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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
ASSET CHARACTERISTICS:
1. the future economic benefits are probable and measurable,
$
The Balance Sheet 10
ASSET CHARACTERISTICS:
1. the future economic benefits are probable and measurable,2. they were obtained or controlled by the entity as a result of
The Balance Sheet 11
ASSET CHARACTERISTICS:
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.
The Balance Sheet 12
ASSET CHARACTERISTICS:
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
The Balance Sheet 13
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.
The Balance Sheet 14
LIABILITIES ARE:
obligations to give an asset to,
or perform a service for, another entity in the future.
Liabilities have four characteristics:
The Balance Sheet 15
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which
The Balance Sheet 16
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which2. the future sacrifice is measurable
$
The Balance Sheet 17
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which2. the future sacrifice is measurable3. probable, and
The Balance Sheet 18
LIABILITY CHARACTERISTICS:
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)
The Balance Sheet 19
LIABILITY MEASUREMENT (VALUATION)
Almost always “present value” – in theory, the economic amount the company would have to pay today to satisfy the debt.
The Balance Sheet 20
CONTINGUENT LIABILITY
lawsuitwarranties (guarantees)
asset retirement obligations (ARO)
sick & vacation payetc.
The Balance Sheet 21
CONTINGUENT LIABILITY
The Balance Sheet 22
OWNER’S EQUITY
Whatever.
The Balance Sheet 23
BOOK VALUE
A commonly used term meaning owners’ equity.
Book value per share - also commonly used (owners’ equity ÷ no. of shares of stock)
The Balance Sheet 24
BALANCE SHEET “FLAW”
The balance sheet does not always show assets and
liabilities well.
The Balance Sheet 25
BALANCE SHEET “FLAW”
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?
The Balance Sheet 26
BALANCE SHEET “FLAW”
Our company issues buys 1,000 shares of CROX for $26/share. That 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?
The Balance Sheet 27
BALANCE SHEET “FLAW”
The CROX stock goes up to $30/share, our accountant puts the gain in an account that increases Owners’ equity.
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?
The Balance Sheet 28
BALANCE SHEET “FLAW”
Our company buys a piece of land for $20,000 and signs a 30 year mortgage for the entire amount (CROX stock unchanged).
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?
The Balance Sheet 29
BALANCE SHEET “FLAW”
The land goes up in value to $50,000; our accountant ignores the increase in value completely (CROX stock unchanged).
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?
The Balance Sheet 30
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
REVENUE CRITERIA FORCASH AND ACCRUAL BASIS
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.
34Income & Cash Flow Statements
REVENUE CRITERIA FORCASH AND ACCRUAL BASIS
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).
35Income & Cash Flow Statements
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.
37Income & Cash Flow Statements
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
38Income & Cash Flow Statements
THERE ARE OTHER METHODS USED TO RECOGNIZE REVENUES / EXPENSES
Cash basisAccrual basis
Installment sales methodCost recovery
Percentage completionCompleted contract
39Income & Cash Flow Statements
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.
40Income & Cash Flow Statements
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.
42Income & Cash Flow Statements
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)
43Income & Cash Flow Statements
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)
44Income & Cash Flow Statements
INCOME STATEMENT
QUESTIONS?
45Income & Cash Flow Statements
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