Week2-Understanding Basic FS

7/28/2019 Week2-Understanding Basic FS

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2005 Prentice Hall Business Publishing,2005 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting13/e,13/e, Horngren/Sundem/StrattonHorngren/Sundem/Stratton 16 -16 - 11

Understanding BasicUnderstanding Basic

Financial StatementsFinancial Statements

Chapter 16Chapter 16


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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 16 - 2

The Balance SheetThe Balance Sheet

AssetsAssets LiabilitiesLiabilities

EquityEquity

CurrentCurrent

AssetsAssets

Non-currentNon-current

AssetsAssets

CurrentCurrentLiabilitiesLiabilities

Non-currentNon-currentLiabilitiesLiabilities


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Assets ExampleAssets Example

Nike, Inc.Nike, Inc.Current assets:Current assets:

Cash and equivalentsCash and equivalents $ 634.0$ 634.0 $ 575.5$ 575.5

Accounts receivable, netAccounts receivable, net 2,101.12,101.1 1,804.11,804.1

InventoriesInventories 1.514.91.514.9 1,373.81,373.8

Prepaid expensesPrepaid expenses 266.2266.2 260.5260.5

Other current assetsOther current assets 163.7163.7 140.8140.8

Total current assetsTotal current assets $4,679.9$4,679.9 $4,154.7$4,154.7

Noncurrent assets:Noncurrent assets:

Property, plant, and equipment, netProperty, plant, and equipment, net 1,620.81,620.8 1,614.51,614.5

Identifiable intangible assetsIdentifiable intangible assets 118.2118.2 206.0206.0GoodwillGoodwill 65.665.6 232.7232.7

Other assetsOther assets 229.4229.4 232.1232.1

Total noncurrent assetsTotal noncurrent assets $2,034.0$2,034.0 $2,285.3$2,285.3

Total assetsTotal assets $6,713.9$6,713.9 $6,440.0$6,440.0

May 31May 31

20032003 20022002Balance sheet (in millions)Balance sheet (in millions)


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Operating CycleOperating Cycle

CashCash$100,000$100,000

MerchandiseMerchandise

inventoryinventory$100,000$100,000

BuyBuy

AccountsAccounts

receivablereceivable$160,000$160,000

SellSell

$160,000$160,000


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Cash EquivalentsCash Equivalents

Cash equivalents are short-termCash equivalents are short-term

investments that can easily beinvestments that can easily be

converted into cash with little delay.converted into cash with little delay.

What are some examples?What are some examples?

Money market fundsMoney market funds Treasury billsTreasury bills


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Non-current assetsNon-current assets

Leasehold improvementsLeasehold improvements

Construction-in-progressConstruction-in-progress

Accumulated depreciationAccumulated depreciation

Land, buildings,Land, buildings,

machinery & equipmentmachinery & equipment


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Natural ResourcesNatural Resources

Their original cost is written off inTheir original cost is written off in

the form of depletion as thethe form of depletion as thenatural resource is used.natural resource is used.

Natural resources such as mineralNatural resources such as mineraldeposits are typically groupeddeposits are typically grouped

with plant assets.with plant assets.



Intangible AssetsIntangible Assets

What are some examples?What are some examples?

Intangible assets are a class ofIntangible assets are a class oflong-lived assets that are notlong-lived assets that are not

physical in nature.physical in nature.

TrademarksTrademarks

PatentsPatents GoodwillGoodwill

FranchisesFranchises

CopyrightsCopyrights



Liabilities

LiabilitiesLiabilities are the entitys economicare the entitys economic

obligations to nonowners.obligations to nonowners.

Current Liabilities:Current Liabilities:

Creditors, Rent payable,Creditors, Rent payable,Accrued SalariesAccrued Salaries

Noncurrent Liabilities:Noncurrent Liabilities:

Term loan, Hire purchase,Term loan, Hire purchase,LeaseLease



Liabilities ExampleLiabilities Example

Nike, Inc.Nike, Inc.

Current liabilities:Current liabilities:

Notes payable (short term debt)Notes payable (short term debt) $ 75.4$ 75.4 $ 425.2$ 425.2

Accounts payableAccounts payable 572.7572.7 504.4504.4Accrued liabilitiesAccrued liabilities 1,054.21,054.2 765.3765.3

Income taxes payableIncome taxes payable 107.2107.2 83.083.0

Current portion of long-term debtCurrent portion of long-term debt 205.7205.7 55.355.3

Total current liabilitiesTotal current liabilities $2,015.2$2,015.2 $1,833.2$1,833.2

Noncurrent liabilities:Noncurrent liabilities:

Long-term debtLong-term debt 551.6551.6 625.9625.9

Deferred income taxesDeferred income taxes

and other liabilitiesand other liabilities 156.1156.1 141.6141.6

Total noncurrent liabilitiesTotal noncurrent liabilities $ 707.7$ 707.7 $ 767.5$ 767.5

Total liabilitiesTotal liabilities $2,722.9$2,722.9 $2,600.7$2,600.7

May 31May 31




Shareholders Equity ExampleShareholders Equity Example

Nike, Inc.Nike, Inc.

Shareholders equity:Shareholders equity:

Redeemable preference sharesRedeemable preference shares $ 0.3$ 0.3 $ 0.3$ 0.3Ordinary shares at par valueOrdinary shares at par value 2.82.8 2.82.8

Revaluation reserveRevaluation reserve 589.0589.0 538.7538.7

Retained earningsRetained earnings 3,639.23,639.2 3,495.03,495.0

OtherOther (240.3) (240.3) (197.5) (197.5)

Total shareholders equityTotal shareholders equity

$3,991.0$3,991.0

$3,839.3$3,839.3

Total liabilities and shareholders equityTotal liabilities and shareholders equity $6,713.9$6,713.9 $6,440.0$6,440.0

May 31May 31



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Shareholders EquityShareholders Equity

The main elements of shareholdersThe main elements of shareholders

equity arise from 2 sources:equity arise from 2 sources:

Retained earningsRetained earnings

Paid-up capitalPaid-up capital


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Ordinary sharesOrdinary shares

Ordinary shares has no predeterminedOrdinary shares has no predeterminedrate of dividends and is the last torate of dividends and is the last to

obtain a share in the assets whenobtain a share in the assets whenthe company is dissolved.the company is dissolved.

Ordinary shares usually haveOrdinary shares usually havevoting power to elect the boardvoting power to elect the board

of directors of the company.of directors of the company.


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Preference SharesPreference Shares

Preference shares have some priority overPreference shares have some priority overother shares regarding dividends or theother shares regarding dividends or the

distribution of assets upon liquidation.distribution of assets upon liquidation.


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Income Statement, ExampleIncome Statement, Example

RevenueRevenue $$ 10,697.010,697.0 9,893.09,893.0

Cost of salesCost of sales

6,313.66,313.6

6,004.76,004.7

Gross profitGross profit 4,383.44,383.4 3,888.33,888.3

Selling & admin expensesSelling & admin expenses 3,137.63,137.6 2,820.42,820.4

Income from operationsIncome from operations $1,245.8$1,245.8 $1,067.9$1,067.9

Interest expenseInterest expense 42.942.9 47.647.6

Other income/expense, netOther income/expense, net 79.979.9 3.03.0

Income before income taxesIncome before income taxes 1,123.01,123.0 1,017.31,017.3Income taxIncome tax 382.9382.9 349.0349.0

Net incomeNet income 474.0474.0 663.3663.3

Total no. of sharesTotal no. of shares 264.5264.5 267.7267.7

Earnings per shareEarnings per share $1.79$1.79 $2.48$2.48

May 31May 31

20032003 20022002Income Statement (in millions)Income Statement (in millions)


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Operating PerformanceOperating Performance

Operating managementOperating managementfocuses on the majorfocuses on the majorday-to-day activitiesday-to-day activitiesthat generate salesthat generate sales

revenue.revenue.


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Financial ManagementFinancial Management

In contrast, financialIn contrast, financialmanagement focusesmanagement focuseson where to get cashon where to get cash

and how to use cashand how to use cash

for the benefit of thefor the benefit of theorganization.organization.


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Income, Earnings, and ProfitsIncome, Earnings, and Profits

Net income is the popular bottom lineNet income is the popular bottom line the residual after deducting allthe residual after deducting all

expenses including income taxes.expenses including income taxes.


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Earnings Per ShareEarnings Per Share

Income statements conclude withIncome statements conclude withdisclosure ofdisclosure ofearnings per shareearnings per share,,

which is net income divided by thewhich is net income divided by theaverage number of ordinary sharesaverage number of ordinary shares

outstanding during the year.outstanding during the year.


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Statement ofStatement of

Retained EarningsRetained Earnings

An analysis of the changes in retainedAn analysis of the changes in retained

earnings is frequently placed in aearnings is frequently placed in aseparate financial statement, theseparate financial statement, the

statement of retained earnings.statement of retained earnings.

The major reasons for changes in retainedThe major reasons for changes in retainedearnings are dividends and net income.earnings are dividends and net income.


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Statement of Cash FlowsStatement of Cash Flows

This reports the cash receipts andThis reports the cash receipts andcash payments of an organizationcash payments of an organization

during a particular period.during a particular period.


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Typical Activities Affecting Cash:Typical Activities Affecting Cash:

Fundamental ApproachFundamental Approach

List the activities that increasedList the activities that increased

or decreased cash.or decreased cash.

Place each cash inflow and outflowPlace each cash inflow and outflowinto one of three categories.into one of three categories.

Operating activitiesOperating activities

Investing activitiesInvesting activities

Financing activitiesFinancing activities


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Financing ActivitiesFinancing Activities

Cash flows fromCash flows from financingfinancingactivities:activities:Proceeds from issue of long-term debtProceeds from issue of long-term debt $120,000$120,000

Proceeds from issue of ordinary sharesProceeds from issue of ordinary shares 98,00098,000

Payment of dividendsPayment of dividends (19,000) (19,000)Net cash provided byNet cash provided by financingfinancingactivitiesactivities $199,000$199,000

Balmer CompanyBalmer Company

Cash Flows from Financing Activities, 20xxCash Flows from Financing Activities, 20xx


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Cash flows fromCash flows from investinginvestingactivities:activities:Purchase of fixed assetsPurchase of fixed assets $(287,000)$(287,000)

Proceeds from sale of fixed assetsProceeds from sale of fixed assets 10,000 10,000

Net cash used byNet cash used by investinginvestingactivitiesactivities $(277,000)$(277,000)

Investing ActivitiesInvesting Activities

Balmer CompanyBalmer Company

Cash Flows from Investing Activities, 20xxCash Flows from Investing Activities, 20xx


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Noncash Investing andNoncash Investing and

Financing ActivitiesFinancing Activities

These must be reported in a schedule thatThese must be reported in a schedule that

accompanies the statement of cash flows.accompanies the statement of cash flows.

Ordinary shares issued toOrdinary shares issued toacquire store equipmentacquire store equipment $150,000$150,000Loan payable for acquisitionLoan payable for acquisition

of store equipmentof store equipment $137,000$137,000

Balmer CompanyBalmer CompanySchedule of Noncash InvestingSchedule of Noncash Investing

and Financing Activities, 20xxand Financing Activities, 20xx


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Financial Statements AidFinancial Statements Aid

Managers Decision MakingManagers Decision Making

Managers and investors use balanceManagers and investors use balancesheets to assess a companyssheets to assess a companys

financial position at a point in time.financial position at a point in time.

They use income statements andThey use income statements and

statements of cash flows to assessstatements of cash flows to assessperformance over a period of time.performance over a period of time.


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2005 Prentice Hall Business Publishing Introduction to Management Accounting 13/e Horngren/Sundem/Stratton 16 27

Tutorial QuestionsTutorial Questions

Pick any company and give 2 examples ofPick any company and give 2 examples ofassets and liabilities (both currentassets and liabilities (both current

non-current)non-current)

Week2-Understanding Basic FS

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