CORPORATE FINANCIAL REPORTING

Chapters 2, 3 & 4

Introduction 2

HOW DID ANDETONY CORP.DO IN SEPTEMBER?

What would we look at to decide?

Introduction 3

HOW EASY WOULD IT BE TOTRICK OUR ACCOUNTANT?

Introduction 4

OTHER POINTS TO DISCUSS

Redundancy in financial statements

Bookkeeping stuff

The Balance Sheet 5

THE BALANCE SHEET

ASSETS LIABILITIES Current assets Current liabilities

Noncurrent assets Non current liabilities

(usually are “sub groups” OWNERS’ EQUITY like PP&E, intangibles, etc.) Paid in capital

Retained earnings

Other comprehensive income

The Balance Sheet 6

FINANCIAL REPORTING IS ALL ABOUT THREE THINGS:

Recognition

Valuation (measurement)

Classification

The Balance Sheet 7

ASSETS ARE:

economic resources that will provide the company with future economic benefits.

Assets have three characteristics:

The Balance Sheet 8

ASSET CHARACTERISTICS:

1. the future economic benefits are probable and measurable,

The Balance Sheet 9

1. the future economic benefits are probable and measurable,

The Balance Sheet 10

1. the future economic benefits are probable and measurable,2. they were obtained or controlled by the entity as a result of

1. the future economic benefits are probable and measurable,2. they were obtained or controlled by the entity as a result of 3. a past transaction.

1. the future economic benefits are probable and measurable,2. they were obtained or controlled by the entity as a result of economic3. a past transaction. exchange

ASSET MEASUREMENT (VALUATION):

Originally what the asset cost – after that it gets wild – FASB is moving toward fair value for all assets, but is not there yet.

LIABILITIES ARE:

obligations to give an asset to,

or perform a service for, another entity in the future.

Liabilities have four characteristics:

LIABILITY CHARACTERISTICS:

1. it is a present obligation for which

1. it is a present obligation for which2. the future sacrifice is measurable

1. it is a present obligation for which2. the future sacrifice is measurable3. probable, and

1. it is a present obligation for which2. the future sacrifice is measurable3. probable, and 4. is the result of a past transaction. (economic exchange)

LIABILITY MEASUREMENT (VALUATION)

Almost always “present value” – in theory, the economic amount the company would have to pay today to satisfy the debt.

CONTINGUENT LIABILITY

lawsuitwarranties (guarantees)

asset retirement obligations (ARO)

sick & vacation payetc.

CONTINGUENT LIABILITY

OWNER’S EQUITY

Whatever.

BOOK VALUE

A commonly used term meaning owners’ equity.

Book value per share - also commonly used (owners’ equity ÷ no. of shares of stock)

BALANCE SHEET “FLAW”

The balance sheet does not always show assets and

liabilities well.

Our company issues 1,000 shares of stock to investors for $100/share. The price is the fair value of the stock.

What would our balance sheet look like?What is our “book value”?What is our book value/share?What is our stock’s market value/share?

Our company issues buys 1,000 shares of CROX for $26/share. That price is the fair value of the stock.

The CROX stock goes up to $30/share, our accountant puts the gain in an account that increases Owners’ equity.

Our company buys a piece of land for $20,000 and signs a 30 year mortgage for the entire amount (CROX stock unchanged).

The land goes up in value to $50,000; our accountant ignores the increase in value completely (CROX stock unchanged).

THE BALANCE SHEET

Questions?

MEASURING INCOME

Economist’s approach

Accountant’s approach (commonly):Cash basis

Accrual basis31Income & Cash Flow Statements

REVENUECASH VS. ACCRUAL

CASH BASIS: Revenue represents an increase in CASH as a result of providing goods or services to customers.ACCRUAL BASIS: Revenue is an increase in NET ASSETS (assets - liabilities) as a result of providing goods or services to customers. 32Income & Cash Flow Statements

REVENUE CRITERIA FORCASH AND ACCRUAL BASIS

Cash basis: to show revenue on the income statement the company must have received cash from its customer as a result of providing goods or services to the customer.

33Income & Cash Flow Statements

Accrual basis-the SEC says 4 criteria must be met:1. there is persuasive evidence of an

arrangement,2. delivery has occurred or services have

been rendered,

3. the seller’s price is fixed or determinable, &4. collectability is reasonably assured.

We could condense those into two criteria:

1. The company has received a measurable asset from the customer (SEC’s criteria 1, 3 & 4) and

2. The revenue is earned - meaning that the company has done what the customer is paying it to do (SEC’s criterion 2).

REVENUECASH VS. ACCRUAL

YOU WORK GET PAID ON AMOUNT

October Nov. 1, 2013 6,000November Dec. 1, 2013 12,000December Jan. 2. 2014 12,000What is revenue in 2013 on the cash basis? on the accrual basis? 36Income & Cash Flow Statements

USING THE ACCRUAL BASIS

AN EXPENSE IS:

a decrease in net assets (assets - liabilities) as a result of providing goods or services to customers.

REVENUE AND EXPENSESCASH BASIS VS ACCRUAL

Our company engages in the following transactions:

QTR1: buys inventory for $6,000 on account & sells 1/3 of the inventory for $7,000 cash

QTR2: pays for the inventory purchased in QTR1 & sells the remaining inventory for $15,000 on account

QTR3: collects the $15,000 from the QTR2 sale

THERE ARE OTHER METHODS USED TO RECOGNIZE REVENUES / EXPENSES

Cash basisAccrual basis

Installment sales methodCost recovery

Percentage completionCompleted contract

INCOME STATEMENT FORMAT

Point of the income statement –give information about revenue/gains and expenses/and losses for thepast year/quarter and to give that information in a way that helps predict future income.

INCOME STATEMENT FORMAT Continuing operations+/-Discontinued operations

◊ income from operations prior to disposal ◊ gain or loss on disposal

+/-Extraordinary items

events that are unusual in nature and infrequent

in occurrence

+/-Cumulative effect of changes in accounting principles= Net income 41Income & Cash Flow Statements

INCOME STATEMENT FORMAT

And every publicly traded company must show earnings per share on its income statement.

INCOME STATEMENT FORMATCROX, INC. (simplified)

Consolidated Statement of Operations

Year Ended December 31 (in thousands)

2010 2009 2008

Revenues $789,695 $645,767$721,589

Cost of sales (364,631) (337,720) (486,722)

Gross profit 425,064 308,047 234,867

Selling, general and administrative expense (344,029) (359,231) (423,149)

Income from operations 81,258 ( 51,184)(188,282)

Interest expense ( 657) ( 1,495) ( 1,793)

Other income (expense) - net 414 4,058 565

Income (loss) before income taxes 80,792 ( 48,621)(189,076)

Income tax (expense) benefit (13,066) ( 6,543) ( 4,434)

Net income $67,726 ($42,078) ($185,076)

INCOME STATEMENT FORMATCROX, INC. (simplified)

Consolidated Statement of Operations

Year Ended December 31 (in thousands)

2010 2009 2008

Revenues $789,695 $645,767$721,589

Cost of sales (364,631) (337,720) (486,722)

Gross profit 425,064 308,047 234,867

Selling, general and administrative expense (344,029) (359,231) (423,149)

Income from operations 81,258 ( 51,184)(188,282)

Interest expense ( 657) ( 1,495) ( 1,793)

Other income (expense) - net 414 4,058 565

Income (loss) before income taxes 80,792 ( 48,621)(189,076)

Income tax (expense) benefit (13,066) ( 6,543) ( 4,434)

Net income $67,726 ($42,078) ($185,076)

Income (loss) per common share:

Basic $ .78 $(0.49) $(2.24)

Diluted $ .76 $(0.49) $(2.24)

INCOME STATEMENT

QUESTIONS?

CORPORATE FINANCIAL REPORTING

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