Bài giảng Financial Accounting - Chapter 2: More on Financial statements

1 A BALANCE SHEET: i - changes constantly (every time an activity occurs) ii - shows assets, liabilities and equities as of a specific date. Prepared at least once per year.iii - uses original cost (historical cost principle) for most items. Current Fair Market Value (FMV) used for some assets like marketable securities since daily price is readily available.iv - Only shows items that can be expressed in monetary units ($) Which assets or liabilities can’t be expressed in $$$?201Lec02.PPTXMore on Financial statements Chapter 22 Generally contains the following standard classifications:The Classified Balance SheetASSETS Current AssetsLong-Term InvestmentsProperty, Plant, and EquipmentIntangible AssetsCurrent LiabilitiesLong-Term LiabilitiesLIABILITIESStockholders' EquityAssets that are expected to be converted to cash or used in the business within a short period of time, usually one year. Current assets are listed in order of liquidity (convert them to cash).Examples:CashShort-term investmentsReceivablesInventoriesSupplies on handPrepaid expenses3Current Assets4Assets That A Company Depreciates...Subtotals are usually made for current items: CHUCK CORPORATION Balance Sheet December 31, 2015AssetsCurrent Assets: Cash $ 2,000 Accounts receivable 4,000 Total Current Assets $ 6,000Long-term investments: Stocks 5,000 Real estate 90,000 95,000Property, plant & equipment: Equipment 24,000 Less: Accumulated Depreciation - 8,000 16,000Intangible assets Patents 50,000Total assets $167,000 Assets whose conversion to cash is not expected within one year.Assets not intended for use within the business.Examples:Investments of stocks, notes and bonds of other corporations.Land held for speculationRental buildings5Long-Term InvestmentsAssets with relatively long useful lives.Assets used in operating the business.Examples:landbuildingsmachinerydelivery equipmentfurniture and fixtures6Property, Plant & Equipment (PP&E)7PP&E recording rules . . . Record and keep on balance sheet the COST of the asset (NOT value). Expense a portion of asset cost over a number of years. Depreciation expense is recorded each year on most long lived assets used in a business.Accumulated Depreciation appears on the balance sheet as a negative adjustment to PP&E It is the total amount of depreciation expense taken over the life of the asset. 8Assets That A Company Depreciates...PP&E is shown at cost less accumulated depreciationCHUCK CORPORATION Balance Sheet December 31, 2015AssetsCurrent Assets: Cash $ 2,000 Accounts receivable 4,000 Total Current Assets $ 6,000Long-term investments: Stocks 5,000 Real estate 90,000 95,000Property, plant & equipment: Equipment 24,000 Less: Accumulated Depreciation - 8,000 16,000Intangible assets Patents 50,000Total assets $167,000 Like PP&E, usually have long useful lifeHave no physical substanceExamples:patentscopyrightstrademarks or trade namesFranchiseGoodwill9Intangible Assets Goodwill LicenseTrademarkFranchisePatentCopyrightObligations that are supposed to be paid within the coming year.Examples:notes payableaccounts payablewages payableinterest payabletaxes payablecurrent maturities of long-term debt payableUtilities payableUnearned revenues10Current LiabilitiesDebts expected to be paid after one yearExamplesbonds payablemortgages payablelong-term notes payableobligations under employee pension plans11Long-term (non-current) LiabilitiesCommon stock - investments in the business by the stockholdersRetained earnings - earnings kept for use in the business12Stockholder’s Equity13Ratio Analysis...Uses relationships on statements to evaluate a company.3 groups of ratios are intended to indicate different things.14Profitability Ratios - Measures the success of a company’s ability to generate a profit.Ratio discussed: Earnings Per Share (EPS) 15Earnings Per Share (EPS) Higher value = improved performanceCompare trend for a single company. Not good for comparing one company to another....measures the net income earned on each share of common stock.= = Illustration: (EPS)$1,277(393- $0+ 419) 2$3.14$1,317(419- $0+ 414) 2$3.16Profitability Ratio $1.19 $1.031617Liquidity Ratios - Measures short-term ability of company to pay its debts.Ratios discussed: Working capital Current Ratio18current assets – current liabilitiesThe more working capital and higher current ratio, the more likely current liabilities will be paid when due.Lenders often require that the company maintain a 2:1 ratio at all times.Working capital equals: current assets current liabilitiesExpress as x:1 Current ratio formula Classified Balance Sheet ofIllustration: Working Capital 2011 = $10,473 million – 8,663 million $ 1,810 million19Illustration: Current RatioFor every dollar of current liabilities, Best Buy has $1.21 of current assets.Liquidity Ratio2021Solvency Ratios - measures of the ability of a company to survive over a long period of timeRatios discussed: Debt to Asset percentage Free cash flow22Often used in risk analysis. The greater the debt to asset ratio, the greater the risk.Total liabilities Total assetsMultiply by 100 to create %Debt to Total Assets Ratio formula...measures % of assets financed by creditors.The 2011 ratio means that every dollar of assets was financed by 59 cents of debt.Illustration: Debt to AssetsSolvency Ratio23See Best Buy balance sheet on slide 19 for amounts.Cash Provided By Operations – Capital Expenditures – Dividends Paid Free Cash Flow Considered as excess cash available after spending to maintain operations and satisfy shareholders.24Free Cash Flow Ratio