/expense, net Income before income taxes Income tax Net income Total no. of shares Earnings per share $ 2003 10,697.0 6,313.6 4,383.4 3,137.6 $1,245.8 42.9 79.9 1,123.0 382.9 474.0 264.5 $1.79 2002 9,893.0 6,004.7 3,888.3 2,820.4 $1,067.9 47.6 3.0 1,017.3 349.0 663.3 267.7 $2.48
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Operating Performance
Operating management focuses on the major day-to-day activities that generate sales revenue.
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Financial Management
In contrast, financial management focuses on where to get cash and how to use cash for the benefit of the organization.
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Income, Earnings, and Profits

Net income is the popular bottom line the residual after deducting all expenses including income taxes.
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Earnings Per Share

Income statements conclude with disclosure of earnings per share, which is net income divided by the average number of ordinary shares outstanding during the year.
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Statement of Retained Earnings

An analysis of the changes in retained earnings is frequently placed in a separate financial statement, the statement of retained earnings. The major reasons for changes in retained earnings are dividends and net income.
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Statement of Cash Flows

This reports the cash receipts and cash payments of an organization during a particular period.
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Typical Activities Affecting Cash: Fundamental Approach

List the activities that increased or decreased cash. Place each cash inflow and outflow into one of three categories. Operating activities Investing activities Financing activities
Financing Activities
Balmer Company Cash Flows from Financing Activities, 20xx Cash flows from financing activities: Proceeds from issue of long-term debt Proceeds from issue of ordinary shares Payment of dividends Net cash provided by financing activities $120,000 98,000 (19,000) $199,000
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Investing Activities
Balmer Company Cash Flows from Investing Activities, 20xx Cash flows from investing activities: Purchase of fixed assets Proceeds from sale of fixed assets Net cash used by investing activities $(287,000) 10,000 $(277,000)
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Noncash Investing and Financing Activities

These must be reported in a schedule that accompanies the statement of cash flows. Balmer Company Schedule of Noncash Investing and Financing Activities, 20xx Ordinary shares issued to acquire store equipment Loan payable for acquisition of store equipment $150,000 $137,000
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Financial Statements Aid Managers Decision Making

Managers and investors use balance sheets to assess a companys financial position at a point in time. They use income statements and statements of cash flows to assess performance over a period of time.
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Tutorial Questions
Pick any company and give 2 examples of assets and liabilities (both current non-current)
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Week2-Understanding Basic FS

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Week2-Understanding Basic FS

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Understanding Basic Financial Statements

The Balance Sheet

Liabilities Current Liabilities Non-current Liabilities

Assets Example Nike, Inc. Balance sheet (in millions)

Buy Merchandise Sell inventory $100,000

Accounts receivable $160,000

Liabilities Liabilities are the entitys economic obligations to nonowners.

Liabilities Example Nike, Inc.

Shareholders Equity Example Nike, Inc.

Income Statement, Example

Income, Earnings, and Profits

Earnings Per Share

Statement of Retained Earnings

Statement of Cash Flows

Typical Activities Affecting Cash: Fundamental Approach

Noncash Investing and Financing Activities

Financial Statements Aid Managers Decision Making

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