Chapter 2
Financial Statements and
the Annual Report
Financial Accounting, Alternate 4e by Porter and Norton
1
Primary Objective of
Financial Reporting
Provide information
for decision making
Extend credit $$??
Borrow $$??
Invest??
Start new business??
Loan $$??
Sell stocks or bonds??
2
Secondary Objectives of
Financial Reporting
Assess investor/
creditor cash
receipts
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L70744629F
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
12
12
A
WASHINGTON, D.C.
L70744629F
12
H 293
SERIES
12
1985
ONE DOLLAR
Assess cash
flows to
company
Reflect
resources and
claims to
them
Assets = Liabilities + OE
3
Qualitative Characteristics
Understandability To those willing to take
the time to understand it
Relevance -
Reliability -
Has capacity to
make a difference
Represents what
it purports to
4
Qualitative Characteristics
Comparability
between companies
Consistency
from one period to the next
5
Qualitative Characteristics
Materiality
Will it make a difference
to the decision maker?
Conservatism
All else equal, choose
least optimistic alternative
6
Typical Operating Cycle
CASH
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L70744629F
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
12
WASHINGTON, D.C.
L70744629F
12
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
12
A
H 293
SERIES
L70744629F
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
12
12
1985
ONE DOLLAR
12
A
WASHINGTON, D.C.
L70744629F
H 293
12
SERIES
12
1985
ONE DOLLAR
ACCTS. RECEIVABLE
INVENTORY
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L70744629F
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
12
12
A
WASHINGTON, D.C.
L70744629F
12
H 293
SERIES
12
1985
ONE DOLLAR
Time it takes to go from cash back to cash
7
Basic Structure of a
Classified Balance Sheet
Current assets
+ Noncurrent (long-term) assets
Total assets
Current liabilities
+ Noncurrent (long-term) liabilities
+ Stockholders’ equity
Total liabilities and stockholders’ equity
8
Monaco Coach Corporation
Consolidated Balance Sheets
Assets
(in thousands)
A
Current assets:
Trade receivables, net
Inventories
Resort lot inventory
Prepaid expenses
Deferred income taxes
Total current assets
Notes receivable
Property, plant and equipment, net
Debt issuance costs, net
Goodwill, net
A = L + SE
Dec. 29,
2001
Dec. 28,
2002
$ 82,885
127,075
0
2,063
27,327
239,350
$ 116,647
175,609
26,883
3,612
33,379
356,130
8,157
122,795
940
55,856
0
135,350
683
55,254
$ 427,098
$ 547,417
9
A
=
L
+
SE
Monarch Coach Corporation
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
Current liabilities:
=L
Book overdraft
$
5,889
26,004
10,000
66,859
19,856
27,799
0
19,249
175,656
30,000
8,312
213,968
Line of credit
Current portion of long-term note payable
Accounts payable
Product liability reserve
Product warranty reserve
Income taxes payable
Accrued expenses and other liabilities
Total current liabilities
Long-term note payable
Deferred income taxes
Total liabilities
Stockholders' equity:
+ SE
Common stock
286
Additional paid-in capital
48,522
Retained earnings
164,322
Total stockholders' equity
213,130
$ 427,098
$ 3,518
51,413
21,667
78,055
21,322
31,745
4,536
29,633
241,889
30,333
14,568
286,790
289
51,501
208,837
260,627
$ 547,417
10
Analysis of Liquidity
Of particular
interest to
bankers and
other
creditors
Current
Ratio
Ability of
company to
pay debts
as they
come due
Working
Capital
11
Monaco Coach's Liquidity
Current assets
Current liabilities
What's the
(in 000’s)
2001
2002
$239,350
175,656
$356,130
241,889
trend??
Working
Capital = C.A. less C.L.
$ 63,694 $ 114,241
Current = Current Assets
1.36:1
Ratio
Current Liabilities
1.47:1
12
Comparison of Liquidity
Some 2002 current ratios:
 Gap, Inc.
2.11:1
 Sprint
0.78:1
 McDonald's
0.71:1
Can you compare
the ratios?
Consider composition
of current assets and
frequency of turnover
13
Income Statement
Revenues
$$$
Less: expenses ($$)
Net income
$$
Single
Step
14
Multiple-Step Income Statement
–
=
–
–
=
+/–
=
–
=
Sales
Cost of goods sold
Gross profit
Operating expenses:
Selling expenses
General and
administrative expenses
Income from operations
Other revenues and expenses
Income before income taxes
Income tax expense
Net income
Four
important
subtotals
15
Monaco Coach Corporation
Consolidated Statements of Operations
For the Years Ended
Net Sales
Cost of sales
Gross profit
Selling, general and administrative
expenses
Amortization of goodwill
Operating income
Other income, net
Interest expense
Income before income taxes
Provision for income taxes
Net income
2001
2002
$ 937,073
823,083
113,990
$1,222,689
1,059,560
163,129
70,687
645
42,658
334
(2,357)
40,635
15,716
$ 24,919
87,202
0
75,927
105
(2,752)
73,280
28,765
$ 44,515
16
Analysis of Profitability
Of
particular
interest
to current and
potential
investors
Gross
Profit %
Profit
Margin %
17
Monaco Coach Corporation's Profitability
(in 000’s)
Net sales
Cost of sales
Gross profit
2000
2001
2002
$901,890
772,240
$129,650
$937,073
823,083
$113,990
$1,222,689
1,059,560
$ 163,129
Gross profit % = 14.4%
12.2%
13.3%
Gross Profit (Margin) % =
Gross Profit
Sales
(How many cents on every $ of sales are left over
after covering the cost of the product)
18
Monaco Coach Corporation's Profitability
(in 000’s)
2000
2001
2002
Net sales
$ 901,890
$937,073
$1,222,689
Net income
$ 42,521
$ 24,919
$
Profit margin % = 4.7%
2.7%
44,515
3.6%
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses)
19
Statement of Stockholders’ Equity

Shows changes in all equity accounts
including:
»
Sales and purchases of capital stock
•Includes:
Statement of Retained Earnings
Beginning retained earnings
Add: net income
Deduct: dividends
= Ending retained earnings
20
Basic Format of the
Statement of Cash Flows
Cash flows from operating activities:
$$
Cash flows from investing activities:
$$
Cash flows from financing activities:
$$
Net increase in cash
Cash at beginning of year
Cash at end of year
$$
$$
$$
21
Basic Format for the
Statement of Cash Flows
Cash flows from operating activities:
Involve the purchase and sale
of products or services
Cash flows from investing activities:
Involve the acquisition and sale
of long-term assets
Cash flows from financing activities:
Involve the issuance and repayment
of long-term liabilities and stock
Net increase in cash
Cash at beginning of year
Cash at end of year
$$
$$
$$
$$
$$
$$
22
Elements of an Annual Report




Report of independent accountants
Management discussion & analysis
Summary of financial data
Letter to stockholders
 Financial statements
 Notes to financial
statements
23
End of Chapter 2
24