Post on 19-Dec-2015
1
Chapter 2
Financial Statements and the Annual Report
Financial Accounting, Alternate 4e by Porter and Norton
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Primary Objective of Financial Reporting
Invest??
Borrow $$??
Sell stocks or bonds??Start new business??
Loan $$??
Extend credit $$??
Provide informationfor decision making
3
Secondary Objectives of Financial Reporting
Assess investor/creditor cash
receipts
AFE
DER
AL R
ESER
VE N
OTE
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THE
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ENDER
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E
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S19
85
H 2
93
Assess cash flows to
company
A
FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Assets = Liabilities + OE
Reflect resources and
claims tothem
4
Qualitative Characteristics
Understandability -
Relevance -
Reliability -
To those willing to take the time to understand it
Represents what
it purports to
Has capacity to
make a difference
5
Qualitative Characteristics
between companies
Comparability
from one period to the next
Consistency
6
Qualitative Characteristics
Materiality
Conservatism
All else equal, choose least optimistic alternative
Will it make a difference to the decision maker?
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Typical Operating Cycle
CASH
Time it takes to go from cash back to cash
A
FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
INVENTORY
A
FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
ACCTS. RECEIVABLE
A
FEDERAL RESERVE NOTETHE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDERFOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
8
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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Monaco Coach CorporationConsolidated Balance SheetsAssets Dec. 29, Dec. 28,
2001 2002A
A = L + SE
(in thousands)
Realized, sold or consumed in
one year or operating cycleCurrent assets:Trade receivables, net $ 82,885 $ 116,647Inventories 127,075 175,609Resort lot inventory 0 26,883Prepaid expenses 2,063 3,612Deferred income taxes 27,327 33,379
Total current assets 239,350 356,130
Notes receivable 8,157 0Property, plant and equipment, net 122,795 135,350Debt issuance costs, net 940 683Goodwill, net 55,856 55,254
$ 427,098 $ 547,417
Current liabilities:Book overdraft $ 5,889 $ 3,518Line of credit 26,004 51,413Current portion of long-term note payable 10,000 21,667Accounts payable 66,859 78,055Product liability reserve 19,856 21,322 Product warranty reserve 27,799 31,745Income taxes payable 0 4,536Accrued expenses and other liabilities 19,249 29,633
Total current liabilities 175,656 241,889Long-term note payable 30,000 30,333Deferred income taxes 8,312 14,568
Total liabilities 213,968 286,790
Liabilities and Stockholders' Equity
Stockholders' equity:Common stock 286 289Additional paid-in capital 48,522 51,501Retained earnings 164,322 208,837
Total stockholders' equity 213,130 260,627 $ 427,098 $ 547,417
= L
+ SE
A = L + SEMonarch Coach CorporationConsolidated Balance Sheets
Satisfied within one
year or operating cycle
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11
Analysis of Liquidity
Of particularinterest to bankers andother creditors
CurrentRatio
Working Capital
Ability of company to pay debts as they
come due
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Monaco Coach's Liquidity
Current assets $239,350 $356,130Current liabilities 175,656 241,889
2001 2002
(in 000’s)
Working Capital = C.A. less C.L. $ 63,694 $ 114,241
Current = Current Assets 1.36:1 1.47:1 Ratio Current Liabilities
What's the trend??
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Comparison of Liquidity
Some 2002 current ratios: Gap, Inc. 2.11:1 Sprint 0.78:1 McDonald's 0.71:1
Can you comparethe ratios?
Consider compositionof current assets and
frequency of turnover
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Sales– Cost of goods sold= Gross profit Operating expenses:– Selling expenses– General and
administrative expenses= Income from operations+/– Other revenues and expenses= Income before income taxes– Income tax expense= Net income
Fourimportantsubtotals
Multiple-Step Income Statement
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Net Sales $ 937,073 $1,222,689Cost of sales 823,083 1,059,560
Gross profit 113,990 163,129Selling, general and administrative
expenses 70,687 87,202Amortization of goodwill 645 0
Operating income 42,658 75,927Other income, net 334 105Interest expense (2,357) (2,752) Income before income taxes 40,635 73,280Provision for income taxes 15,716 28,765
Net income $ 24,919 $ 44,515
Monaco Coach Corporation Consolidated Statements of Operations
For the Years Ended 2001 2002
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Analysis of Profitability
Gross
Profit %
Profit
Margin %
Of particular
interest to current and
potentialinvestors
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Gross Profit (Margin) % = Gross Profit Sales
(How many cents on every $ of sales are left over after covering the cost of the product)
Monaco Coach Corporation's Profitability(in 000’s) 2000 2001 2002
Net sales $901,890 $937,073 $1,222,689Cost of sales 772,240 823,083 1,059,560Gross profit $129,650 $113,990 $ 163,129
Gross profit % = 14.4% 12.2% 13.3%
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Profit Margin % = Net Income Sales
(How many cents on every $ of sales are left over after covering all expenses)
(in 000’s) 2000 2001 2002
Net sales $ 901,890 $937,073 $1,222,689
Net income $ 42,521 $ 24,919 $ 44,515
Profit margin % = 4.7% 2.7% 3.6%
Monaco Coach Corporation's Profitability
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Statement of Stockholders’ Equity
Shows changes in all equity accounts including:» Sales and purchases of capital stock
Statement of Retained Earnings
Beginning retained earningsAdd: net incomeDeduct: dividends= Ending retained earnings
•Includes:
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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 $$
Basic Format of theStatement of Cash Flows
Reconciles change
in cash for
the period
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Cash flows from operating activities: $$
Cash flows from investing activities: $$
Cash flows from financing activities: $$
Net increase in cash $$Cash at beginning of year $$Cash at end of year $$
Basic Format for theStatement of Cash Flows
Involve the purchase and sale of products or services
Involve the acquisition and saleof long-term assets
Involve the issuance and repaymentof long-term liabilities and stock
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Report of independent accountants Management discussion & analysis Summary of financial data Letter to stockholders Financial statements Notes to financial
statements
Elements of an Annual Report