Ch.2 Financial Statements and the Annual Report

Prof. Jamie Wang

What Financial Statements Tell about a Business B/S:

How much of the assets was borrowed, and how much provided by its shareholders

What obligations will be due in the near future and what assets will be available to satisfy them

I/S: Revenues and expenses for the period

Statement of Cash Flows: Where cash came from and how it was used

Objective of financial reporting:Provide useful information To be useful, the information must be:

Relevant Reliable Understandable Comparable across companies Consistent over time

Classified Balance Sheet

Classification of assets: Current assets: expected to be realized in

cash or sold or consumed in one year (or an operating cycle if longer)

Noncurrent assets Investments Property, plant, and equipment Intangible assets

Classified Balance Sheet

Classification of liabilities and shareholders’ equity: Liabilities:

Current liabilities: obligations that will be satisfied within one year (or one operating cycle if longer)

Long term liabilities Shareholders’ equity

Contributed capital Retained earnings

Use of classified balance sheet

Working capital:Working capital = Current assets – current liabilities

Current ratio:Current ratio = (current assets) ÷ (current liabilities)

Income Statement

What appears on the I/S? Revenues Expenses

Objective of I/S users: predict future performance

One time/incidental events v. events related to continuing operations

Multiple v. Single Step

Single step I/S P.72

Multiple step I/S P.73

Major ratios for evaluating a company’s operating performance and financial condition

Operating performance: Return on shareholders’ equity (ROE)

Liquidity: ability to pay short-term obligations Current ratio

Solvency: ability to pay all the debts Total Liability to total assets ratio

Financial Statement Analysis

Comparing ratios of the company being analyzed with those of its competitors, with industry average, and with past performances