Foundations of Business
Introduction to Financial Reporting
The Balance Sheet
Financial Application Assignment
Basic Elements of
Financial Statements

Assets
=
What a business owns

Liabilities
=
What a business owes

Equity
=
Owners’ economic
position in the
business
Balance Sheet Equation


Assets =
(What a
company owns) 
A
= L
Liabilities
+
Stockholders’
Equity
+
OE
(Funds
to
purchase
what a
company
owns)
Balance Sheet
What a
Company
owns
A
=
Funds to
purchase what
a company
owns
=
L
+
OE
Champ Creemee Company
Balance Sheet
(as of 12/31/10)
Cash
Accounts Receivable
Inventory
$8,690
3,000
3,500
Current Assets
15,190
Equipment
Total Assets
3,000
$18,190
Shows the
company’s position
on a fixed date;
“snapshot” in time
Accounts Payable
Wages Payable
Current Liabilities
Notes Payable (L.T.)
Total Liabilities
Common Stock
Retained Earnings
Total Shareholders’
Equity
Total Liab. & SH Equity
$2,000
500
2,500
5,000
7,500
10,000
690
10,690
$18,190
How Transactions Impact Financial
Statements

Increase in something owned

+ Asset

Increase in something owed

+ Liability

Sale of Common stock

+ Common Stock

Increase in Sales



Increased Expenses associated
with sales

Increase in Net Income

Pay dividend
+ Sales
+ Net Income

+ Expenses
- Net Income

+ Retained Earnings

- Retained Earnings

Owners’ Equity
Example: Owning a house with a mortgage
Value of the house (= asset):
- Mortgage (= liability):
Owners’ Equity:
$300,000
$200,000
$100,000
Assets
- Liabilities
(House)
- (Mortgage)
$300,000 - $200,000
Equity
Equity
$100,000
=
=
=
The 30 Companies in the
Dow Jones Industrial Average (DJIA)
3M Company
(MMM)
Alcoa Inc. (AA)
Amer. Express
(AXP)
AT&T (T)
Bank of America
(BAC)
Boeing (BA)
Caterpillar Inc.
(CAT)
Chevron
Corporation
(CVX)
Cisco Systems
(CSCO)
Coca-Cola (KO)
Gen'l Electric
(GE)
Hewlett
- Packard
(HPQ)
Home Depot
(HD)
JPMorgan
Chase
(JPM)
Kraft Foods
(KFT)
DuPont (DD)
Exxon Mobil
Corp. (XOM)
Intel (INTC)
Int'l Business
Mach. (IBM)
McDonald's
Corp.
(MCD)
Merck & Co.
(MRK)
Travelers
(TRV)
United
Technologies
(UTX)
Johnson &
Johnson (JNJ)
Microsoft Corp.
(MSFT)
Pfizer, Inc.
(PFE)
Verizon
Communic.
(VZ)
Wal-Mart
Stores
(WMT)
Procter &
Gamble (PG)
Walt Disney
(DIS)
Spring 2011
The Dow Jones Industrial Average
(The DJIA or the “Dow”)
= Dow Jones
Source: Google Finance
The Dow vs. the S&P 500
(Standard & Poor’s 500)
= Dow Jones
Source: Google Finance
= S&P 500
3 major market indexes
the DJIA, S&P 500, NASDAQ
=NASDAQ
Source: Google Finance
BP vs. Exxon Mobil vs. the S&P 500
Source: Google Finance
Link to Financial Application Assignment
A major company event—Jan. 13, 2011
Effect on company stock price?
Merck clot drug seen unfit for stroke
headline
Top experimental drug found unfit for stroke patients
* Vorapaxar acquired in Merck's buy of Schering-Plough
* Dashed drug hopes pose challenge to new CEO
* Merck shares drop 6.6 pct (Adds Merck drag on Dow, drug sales potential, stroke
statistics)
Date, source
By Ransdell Pierson
NEW YORK, Jan 13 (Reuters) - One of Merck & Co's (MRK) most important experimental
drugs, blood clot preventer Vorapaxar, has been deemed inappropriate for patients
who have suffered a stroke, dashing investor hopes and erasing nearly $8 billion from
its market value.
Vorapaxar, meant to prevent heart attacks and strokes or their recurrence, was considered
a crown jewel in Merck's $41 billion acquisition in late 2009 of Schering-Plough Corp
and deemed capable of generating annual sales of more than $3 billion.
Jan. 13, 2011
Company
announcement
Comparison chart:
The impact of a company event on the
company’s stock price
Event:
Announcement
by Merck of
Vorapaxar’s
ineffectiveness
Effect of a company announcement on
the company’s stock price
MRK’s stock price underperforms the S&P500 slightly before the event but then
experiences a sharp decline on the day of the event and continues to underperform the
S&P 500 for the next 5 days.
104.00
102.00
100.00
98.00
96.00
94.00
92.00
90.00
INDEX VALUES Merck
88.00
INDEX VALUES S&P 500
86.00
84.00
Date of Announcement
Creating an Index
Base value 1
Base value 2
Index = new value / base value * 100
DATE
S&P 500 ACTUAL
VALUE
(Close)
S& P 500 INDEX VALUE
(calculated)
MERCK
ACTUAL STOCK
PRICE (Close)
MERCK
INDEX VALUE
(calculated)
1/10/11
1269.75
100
$37.20
100
1/11/11
1274.48
1274.48 / 1269.75 x 100
= 100.37
$36.95
36.95 / 37.20 x 100
= 99.33
1/12/11
1285.96
1285.96 / 1269.75 x 100
= 101.28
$37.15
37.15 / 37.20 x 100
= 99.87
1/13/11
1283.76
1283.76 / 1269.75 x 100
= 101.10
$34.69
34.69 / 37.20 x 100
= 93.25
1/14/11
1293.24
1293.24 / 1269.75 x 100
= 101.85
$34.23
34.23 / 37.20 x 100
= 92.02
1/18/11
1295.02
1295.02 / 1269.75 x 100
=101.99
$33.87
33.87 / 37.20 x 100
= 91.05
1/19/11
1281.92
1281.92 / 1269.75 x 100
=100.96
$33.91
33.91 / 37.20 x 100
= 91.16
1/20/11
1280.26
1280.26 / 1269.75 x 100
=100.83
$34.05
34.05 / 37.20 x 100
= 91.53
1/21/11
1283.35
1283.35 / 1269.75 x 100
= 101.07
$33.90
33.90 / 37.20 x 100
= 91.13
Champ Creemee Company
Inventory
2 gallons of ice cream
cones
napkins