CHAPTER 4. FINANCIAL STATEMENTS

Size: px
Start display at page:

Download "CHAPTER 4. FINANCIAL STATEMENTS"

Transcription

1 CHAPTER 4. FINANCIAL STATEMENTS Accounting standards require statements that show the financial position, earnings, cash flows, and investment (distribution) by (to) owners. These measurements are reported, respectively, by the following statements: balance sheet, income statement, statement of cash flows, and statement of changes in equity. These statements can be constructed in a variety of different ways and levels of detail. An important consideration is that the financial framework of the firm should compliment the physical performance measures of the firm. A typical indicator used as a measure of the firm s financial health is its cash position. Cash flows are an important, but often misleading, indicators of the financial health of a firm. Two necessary conditions for long-term survival in any firm are profitability and feasibility. Profitability is defined as the difference between a firm s revenues and its expenses. Feasibility is the solvency or short-term ability of the firm to meet its obligations when they become due. If a firm is not both profitable and feasible over time, it cannot survive. In the short run, a firm can be feasible but not profitable. For a limited time, the firm can generate cash flows to remain solvent by borrowing, refinancing existing debt, selling inventory, liquidating capital assets, increasing accounts payable, or depleting its capital base. Unfortunately, these techniques are only temporary solutions and don t substitute for long-run profitability. Focusing on only the firm s "cash position" can, and has, led to devastating results for firms. An appropriately constructed set of financial statements will allow a firm to monitor both profitability and solvency and diagnose any difficulties the firm has in these areas. Chapter 4 54 Spring 2003

2 Balance Sheet A balance sheet is a listing of a firm s assets, debt claims, and equity claims at a particular point in time. People are usually taught to think of it as a "snap shot" of the firm on a given date. As a result, it is important to know the date for which the balance sheet was constructed. Table 2.4 presents year-end balance sheets for the hypothetical HiQuality Nursery company, which might be organized as sole proprietorship, partnership, or corporation. The underlying principal for any balance sheet is the fundamental accounting equation: Assets / Liabilities + Equity. In other words, every dollar of the firm s assets must be financed either by a liability (debt borrowed by the firm) or equity claim (capital supplied by the firm s owners), or some combination of the two. This principal results in the separation of assets from liabilities and equity on the balance sheet. We can check the above equality by noting that the total value of assets at the bottom of the balance sheet is equal to the total value of liabilities and equity for each year. Chapter 4 55 Spring 2003

3 Table 4.1 Year-End Balance Sheets for HiQuality Nursery HiQuality Nursery Balance Sheets ($000) Year ASSETS Cash and Mkt Securities Accounts Receivable Inventory $ 600 1,200 5,200 $ 930 1,640 3,750 $1,200 1,560 3,150 CURRENT ASSETS 7,000 6,320 5,910 Prop, Plant, and Equip Other Assets 2, , , LONG TERM ASSETS 3,400 3,680 3,980 TOTAL ASSETS 10,400 10,000 9,890 LIABILITIES Notes Payable Current Portion LTD Accounts Payable Accrued Liabilities 1, , , , , , CURRENT LIABILITIES 6,600 5,958 5,370 TOTAL LONG TERM DEBT 1,985 2,042 2,560 TOTAL EQUITY 1,815 2,000 1,960 TOTAL DEBT AND EQUITY 10,400 10,000 9,890 The firm s assets and liabilities are typically listed in order of liquidity or payment. For example, current assets are expected to be liquidated within the next year and are listed above long- Chapter 4 56 Spring 2003

4 term assets, which are not expected to be liquidated during the upcoming year. Likewise, current liabilities are debts due within the upcoming year and are listed above long-term liabilities, which are debts that will not come due during the next year. Equity, which represents residual ownership of the firm s assets, has no fixed due date and is consequently listed last. Items within each category on the balance sheet are also listed in order of liquidity or payment. Assets Assets represent the resources available to the firm to be used to generate earnings and includes everything owned that has value. Current assets are represented by cash and near-cash assets that are expected to be liquidated during the next year. Current assets are typically assets whose liquidation will not significantly disrupt the operation of the firm. Besides cash, current assets often include marketable securities, accounts receivable, notes receivable, and inventories. Marketable securities are interest bearing deposits which are low risk in terms of principal balance and can easily be converted to cash if needed. Accounts receivable are sales that have been made but not collected from customers. Notes receivable are debt payments due to the firm during the upcoming year. Finally, inventories represent the value of inputs used in production or manufacturing of goods that have not been sold. Inventories are often the least liquid of the current assets and their value is often not known until the assets are sold. Noncurrent long-term assets are assets that yield service over a period of time and are expected to remain in the firm beyond the upcoming year. Liquidation of fixed assets typically would Chapter 4 57 Spring 2003

5 disrupt the operations of the firm. Fixed assets include such items as machinery, equipment, automobiles, breeding stock, contracts, long-term notes receivable, and real estate. Book Value versus Market Value Assets are recorded at a value equal to their acquisition costs. Many fixed assets wear out or lose value over time. This loss in value is accounted for by depreciating, or lowering the acquisition cost, of the assets over time. The value of each asset on the balance sheet (acquisition cost - accumulated depreciation) is called the asset s book value. A difficulty with financial statement analysis is that an asset s book value almost always differs significantly from the asset s market value which is what the firm can actual get if it sells the asset. In order to understand why book value is not equal to market value, let s think about what determines market value. We ll show this more formally later, but it turns out that the value of an asset generally depends on the following three characteristics of the future cash flows the asset is expected to generate: 1. the size and/or number of expected future cash flows; 2. the timing of expected future cash flows; and 3. the risk and variability of future cash flow. In general, the larger the size and/or number of expected future cash flows, the larger the assets market value will be. Likewise, the sooner you expect to get the cash flows, the higher the market value of the asset (think about the time value of money concept). Finally, everything else held constant, the greater the risk or variability of an asset s future cash flows, the lower the market value Chapter 4 58 Spring 2003

6 of the asset. Hopefully, these ideas make some intuitive sense to you; if not, don t worry. We will revisit these concepts in detail later. One final note on market value. In some cases, an asset s value may not be solely based on the future cash flows an asset will generate; the asset may provide other nonmonetary services. For example, you might be able to purchase a $50,000 house that has a higher level of expected future after-tax cash flows than the $100,000 house you are also considering; that is, you think you can make more (or spend less) money by investing in the $50,000 house; however, you might buy the $100,000 house because it will be a nicer place to live and you are willing to sacrifice some of your wealth to increase your living standard. In other words, the house you live in is both an investment and a consumption good. As we discussed in Chapter 1, whenever you mix management and ownership, you can get results that aren t solely based on value maximization. Liabilities and Equity Liabilities are obligations to repay debt that has been incurred. Current liabilities are normally paid during the upcoming year. These typically include accounts payable, current principal and interest payments, and accrued expenses. Accounts payable are expenditures that have been made, to purchase inputs used in production, for example, but not paid yet. Current principal and interest, often called notes payable, are the short-term debt obligations and/or the portion of longterm debt obligations that are due during the upcoming year. Accrued expenses are expenses that have been incurred through the operation of the firm but are not due for payment yet. Examples of accrued expenses include taxes payable and salary and wages payable. Noncurrent or long-term Chapter 4 59 Spring 2003

7 liabilities are obligations that will be payable sometime after the upcoming year. These are usually long-term notes payable, mortgages, or bond obligations. Equity, or net worth, is always the difference between the total book value of assets and the total liabilities of the firm. The value of the equity is an estimate of what owners of the firm would have left after selling all the assets and paying all liabilities. Therefore, this is a major item of concern in financial statements. In a corporation, the firm owns the assets and shareholders own shares of stock in the corporation. In large corporations whose shares are traded on organized exchanges, the value of the stock can differ substantially from the book value of the stock. Why do you think this is the case? The equity portion of the balance sheet looks different for a corporation than for a partnership or sole proprietorship, simply because of the nature of the equity. Corporations report equity in terms of the amount of initial value of the different types of stock that the shareholders own. Similarly, withdrawals are reported as dividends in corporate reporting. Income Statement The balance sheet provides useful information about a firm s financial situation at a single point in time. Nevertheless, it doesn t tell you much about a firm s performance over time. Looking at the change in retained earnings on the balance sheet from one period to the next gives a clue as to whether the firm earned a profit, or realized a loss, but that is all the information that is discernable about a firm s profit-loss situation from the balance sheet. An income statement breaks a firm s revenues and expenses into different components that determine the firm s profitability. Table 4.2 Chapter 4 60 Spring 2003

8 shows the 1996 and 1997 income statements for HiQuality Nursery. Unlike the balance sheet which is a picture of the firm s assets at a particular point in time, the income statement is a record of what has happened to the firm s operations between two points in time in terms of profits and losses. Total revenue is made up the gross receipts or sales that are generated by the firm during the accounting period. Expenses during the period are then deducted from total revenue to determine the firm s profitability during the period. Cost of goods sold reflect the direct cost to the firm to produce, manufacture, or purchase the goods that were sold to generate the firm s revenue. Cost of goods sold is typically the largest expense in most businesses. Operating expenses, or overhead, represent the costs of operating and administrating the business beyond those expense items included in the cost of goods sold. These expenses typically include such things as sales expenses, administrative expenses, general office expenses, rents, salaries, and utilities. Depreciation is the accounting measure of the decline in the value of the firm s fixed assets during the period and can be thought of as the cost to replace the long-term assets used up during the period. Earnings before interest and taxes (EBIT) represents the firm s profits from operations. In other words, this is the profit the firm generates before paying the interest costs of the firm s debt financing and the tax obligations of the firm. Subtracting interest expenses from EBIT gives the firm s earnings before taxes (EBT) which is the firm s profits after paying all expenses except taxes; EBT is sometimes called profit before taxes. Chapter 4 61 Spring 2003

9 Table 4.2 Income Statement for HiQuality Nursery HiQuality Nursery Income Statements ($000) Year Net Sales Cost of Sales Operating Expenses Depreciation EARNING BEFORE INTEREST AND TAXES Interest EARNINGS BEFORE TAXES Taxes NET INCOME AFTER TAXES 1997 $40,000 28,000 11, $38,000 25,600 11, Subtracting the firm s tax liabilities from EBT gives the firm s net income after taxes (NIAT), which is the firm s profit after taxes and is generally what we think about when we talk about a firm s profits. This is the amount of profit the firm generated during the accounting period after paying all expenses including the debt servicing costs and taxes. NIAT is also the profit that is available to be reinvested in the firm or withdrawn by the owners. Subtracting the amount of cash withdrawn by the owner(s) from NIAT leaves the amount of profits reinvested in the firm, which is called retained earnings. It is important to note that retained earnings is the link between the income statement and Chapter 4 62 Spring 2003

10 the balance sheet. The amount of retained earning during the accounting period must equal the difference between the retained earnings on the balance sheet at the end of the period and the retained earnings at the beginning of the accounting period; that is, the change in retained earnings between the two periods. Net Working Capital Net working capital (NWC) is defined as current assets minus current liabilities and provides a measure of the firm s liquidity. If NWC is positive then the assets which are expected to be converted to cash during the upcoming year will likely be sufficient to meet the liabilities due during the upcoming year. HiQuality Nursery s net working capital is positive each year, suggesting the firm was capable of meeting short term debt obligations by using only the assets expected to be liquidated during the upcoming year. Year Current Assets - Current Liabilities = Net Working Capital 1995 $5,910,000 $5,370,000 $540, $6,320,000 $5,958,000 $362, $7,000,000 $6,600,000 $400,000 Typically, you would like to see a positive NWC in a firm. A firm s investment (or deinvestment) in working capital can be measured by the change in NWC during the year. HiQuality Nursery s change in NWC during 1997 is measured by taking the difference between its 1997 and 1996 NWC; in other words NWC = $400,000 - $362,000 = $38,000 (the symbol denotes "change" in the specified Chapter 4 63 Spring 2003

11 variable, in this case, NWC). This suggests that HiQuality has increased investment in NWC. Normally you would like to see NWC increase over time in a growing firm. Changes in Owners Equity Because of the importance of measuring equity, a detailed statement of the reasons for changes in equity is sometimes reported. The statement of changes in owner s equity reports the same information as contained in the balance sheet but provides detail on the reasons underlying the change in equity. The equity position in a business can change as the result of profit or losses from the firm s operations, withdrawals by the firm s owners, and/or new equity contributions by owners. The statement of changes in owners equity generally takes on the following structure: NIAT - Dividends + capital contributions - repurchase of equity capital Change in equity Financial Cash Flow The firm s balance sheet shows its financial position at a point in time, while the income statement gives a measure of the firm s profits over time. Nevertheless, we have mentioned several times that an equally important measure is the firm s after-tax cash flow (ATCF). NIAT differs from a firm s cash flow because NIAT includes a number of non-cash items and because cash inflows and outflows also occur from nonoperating sources. For example, depreciation is generally a major expense item on the income statement for most firms. This is, however, a noncash cash accounting Chapter 4 64 Spring 2003

12 expense; in other words, no cash was spent even though there is an expense on the income statement. Clearly, NIAT underestimates a firm s cash flows from operations by at least the amount of depreciation expense. Remember that the balance sheet requires that Assets = Liabilities + Equity. Similarly it must be the case that the cash flows from a firm s assets (CF a ) must equal the cash flows to the firms creditors (CF c ) and equity holders (CF e ): CF a = CF c + CF e The Statement of Cash Flows identifies the sources and uses of cash during the period between two balance sheets. It replaces a similar statement called the Sources and Uses of Funds Statement as a result of changes in the Generally Accepted Accounting Principles (GAAP) in The general structure of the Statement of Cash Flows is cash flows from operations + cash flows from investment activities + cash flows from financing activities change in cash position This format separates cash flows into the three major management areas: 1) operation management, 2) asset management, and 3) financial management. The cash flows from operations are associated with the management of the firm s operations and reflect the cash flows generated by the firm in producing and delivering its goods and services. The cash flows from investment activities come from the purchase and sale of capital assets that occur as a result of the firm s asset management Chapter 4 65 Spring 2003

13 strategies. The cash flows from financing activities result from borrowing new debt, repayment of old debt, raising new equity capital, and returning capital to owners as a result of the firm s financial management practices. The primary purpose of the Statement of Cash Flows is to detail the sources of cash flows in order to assess the firm s ability to generate future cash flows, meet obligations, pay dividends, and obtain future financing. The Statement isolates the difference between income from operations and cash flows, as well as the effects of the firm s investment and financing activities. Table 4.3 Shows the Statement of Financial Cash Flow for the HiQuality Nursery Company. Chapter 4 66 Spring 2003

14 Table 4.3 Financial Cash Flow HiQuality Nursery HiQuality Nursery Statement of Cash Flows ($000) Year CASH FLOWS FROM OPERATIONS Net Income Depreciation Expense Change in Acct. Rec. Change in Inventory Change in Current Liabilities Net Cash from Operations CASH FLOWS FROM INVESTMENTS Net cash from investments CASH FLOWS FROM FINANCING ACTIVITIES Payment of LTD Payment of dividends Net cash from financing CHANGE IN CASH POSITION 1997 $ $ Chapter 4 67 Spring 2003

15 The cash flow generated by the firm s assets is often called the cash flow from operations and is equal to the firm s NIAT plus depreciation expense less the change in accounts receivable and inventory plus the change in current liabilities. HiQuality s operating cash flows are: NIAT + Depreciation Expense - Change in Accounts Receivable - Change in Inventory + Change in Current Liabilities Net Cash Flow From Operations Adding depreciation expense to NIAT adjusts the firm s profit for noncash expenses and converts profits to an after-tax cash flows basis. Increasing (decreasing) accounts receivable or inventory uses (generates) cash and decreases (increases) the cash flow from operations. Likewise, an increase (decrease) in current liabilities generates (uses) cash, increasing (decreasing) the cash flows from operations. The cash flows from investments focuses on the reinvestment in and/or sale of the firm s longterm assets. Purchasing fixed assets uses cash flow, while the sale of fixed assets generates cash flow for the firm. For example, if you go out and sell your car, you generate some cash inflow. If you then turn around and purchase a new car, you will have spent cash creating a cash outflow. The net cash from investments is equal to amount of long term assets purchased less the amount sold. The cash outflow from investment can be calculated as the beginning long-term assets less depreciation expense less ending long-term assets. Beginning LT Assets - Depreciation Expenses - Ending LT Assets Net Cash Outflow from Investments Chapter 4 68 Spring 2003

16 The depreciation expense is the amount of assets used up during the period through operations. The change in long-term assets represents the actual change in long-term assets during the period and will differ from the depreciation expense if assets have been purchased or sold during the period. Cash flows from financing activities reflect cash flows from long-term debt and/or equity financing. The net cash flow from financing activities is equal to the change in long-term debt less the amount of withdrawals plus the amount of new equity capital less the amount of equity capital repurchased: Change in long-term debt - Amount of dividends + Amount of new equity capital - Amount of equity repurchased Net Cash flow from financing Increasing (decreasing) long-term borrowing increases (decreases) available cash. The payment of dividends uses cash while a new equity contributions provides additional cash. Repurchasing equity from same owners would require the use of cash and decrease cash flow. Cash Versus Accrual Accounting Another factor which causes actual cash flows to differ from profit measures and accounting cash flow is the use of accrual accounting. Accrual accounting recognizes revenues in the period they are earned and expenses in the period they are incurred. For example, you might sell corn in December 1997 but not receive cash for it until January In this case you earned your revenue Chapter 4 69 Spring 2003

17 in 1997, even though you didn t receive cash for it until Accrual accounting doesn t care about the timing of actual cash inflows and outflows. An alternative available to many small businesses is to use a cash accounting system for tax reporting purposes. Cash accounting recognizes revenues and expenses in the period in which they are received. Using a cash accounting system in our corn example above, you would not count the revenue from the corn sale until the cash was received in 1994 even though the grain was sold in Cash accounting allows firms to make some adjustments to revenues and expenses which allows them to manage their tax liability to some extent. Accrual accounting, on the other hand, provides a more accurate reflection of the firm s profitability and gives a better picture of the firm s situation for monitoring and control purposes. As a result, many small businesses use cash accounting for tax purposes and accrual accounting for management purposes. It should be noted that businesses in which inventories are held are required by the IRS to use an accrual based accounting system. However, most types of farm businesses are excluded from this requirement and are allowed to use the cash basis of accounting for tax purposes. It is usually not difficult to adjust financial statements from cash accounting to accrual accounting; and this should be done for businesses that use a cash accounting system for tax purposes in order to provide better information on the financial performance of the firm. Chapter 4 70 Spring 2003

Understanding Cash Flow Statements

Understanding Cash Flow Statements Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

More information

In this chapter, we build on the basic knowledge of how businesses

In this chapter, we build on the basic knowledge of how businesses 03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize

More information

Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

More information

Preparing Agricultural Financial Statements

Preparing Agricultural Financial Statements Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural environment. Accurate records

More information

how to prepare a cash flow statement

how to prepare a cash flow statement business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

More information

Cash Flow Analysis. 15.511 Corporate Accounting Summer 2004. Professor SP Kothari. Sloan School of Management Massachusetts Institute of Technology

Cash Flow Analysis. 15.511 Corporate Accounting Summer 2004. Professor SP Kothari. Sloan School of Management Massachusetts Institute of Technology Cash Flow Analysis 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 16, 2004 1 Statement of Cash Flows Reports operating

More information

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

More information

COMPONENTS OF THE STATEMENT OF CASH FLOWS

COMPONENTS OF THE STATEMENT OF CASH FLOWS ILLUSTRATION 24-1 OPERATING, INVESTING, AND FINANCING ACTIVITIES COMPONENTS OF THE STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES + Sales and Service Revenue Received Cost of Sales Paid Selling

More information

Preparing a Successful Financial Plan

Preparing a Successful Financial Plan Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

More information

Cash is King. cash flow is less likely to be affected

Cash is King. cash flow is less likely to be affected Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an

More information

Reporting and Analyzing Cash Flows QUESTIONS

Reporting and Analyzing Cash Flows QUESTIONS Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users

More information

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size

More information

Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of

More information

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,

More information

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

More information

Financial Statements

Financial Statements Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

More information

Financial Statement and Cash Flow Analysis

Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

More information

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

More information

Oklahoma State University Spears School of Business. Financial Statements

Oklahoma State University Spears School of Business. Financial Statements Oklahoma State University Spears School of Business Financial Statements Slide 2 Sources of Information Annual reports (10K) & Quarterly reports (10Q) SEC EDGAR Major databases COMPUSTAT(access through

More information

Fuqua School of Business, Duke University ACCOUNTG 510: Foundations of Financial Accounting

Fuqua School of Business, Duke University ACCOUNTG 510: Foundations of Financial Accounting Fuqua School of Business, Duke University ACCOUNTG 510: Foundations of Financial Accounting Lecture Note: Financial Statement Basics, Transaction Recording, and Terminology I. The Financial Reporting Package

More information

Construction Economics & Finance. Module 6. Lecture-1

Construction Economics & Finance. Module 6. Lecture-1 Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential

More information

Balance Sheet. 15.501/516 Accounting Spring 2004. Professor S.Roychowdhury. Sloan School of Management Massachusetts Institute of Technology

Balance Sheet. 15.501/516 Accounting Spring 2004. Professor S.Roychowdhury. Sloan School of Management Massachusetts Institute of Technology Balance Sheet 15.501/516 Accounting Spring 2004 Professor S.Roychowdhury Sloan School of Management Massachusetts Institute of Technology Feb 09, 2003 1 Some residual administrative matters Access web

More information

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of

More information

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL)

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where

More information

Chapter 2 Balance sheets - what a company owns and what it owes

Chapter 2 Balance sheets - what a company owns and what it owes Chapter 2 Balance sheets - what a company owns and what it owes SharePad is packed full of useful financial data. This data holds the key to understanding the financial health and value of any company

More information

CHAPTER 10 Financial Statements NOTE

CHAPTER 10 Financial Statements NOTE NOTE In practice, accruals accounts and prepayments accounts are implied rather than drawn up. It is common for expense accounts to show simply a balance c/d and a balance b/d. The accrual or prepayment

More information

BUSINESS TOOLS. Preparing Agricultural Financial Statements. How do financial statements prove useful?

BUSINESS TOOLS. Preparing Agricultural Financial Statements. How do financial statements prove useful? Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural, forestry and fisheries

More information

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source:

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source: CASH FLOW STATEMENT On the statement, cash flows are segregated based on source: Operating activities: involve the cash effects of transactions that enter into the determination of net income. Investing

More information

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

More information

Financial Reporting & Analysis Chapter 17 Solutions Statement of Cash Flows Exercises

Financial Reporting & Analysis Chapter 17 Solutions Statement of Cash Flows Exercises Financial Reporting & Analysis Chapter 17 Solutions Statement of Cash Flows Exercises Exercises E17-1. Determining cash flows from operations Using the indirect method, cash flow from operations is computed

More information

Accounting Self Study Guide for Staff of Micro Finance Institutions

Accounting Self Study Guide for Staff of Micro Finance Institutions Accounting Self Study Guide for Staff of Micro Finance Institutions LESSON 2 The Balance Sheet OBJECTIVES The purpose of this lesson is to introduce the Balance Sheet and explain its components: Assets,

More information

Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

Total shares at the end of ten years is 100*(1+5%) 10 =162.9. FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a $40 stock that pays a annual cash dividend of $2 a share (a 5% dividend yield) and signs up for the

More information

Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Return on Equity has three ratio components. The three ratios that make up Return on Equity are: Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

More information

The Statement of Cash Flows

The Statement of Cash Flows CHAPTER The Statement of Cash Flows OBJECTIVES After careful study of this chapter, you will be able to: 1. Define operating, investing, and financing activities. 2. Know the categories of inflows and

More information

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

More information

International Financial Accounting (IFA)

International Financial Accounting (IFA) International Financial Accounting (IFA) Preparation and presentation of Financial Statements DEPARTMENT OF BUSINESS AND LAW ROBERTO DI PIETRA SIENA, NOVEMBER 4, 2013 1 INTERNATIONAL FINANCIAL ACCOUNTING

More information

> DO IT! Chapter 13. Classification of Cash Flows. Cash from Operating Activities D-1. Solution. Action Plan

> DO IT! Chapter 13. Classification of Cash Flows. Cash from Operating Activities D-1. Solution. Action Plan Chapter 13 > DO IT! Classification of Cash Flows Identify the three types of activities used to report all cash inflows and outflows. Report as operating activities the cash effects of transactions that

More information

CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS

CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS The financial statements discussed in Chapter 4 provide valuable information about a firm s financial and business health. Ratio analysis

More information

This week its Accounting and Beyond

This week its Accounting and Beyond This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools

More information

TIME WARNER CABLE INC. CONSOLIDATED BALANCE SHEET (Unaudited)

TIME WARNER CABLE INC. CONSOLIDATED BALANCE SHEET (Unaudited) CONSOLIDATED BALANCE SHEET June 30, December 31, 2011 2010 (in millions) ASSETS Current assets: Cash and equivalents...$ 3,510 $ 3,047 Receivables, less allowances of $86 million and $74 million as of

More information

Chapter 6 Statement of Cash Flows

Chapter 6 Statement of Cash Flows Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions

More information

Balance Sheet. Financial Management Series #1 9/2009

Balance Sheet. Financial Management Series #1 9/2009 Balance Sheet Prepared By: James N. Kurtz, Extension Educator Financial Management Series #1 9/2009 A complete set of financial statements for agriculture include: a Balance Sheet; an Income Statement;

More information

Statement of Cash Flows

Statement of Cash Flows THE CONTENT AND VALUE OF THE STATEMENT OF CASH FLOWS The cash flow statement reconciles beginning and ending cash by presenting the cash receipts and cash disbursements of an enterprise for an accounting

More information

Chapter 002 Financial Statements, Taxes and Cash Flow

Chapter 002 Financial Statements, Taxes and Cash Flow Multiple Choice Questions 1. The financial statement summarizing the value of a firm's equity on a particular date is the: a. income statement. B. balance sheet. c. statement of cash flows. d. cash flow

More information

Farm Financial Management

Farm Financial Management Farm Financial Management Your Farm Income Statement How much did your farm business earn last year? There are many ways to answer this question. A farm income statement (sometimes called a profit and

More information

The key tools of farm business analyses

The key tools of farm business analyses 10 The key tools of farm business analyses This chapter explains the benefits of accurately documenting farm assets and liabilities, as well as farm costs and income, to monitor the business performance

More information

Cash Flow Analysis. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Sloan School of Management Massachusetts Institute of Technology

Cash Flow Analysis. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Sloan School of Management Massachusetts Institute of Technology Cash Flow Analysis 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Mar 1/3, 2004 1 About The Exam March 10 th a week from today.

More information

What Do I See on Cash Flow Statements?

What Do I See on Cash Flow Statements? Cash Flow Statements» What Do I See on Cash Flow Statements» Learning Objectives and Key Take-aways www.navigatingaccounting.com What Do I See on Cash Flow Statements? L E A R N I N G O B J E C T I V E

More information

UNDERSTANDING FINANCIAL STATEMENTS

UNDERSTANDING FINANCIAL STATEMENTS UNDERSTANDING FINANCIAL STATEMENTS ITEM 8 It is important that the directors of any business, cooperative or otherwise, understand the financial statements of the business. Without a basic understanding

More information

Accrual Accounting Process

Accrual Accounting Process Accrual Accounting Process 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Feb 17/18, 2004 1 What is Cost of Goods Sold? Q Mart

More information

Chapter 14. 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 14. 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 14 1 Identify the purposes of the statement of cash flows Distinguish among operating, investing, and financing cash flows Prepare the statement of cash flows by the indirect method Identify noncash

More information

MASTER BUDGET - EXAMPLE

MASTER BUDGET - EXAMPLE MASTER BUDGET - EXAMPLE Sales IN UNITS for the previous two months (of last quarter), as well as the sales forecast for next quarter are as follows: Sales Budget Units May sales (ACTUAL) 20 June sales

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

Ch. 3 Financial Statements, Cash Flows & Taxes Financial Statements All businesses should keep careful financial records. 2 Financial Statements However, many businesses do not need to report their financial

More information

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for. A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

More information

14. Calculating Total Cash Flows.

14. Calculating Total Cash Flows. 14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = $138,000 Costs = $71,500 Other expenses = $4,100 Depreciation expense = $10,100 Interest

More information

Chapter 13 Financial Statements and Closing Procedures

Chapter 13 Financial Statements and Closing Procedures Chapter 13 - Financial Statements and Closing Procedures Chapter 13 Financial Statements and Closing Procedures TEACHING OBJECTIVES 13-1) Prepare a classified income statement from the worksheet. 13-2)

More information

Course 1: Evaluating Financial Performance

Course 1: Evaluating Financial Performance Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating

More information

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

More information

How much did your farm business earn last year?

How much did your farm business earn last year? Your Farm Ag Decision Maker Income Statement File C3-25 How much did your farm business earn last year? Was it profitabile? There are many ways to answer these questions. A farm income statement (sometimes

More information

Would you like to know more about the

Would you like to know more about the Your Net Worth Ag Decision Maker Statement File C3-20 Would you like to know more about the current financial situation of your farming operation? A simple listing of the property you own and the debts

More information

A Simple Model. Introduction to Financial Statements

A Simple Model. Introduction to Financial Statements Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written

More information

2-8. Identify whether each of the following items increases or decreases cash flow:

2-8. Identify whether each of the following items increases or decreases cash flow: Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease

More information

The Cash Flow Statement and Decisions

The Cash Flow Statement and Decisions CHAPTER THIRTEEN The Cash Flow Statement and Decisions Review Previous chapters examined the information provided by the income statement, balance sheet, and statement of changes Where in This owners Chapter

More information

A Simple Model. Cash Flow Statement

A Simple Model. Cash Flow Statement An introduction to the cash flow statement in the context of building a financial model. This series introduces the financial statements in the context of a financial model. Cash Flow Statement NOTES TO

More information

FINANCIAL ACCOUNTING WEEK 12 STATEMENT OF CASH FLOWS. A. Understand the basic structure and format of the statement of cash flows.

FINANCIAL ACCOUNTING WEEK 12 STATEMENT OF CASH FLOWS. A. Understand the basic structure and format of the statement of cash flows. FINANCIAL ACCOUNTING WEEK 12 STATEMENT OF CASH FLOWS I. LEARNING OBJECTIVES - STATEMENT OF CASH FLOWS A. Understand the basic structure and format of the statement of cash flows. B. Distinguish cash flows

More information

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements In the United States, businesses generally present financial information in the form of financial statements

More information

Review of the Accounting Process THE BASIC MODEL

Review of the Accounting Process THE BASIC MODEL THE BASIC MODEL The accounting information system is designed to collect and organize data into information that is useful for stakeholders. The Accounting Equation The basic accounting equation is what

More information

SOLUTIONS. Learning Goal 15

SOLUTIONS. Learning Goal 15 Learning Goal 15: Prepare a Classified S1 Learning Goal 15 Multiple Choice 1. b 2. c 3. a 4. b 5. d 6. a 7. c Their importance in paying current liabilities is the main reason current assets are shown

More information

This article illustrated deferred tax liabilities for a cash crop farm in west central Indiana. The

This article illustrated deferred tax liabilities for a cash crop farm in west central Indiana. The September 2014 Computation of Deferred Liabilities Michael Langemeier, Associate Director, Center for Commercial Agriculture This article is one of a series of financial management articles that will examine

More information

The BASICS of FINANCIAL STATEMENTS For Agricultural Producers

The BASICS of FINANCIAL STATEMENTS For Agricultural Producers The BASICS of FINANCIAL STATEMENTS For Agricultural Producers Authors: James McGrann Francisco Abelló Doug Richardson Christy Waggoner Department of Agricultural Economics Texas Cooperative Extension Texas

More information

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information. 0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

More information

Cash Flow Statement. Introduction. Introd. Contd. Chapter 4

Cash Flow Statement. Introduction. Introd. Contd. Chapter 4 Cash Flow Statement Chapter 4 Introduction Management and other interested external parties have always recognized the need for a cash flow statement but it was never required until the FASB (Financial

More information

Understanding Basic Financial Statements

Understanding Basic Financial Statements Understanding Basic Financial Statements During the accounting cycle, the accounting system is used to track, organize and record the financial transactions of an organization. At the close of each period,

More information

Chapter 21 The Statement of Cash Flows Revisited

Chapter 21 The Statement of Cash Flows Revisited Chapter 21 The Statement of Cash Flows Revisited AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments,

More information

Chapter. Statement of Cash Flows For Single Company

Chapter. Statement of Cash Flows For Single Company Chapter 4 Statement of Cash Flows For Single Company 4.1 Single company statement of cash flows Statement of cash flows are primary financial statements and are required along side the income statement

More information

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

More information

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments.

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments. CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Format, objectives purpose, and source of statement.

More information

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

More information

TOPIC LEARNING OBJECTIVE

TOPIC LEARNING OBJECTIVE Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation

More information

CASH FLOW CALCULATION: THE IMPORTANCE OF WORKING CAPITAL

CASH FLOW CALCULATION: THE IMPORTANCE OF WORKING CAPITAL CASH FLOW CALCULATION: THE IMPORTANCE OF WORKING CAPITAL Lesson 5 Castellanza, 15 th October 2014 SUMMARY Financial statements a brief review Financial statements and cash flows The cash source / cash

More information

Chapter 1. Introduction to Accounting and Business

Chapter 1. Introduction to Accounting and Business 1 Chapter 1 Introduction to Accounting and Business Learning Objective 1 Describe the nature of a business, the role of accounting, and ethics in business. Nature of Business and Accounting A business

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

More information

CASH FLOW STATEMENT & BALANCE SHEET GUIDE

CASH FLOW STATEMENT & BALANCE SHEET GUIDE CASH FLOW STATEMENT & BALANCE SHEET GUIDE The Agriculture Development Council requires the submission of a cash flow statement and balance sheet that provide annual financial projections for the business

More information

E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

More information

CHAE Review. Capital Leases & Forms of Business

CHAE Review. Capital Leases & Forms of Business CHAE Review Financial Statements, Capital Leases & Forms of Business This is a complete review of the two volume text book, Certified Hospitality Accountant Executive Study Guide, as published by The Educational

More information

Understanding College and University Financial Statements

Understanding College and University Financial Statements Understanding College and University Financial Statements By Rudy Fichtenbaum Professor of Economics Department of Economics Wright State University Dayton, OH 45435 (937) 775-3085 rfichtenbaum@sbcglobal.net

More information

Measuring and Evaluating Cash Flow

Measuring and Evaluating Cash Flow CHAPTER FOUR 4 Measuring and Evaluating Cash Flow For information on this topic, please visit the online tutorial at www.gibbins6e.nelson.com 4.1 Chapter Introduction: Measuring and Evaluating Cash Flow

More information

Cash Flow Analysis Modified UCA Cash Flow Format

Cash Flow Analysis Modified UCA Cash Flow Format Cash Flow Analysis Modified UCA Cash Flow Format Dr. Charles W. Mulford Invesco Chair and Professor of Accounting Scheller College of Business Georgia Institute of Technology Atlanta, GA 30332-0520 (404)

More information

performance of a company?

performance of a company? How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

More information

Section A: Questions On Fill In The Blanks

Section A: Questions On Fill In The Blanks Section A : 26 FILL IN THE BLANK Section B : 10 TRUE OR FALSE QUESTIONS Section C : 11 Multiple Choice Questions Section A: Questions Fill In The Blanks the right column please insert the items from which

More information

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis By BizMove Management Training Institute Other free books by BizMove that may interest you:

More information

Summary of Financial Report for the FY ending March 2015 (Non-Consolidated)

Summary of Financial Report for the FY ending March 2015 (Non-Consolidated) Summary of Financial Report for the FY ending March 2015 (Non-Consolidated) April 30, 2015 Listed Company Name: Japan Tissue Engineering Co., Ltd. Listed Securities Exchange: JQ Stock Code: 7774 URL http://www.jpte.co.jp

More information

Statement of Cash Flows: Reporting and Analysis

Statement of Cash Flows: Reporting and Analysis Statement of Cash Flows: Reporting and Analysis Statement of Cash Flows: Reporting and Analysis Copyright 2014 by DELTACPE LLC All rights reserved. No part of this course may be reproduced in any form

More information

Business 2019 Finance I Lakehead University. Midterm Exam

Business 2019 Finance I Lakehead University. Midterm Exam Business 2019 Finance I Lakehead University Midterm Exam Philippe Grégoire Fall 2002 Time allowed: 2 hours. Instructions: Calculators are permitted. One 8.5 11 inches crib sheet is allowed. Verify that

More information

Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

More information