Slide 3-1 Balance Sheet and Statement of Cash Flows Chapter 5 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-2 Balance Sheet Usefulness of the Balance Sheet Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s: Liquidity, Solvency, and Financial flexibility. McGraw-Hill/Irwin LO 1 Explain the uses and limitations of a balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-3 Balance Sheet Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost. Use of judgments and estimates. Many items of financial value are omitted. LO 1 Understand the uses and limitations of an income statement. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-4 Balance Sheet Claims against resources (Liabilities) Resources (Assets) McGraw-Hill/Irwin Remaining claims accruing to owners (Owners’ Equity) Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-5 Current Assets Current Assets Cash Receivables Inventories Prepayments Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-6 Balance Sheet – “Current Assets” Current Assets - “Summary” Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash ST Investments Accounts receivable Inventory Prepaid expenses Total current assets $ 285,000 140,000 777,000 402,000 170,000 1,774,000 Investments: Invesment in ABC bonds Investment in UC Inc. 321,657 253,980 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-7 Balance Sheet – “Current Assets” Receivables Claims held against customers and others for money, goods, or services. Accounts receivable – oral promises Notes receivable – written promises Major categories of receivables should be shown in the balance sheet or the related notes. McGraw-Hill/Irwin LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-8 Balance Sheet – “Current Assets” Accounts Receivable – Presentation Options 1 2 Current Assets: Cash Accounts receivable Less allowance for doubtful accounts Inventory Total current assets Current Assets: Cash Accounts receivable, net of $25 allowance Inventory Total current assets McGraw-Hill/Irwin $ 346 500 25 475 812 $1,633 $ 346 475 812 $1,633 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-9 Non-Current Assets Noncurrent Assets Investments and Funds Property, Plant, & Equipment Intangibles Other Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-10 Balance Sheet – “Noncurrent Assets” Long-Term Investments Securities bonds, stock, and long-term notes For marketable securities, management’s intent determines current or noncurrent classification. McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building Land $ 285,000 321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-11 Balance Sheet – “Noncurrent Assets” Long-Term Investments Fixed Assets Land held for speculation McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building Land $ 285,000 321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-12 Balance Sheet – “Noncurrent Assets” Long-Term Investments Special Funds Sinking fund Pensions fund Cash surrender value of life insurance McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building Land $ 285,000 321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-13 Balance Sheet – “Noncurrent Assets” Long-Term Investments Nonconsolidated Subsidiaries or Affiliated Companies McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building Land $ 285,000 321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-14 Balance Sheet – “Noncurrent Assets” Property, Plant, and Equipment Assets of a durable nature used in the regular operations of the business. McGraw-Hill/Irwin Balance Sheet (in thousands) Current assets Cash Total investments Property, Plant, and Equip. Building Land Machinery and equipment Capital leases Leasehold improvements Accumulated depreciation Total PP&E Intangibles Goodwill Patents Trademarks $ 285,000 2,696,592 1,375,778 975,000 234,958 384,650 175,000 (975,000) 2,170,386 3,000,000 177,000 40,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-15 Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Intangibles Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles tested for impairment. McGraw-Hill/Irwin Current assets Cash Accumulated depreciation Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other $ 285,000 (975,000) 2,170,386 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-16 Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Other Assets Current assets Cash This section should include only unusual items sufficiently different from assets in the other categories. McGraw-Hill/Irwin Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets $ 285,000 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 $ 9,210,978 LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-17 Current Liabilities Current Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-18 Balance Sheet Balance Sheet (in thousands) Current Liabilities Current liabilities “Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.” Accounts payable $ 233,450 Notes payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 Income tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650 Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities 979,500 345,800 77,909 1,403,209 Stockholders' equity McGraw-Hill/Irwin LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-19 Non-Current Liabilities Long-Term Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Obligations that will not be satisfied within one year or operating cycle, whichever is longer McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-20 Balance Sheet Long-Term Liabilities Balance Sheet (in thousands) Current liabilities “Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed. McGraw-Hill/Irwin Accounts payable $ 233,450 Notes payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 Income tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650 Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities 979,500 345,800 77,909 1,403,209 Stockholders' equity LO 2 Identify the major classifications of the balance sheet. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-21 Shareholders’ Equity Capital Stock Other Contributed Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-22 Now, let’s look at some ratios! McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-23 Whole Foods Market, Inc. Balance Sheet For the Fiscal Year Ended September 30 In Thousands 2012 2011 Assets Cash and Cash Equivalents Short-Term Investments Accounts Receivable Merchandise Inventory Deferred Taxes Prepaid Expenses Total Current Assets $ 191,889 1,131,213 196,503 374,269 132,246 76,511 2,102,631 $ 303,960 442,320 175,310 336,799 121,176 73,579 1,453,144 Property and Equipment (Net) Long-Term Investments Goodwill Other 2,192,683 221,426 662,938 114,538 1,997,212 52,815 662,938 125,966 Total Assets 5,294,216 4,292,075 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-24 Whole Foods Market, Inc. Balance Sheet For the Fiscal Year Ended September 30 In Thousands 2012 2011 Liabilities Accounts Payable Other Accrued Liabilities Current Portion of Long Term Debt Total Current Liabilities Long-Term Debt Deferred Lease Liabilities Other Liabilities Total Liabilities 247,089 729,087 1,012 977,188 236,913 641,982 466 879,361 23,110 440,822 50,627 1,491,747 17,439 353,776 50,194 1,300,770 2,592,369 0 (28,599) 1,233,433 5,266 3,802,469 $ 5,294,216 2,120,972 0 0 870,497 (164) 2,991,305 $ 4,292,075 Equity Common Stock Additional Paid in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income/(Loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-25 Whole Foods Market, Inc. Income Statement For the Fiscal Year Ended September 30 In Thousands 2012 2011 $ 11,698,828 7,543,054 4,155,774 $ 10,107,787 6,571,238 3,536,549 Direct Store Expenses General and Administrative Expenses Pre-Opening Expenses Restructuring Costs Operating Income/(Loss) 2,983,419 372,065 46,899 9,885 743,506 2,628,811 310,920 40,852 8,346 547,620 Interest Expense Interest Revenue Income/(Loss) before Income Taxes (354) 8,892 752,044 (3,882) 7,974 551,712 Income Tax Expense/(Benefit) Net Income/(Loss) 286,471 465,573 209,100 342,612 Net Sales Cost of Goods Sold Gross Profit McGraw-Hill/Irwin $ $ Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-26 Liquidity Ratios Current assets Current ratio = Current liabilities Measures a company’s ability to satisfy its shortterm liabilities 2011 2012 2.15 = $2,102,631 $977,188 1.65 = $1,453,144 $879,361 Current ratio McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-27 Liquidity Ratios Quick assets Acid-test ratio = Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities 2011 2012 1.56 = $1,519,605 1.05 = $977,188 $921,590 $879,361 Acid-test ratio McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-28 Financing Ratios Total liabilities Debt to equity = Shareholders’ equity ratio Indicates the extent of reliance on creditors, rather than owners, in providing resources 2012 .39 = $1,491,747 $3,802,469 2011 $1,300,770 .43 = $2,991,305 Debt to equity ratio McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-29 Financing Ratios Times interest = earned ratio Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors 2012 2011 $752,398 2,125 = $354 $555,594 143 = $3,882 Times interest earned ratio McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-30 Now, let’s move on to a new topic. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-31 Statement of Cash Flows The Statement of Cash Flows provides relevant information about the cash receipts and cash payments of an enterprise during a period. It provides answers to questions: 1. Where did the cash come from during the period? 2. What was the cash used for during the period? 3. What was the change in the cash balance during the period? McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-32 The Statement of Cash Flows Content and Format Three different activities: Investing, Operating, Financing Illustration 5-24 LO 7 Identify the content of the statement of cash flows. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-33 Statement of Cash Flows Cash Flows from Operating Activities Reports the cash effects of transactions that enter into the determination of net income. The direct method and indirect method are two different approaches to report cash flows from operations. Each has its advantages and disadvantages, but each reconciles to the same number for total cash flows from operating activities. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-34 Statement of Cash Flows Cash Flows from Investing Activities Reports cash effects of transactions that result in a change in long-term assets. For example: Buying or selling property, plant, or equipment Buying or selling financial investment instruments McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-35 Statement of Cash Flows Cash Flows from Financing Activities Reports cash effects of transactions that result in a change in long-term liabilities and stockholder’s equity. For example: Acquiring or paying down borrowings Issuing capital stock Paying dividends to stockholders McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-36 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 payment of long-term liabilities and stock Net increase in cash Cash at beginning of year Cash at end of year McGraw-Hill/Irwin $$ $$ $$ $$ $$ $$ Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 3-38 The Statement of Cash Flows Review In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount receivable. LO 8 Prepare a statement of cash flows. McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.