Chapter 5
Communicating and
Interpreting
Accounting Information
Management
Players in the
Preparation
Accounting
CEO, CFO, Accounting Staff
Communication
Guided by GAAP
Process
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
An unqualified opinion states
that the financial statements are
fair presentations in all material
respects in conformity with
GAAP.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-2
Management
Players in the
Preparation
Accounting
CFO, CEO, Accounting Staff
Communication
Guided by GAAP
Process
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
Information
Intermediaries
Analysis and Advice
Financial analysis,
Information services
McGraw-Hill/Irwin
Financial analysts
make predictions
concerning
companies’ future
earnings and stock
prices.
© 2004 The McGraw-Hill Companies
5-3
Management
Players in the
Preparation
Accounting
CFO, CEO, Accounting Staff
Communication
Guided by GAAP
Process
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
Information
Intermediaries
Analysis and Advice
Financial analysis,
Information services
McGraw-Hill/Irwin
Web Info Services:
Financial
analysts
www/sec/gov
make
predictions
www.compustat.com
concerning
www.djnr.com
companies’ future
www.bloomberg.com
earnings
and stock
www.firstcall.com
prices.
www.hoover.com
© 2004 The McGraw-Hill Companies
5-4
5-5
Management
Players in the
Preparation
Accounting
CFO, CEO, Accounting Staff
Communication
Guided by GAAP
Process
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
Information
Intermediaries
Analysis and Advice
Financial analysis,
Information services
Government
Regulators
Verification
SEC Members
Guided by SEC regs.
Users
Analysis and Decision
Investors, Lenders, etc.
McGraw-Hill/Irwin
Public
companies only
© 2004 The McGraw-Hill Companies
5-6
Guiding Principles for
Communicating Useful Information
Primary Objective of External Financial Reporting
To provide economic information to external users
for decision making.
Primary Qualitative Characteristics
Relevance: Timely and Predictive and Feedback Value
Reliability: Accurate, Unbiased, and Verifiable
Secondary Qualitative Characteristics
Comparability: Across businesses
Consistency: Over time
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-7
Guiding Principles for
Communicating Useful Information
Primary Objective of External Financial Reporting
To provide economic information to external users
for decision making.
The full-disclosure principles requires . . .
Primary Qualitative Characteristics
1. Relevance:
A complete
set
financial
statements,
Timely
andof
Predictive
and Feedback
Value
and Unbiased, and Verifiable
Reliability: Accurate,
2.Notes to the financial statements
Secondary Qualitative Characteristics
Comparability: Across businesses
Consistency: Over time
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-8
The Disclosure Process
Press Releases are used to announce
quarterly and annual earnings as soon as
the verified figures are available.
Earnings Press Release Excerpt for Gallaway Golf
Callaway® Golf
CARLSBAD, Calif./April 25, 2001/ Gallaway Gold
Company (NYSE:ELY) today reported record sales for the
first quarter ended March 31, 2001. Reported net sales
increased 32% to $261.4 million from $197.4 million during
the first quarter of 2000. Net income increased . . . . . .
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-9
Annual Reports
For privately held companies, annual
reports are simple documents that
include:
1. Four basic financial statements.
2. Related footnotes.
3. Report of independent accountants
(auditor’s opinion).
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-10
Annual Reports
For public companies, annual reports
are elaborate because of SEC
reporting requirements:
1. A Nonfinancial Section
A letter to the stockholders, a
description of management’s
philosophy, products, successes, etc.
2. A Financial Section
See next slide for a detailed listing . . .
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-11
Annual Reports - Financial Section
1. Summarized financial
data for 5- or 10-years.
2. Management Discussion
and Analysis (MD&A).
3. The four basic financial
statements.
4. Notes (footnotes).
5. Independent
Accountant’s Report.
McGraw-Hill/Irwin
6. Recent stock price
information.
7. Summaries of the
unaudited quarterly
financial data.
8. Lists of directors and
officers of the company
and relevant addresses.
© 2004 The McGraw-Hill Companies
5-12
Quarterly Reports
Usually begin with short letter to
stockholders,
 Condensed unaudited income statement
and balance sheet for the quarter.
 Often, cash flow statement and
statement of stockholders’ equity are
omitted. Some notes to the financial
statements also may be omitted.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-13
SEC Reports
Form 10-K Annual Report
•Due within 90 days of the fiscal year-end
•Contains audited financial statements
Form 10-Q Quarterly Report
•Due within 45 days of the end of the quarter
•Financial statements can be unaudited
Form 8-K Current Report
•Due within 15 days of the major event date
•Financial statements can be unaudited
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-14
Financial Statement Formats
Let’s take a
closer look
at the asset
section of the
balance
sheet!
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-15
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Deferred taxes
Other current assets
Total current assets
$
Property, plant and equipment, net
Intangible assets, net
Other assets
$
McGraw-Hill/Irwin
102,596 $
58,836
133,962
29,354
17,721
342,469
112,602
54,252
97,938
32,558
13,122
310,472
134,712
112,824
40,929
630,934 $
142,214
120,143
43,954
616,783
© 2004 The McGraw-Hill Companies
5-16
Consolidated Balance Sheet
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Deferred taxes
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
McGraw-Hill/Irwin
December 31,
2000
1999
Current assets
$are
102,596
$ 112,602
assets
that
58,836
54,252
will 133,962
be turned97,938
into
32,558
cash29,354
or expire
(be
17,721
13,122
used
up) within
342,469
310,472
the134,712
longer of142,214
one
112,824 or the
120,143
year
40,929
43,954
operating
cycle.
$ 630,934 $ 616,783
© 2004 The McGraw-Hill Companies
5-17
Consolidated Balance Sheet
Property,
plant
December
31, and
(in thousands, except share data and per shate data)
2000
1999
equipment
includes
ASSETS
assets with useful
Current assets:
lives
of more
than
Cash and cash equivalents
$ 102,596
$ 112,602
Accounts receivable, net
58,836
54,252
one
year
acquired
Inventories, net
133,962
97,938
for29,354
use in the
Deferred taxes
32,558
Other current assets
17,721
13,122
business
rather
Total current assets
342,469
310,472
than for resale. The
Property, plant and equipment, net
134,712
142,214
amount
is
reported
Intangible assets, net
112,824
120,143
Other assets
43,954
net of40,929
accumulated
$ 630,934 $ 616,783
depreciation.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-18
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Deferred taxes
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
Intangible
$ 102,596 $assets
112,602
58,836
54,252
have133,962
no physical
97,938
29,354
32,558
existence
and
a
17,721
13,122
long
life. They
342,469
310,472
include patents,
134,712
142,214
copyrights,
112,824
120,143
40,929
43,954
trademarks,
etc.
$
McGraw-Hill/Irwin
630,934 $
616,783
© 2004 The McGraw-Hill Companies
5-19
Let’s now look
at the liability
section of a
classified
balance sheet.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-20
Consolidated Balance Sheet
December 31,
(in thousands, except share data and per shate data) 2000
1999
LIABILITIES & STOCKHOLDERS" EQUITY
Current Liabilities:
Accounts payable and
accrued expenses
Accrued employee
compensation and benefits
Accrued warranty expense
Accrued restructuring costs
Income taxes payable
Total current liabilities
Long-term liabilities (Note 7)
McGraw-Hill/Irwin
$
44,173 $
22,574
39,363
3,196
109,306
9,884
46,664
21,126
36,105
1,379
105,274
11,575
© 2004 The McGraw-Hill Companies
5-21
Consolidated Balance Sheet
December 31,
(in thousands, except share data and per shate data) 2000
1999
LIABILITIES & STOCKHOLDERS" EQUITY
Current Liabilities:
Accounts payable and
accrued expenses
Accrued employee
compensation and benefits
Accrued warranty expense
Accrued restructuring costs
Income taxes payable
Total current liabilities
Long-term liabilities (Note 7)
McGraw-Hill/Irwin
Current liabilities
$ are
44,173
$
46,664
obligations
that will be paid
22,574
21,126
with
current
39,363
36,105
assets,
- normally
1,379
3,196 one year.
within
109,306
9,884
105,274
11,575
© 2004 The McGraw-Hill Companies
5-22
Consolidated Balance Sheet
December 31,
(in thousands, except share data and per shate data) 2000
1999
LIABILITIES & STOCKHOLDERS" EQUITY
Current Liabilities:
Accounts payable and
accrued expenses
$
44,173 $
46,664
Accrued employee
compensation and benefits
22,574
21,126
Long-term
liabilities
have
Accrued warranty
expenseare debts
39,363 that 36,105
Accrued dates
restructuring
costs
1,379
maturity
extending
beyond
one
Income taxes payable
3,196
year from
the balance 109,306
sheet date.
Total current liabilities
105,274
Long-term liabilities
9,884
11,575
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-23
Finally, we get
to the
stockholders’
equity section
of a classified
balance sheet.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-24
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
LIABILITIES & STOCKHOLDERS" EQUITY
Shareholders' equity:
Common stock, $.01 par value, 240,000,000
shares authorized, 78,958,963 and
76,302,196 issued and outstanding at
December 31, 2000 and 1999
Paid-in capital
$
790 $
247,838
Contributed capital is often shown in
Accumulated other comprehensive income
(6,096)
two separate accounts 349,681
...
Retained Earnings
592,213
1.
Common
stock
Less: Common stock held in treasury, at
cost,
4,815,241 shares
at December 31, 2000
2. Paid-in
capital
and none at Decmeber 31, 1999
(80,469)
Total stockholders equity
511,744
$ 630,934 $
McGraw-Hill/Irwin
763
210,801
280
288,090
499,934
499,934
616,783
© 2004 The McGraw-Hill Companies
5-25
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
LIABILITIES & STOCKHOLDERS" EQUITY
Shareholders' equity:
Common stock, $.01 par value, 240,000,000
Comprehensive
income
includes unrealized
shares authorized, 78,958,963
and
76,302,196
issued and outstanding
at
gains/losses
on security
investments,
December 31, 2000 and 1999
$
790 $
763
minimum
pension
liability
adjustment,
and
Paid-in capital
247,838
210,801
foreign currency translation adjustments.
Accumulated other comprehensive income
Retained Earnings
Less: Common stock held in treasury, at
cost, 4,815,241 shares at December 31, 2000
and none at Decmeber 31, 1999
Total stockholders equity
$
McGraw-Hill/Irwin
(6,096)
349,681
592,213
280
288,090
499,934
(80,469)
511,744
630,934 $
499,934
616,783
© 2004 The McGraw-Hill Companies
5-26
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
LIABILITIES & STOCKHOLDERS" EQUITY
Shareholders' equity:
Common stock, $.01 par value, 240,000,000
shares authorized, 78,958,963 and
76,302,196 issued and outstanding at
December 31, 2000 and 1999
Paid-in capital
Retained earnings is the total
earnings of the company
less
the
$
790 $
763
247,838
total dividends declared
since210,801
inception
of
operations.
Accumulated other comprehensive income
(6,096)
280
Retained Earnings
Less: Common stock held in treasury, at
cost, 4,815,241 shares at December 31, 2000
and none at Decmeber 31, 1999
Total stockholders equity
$
McGraw-Hill/Irwin
349,681
592,213
288,090
499,934
(80,469)
511,744
630,934 $
499,934
616,783
© 2004 The McGraw-Hill Companies
5-27
Consolidated Balance Sheet
December 31,
2000
1999
(in thousands, except share data and per shate data)
LIABILITIES & STOCKHOLDERS" EQUITY
Shareholders' equity:
Common stock, $.01 par value, 240,000,000
shares authorized, 78,958,963 and
76,302,196 issued and
outstanding
at
Companies
often
purchase
shares of its own
December 31,stock.
2000 and 1999
$
common
This stock is said
to790be$ held763
in
Paid-in capital
247,838
210,801
the treasury and can be used to satisfy employee
stock purchase or option plans. Treasury shares
Accumulated other comprehensive income
(6,096)
280
mayEarnings
also be used in connection
with the
Retained
349,681
288,090
acquisition of another company.
592,213
499,934
Less: Common stock held in treasury, at
cost, 4,815,241 shares at December 31, 2000
and none at Decmeber 31, 1999
Total stockholders equity
$
McGraw-Hill/Irwin
(80,469)
511,744
630,934 $
499,934
616,783
© 2004 The McGraw-Hill Companies
5-28
Balance Sheet Ratios and
Debt Contracts
When a company borrows money, they
often agree to certain restrictions on
their activity. Ratios typically part of the
borrowing agreement include:
Total Liabilities
÷ Stockholders' Equity
= Debt-to-Equity Ratio
McGraw-Hill/Irwin
Current Assets
÷ Current Liabilities
= Current Ratio
© 2004 The McGraw-Hill Companies
5-29
Classified Income Statement
Income statements may contain five sections:
1.
2.
3.
4.
Continuing operations
Discontinued operations
Extraordinary items
Cumulative effect of changes in accounting
methods
5. Earnings per share
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-30
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Gross sales minus any
discounts, returns, and
allowances during the period.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-31
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Cost of inventory sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-32
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Not related to the company’s primary
operations. Usually includes interest income or
expense and any gains or losses from the
retirement of equipment.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-33
Classified Income Statement
In addition,
have
nonrecurring
items.
General companies
Format for the may
Classified
Income
Statement
These nonrecurring items may include:
Net sales
− Cost of
goods sold
1. Discontinued
operations,
Gross profit
2. Extraordinary
items,
− Operating expenses
3. Cumulative
effect
changes in accounting methods.
Income
fromof
operations
± Nonoperating revenues/expenses and gains/losses
These itemsIncome
are reported
separately because they are
before income taxes
not useful− inIncome
predicting
future income of the company.
tax expense
Net income
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-34
Discontinued Operations
Sale or abandonment of a segment of a
business.
Income or loss on
segment’s operation for
the period.
Gain or loss on
disposal of the
segment.
Show net of applicable taxes.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-35
Extraordinary Items
Unusual
Infrequent
Show net of applicable taxes.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-36
Cumulative Effect of Changes in
Accounting Methods
GAAP
Method
Change to
Alternative
GAAP
Method
The change must be to a preferable
method and must be disclosed in notes
to financial statements.
Show net of applicable taxes.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-37
Classified Income Statement
Now, let’s look at two common
formats for presenting the
continuing operations section.
1.Single-step income statement
2.Multiple-step income statement
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-38
Single Step
(in thousands)
Net sales
Interest income and other income, net
Total revenues
Cost of goods sold
Selling expenses
General & Administrative expenses
Research and development costs
Other items
Total expenses
Income before income taxes
Provision for income taxes
Net income
2000
$ 837,627
7,267
844,894
440,119
170,541
70,333
34,579
957
716,529
128,365
47,366
$ 80,999
In the single-step format, all revenues, income,
and gains are listed first.
Costs, expenses, and losses are then subtracted
from total revenues to get net income.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-39
Multiple Step
(in thousands)
2000
$ 837,627
440,119
397,508
170,541
70,333
34,579
122,055
7,267
129,322
47,366
81,956
Net sales
Cost of goods sold
Gross Profit
Selling expenses
General & Administrative expenses
Research and development costs
Income from Operations
Interest income and other income, net
Income before income taxes
Provision for income taxes
Income before cumulative effect
Cumulative effect of accounting change
Net income
$
(957)
80,999
Cost of goods sold is shown along with a
separation of non-operating income and
expenses and non-recurring items.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-40
Consolidated Statement of Income
(in thousands, except per share data)
Two unusual
expenses that
may recur in the
future.
Net sales
Cost of goods sold
Gross profit
Selling expenses
General & Admin. expenses
Research and development costs
Restructuring costs
Sumitomo transition costs
Income from operations
Interest and other income, net
Interest expense
Income before income taxes
Provision for income taxes
Cumulative effect of accounting change
Net income
Earnings per common share
Basic
Income before accounting change
Cumulative effect of change
2000
$ 837,627 100% $
440,119
53%
397,508
47%
170,541
20%
70,333
8%
34,579
4%
122,055
15%
8,791
(1,524)
129,322
16%
47,366
(957)
$ 80,999
10% $
$
$
Diluted
Income before accounting change
Cumulative effect of change
$
$
McGraw-Hill/Irwin
Common equivalent shares
Basic
Diluted
1999
719,038 100%
384,265
53%
334,773
47%
128,565
18%
92,478
13%
34,002
5%
(5,894)
-1%
5,713
1%
79,909
11%
9,182
(3,594)
85,497
12%
30,175
55,322
8%
1.17
(0.01)
1.16
$
0.79
$
0.79
1.14
(0.01)
1.13
$
0.78
$
0.78
69,946
70,397
©71,412
2004 The McGraw-Hill71,214
Companies
5-41
Consolidated Statement of Income
(in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Selling expenses
General & Admin. expenses
Research and development costs
Restructuring costs
Sumitomo transition costs
Income from operations
Interest and other income, net
Interest expense
Income before income taxes
Provision for income taxes
Cumulative effect of accounting change
Net income
A nonrecurring
item that is
presented
separately after
income from
operations.
McGraw-Hill/Irwin
Earnings per common share
Basic
Income before accounting change
Cumulative effect of change
2000
$ 837,627 100% $
440,119
53%
397,508
47%
170,541
20%
70,333
8%
34,579
4%
122,055
15%
8,791
(1,524)
129,322
16%
47,366
(957)
$ 80,999
10% $
$
$
Diluted
Income before accounting change
Cumulative effect of change
$
$
Common equivalent shares
Basic
Diluted
1999
719,038 100%
384,265
53%
334,773
47%
128,565
18%
92,478
13%
34,002
5%
(5,894)
-1%
5,713
1%
79,909
11%
9,182
(3,594)
85,497
12%
30,175
55,322
8%
1.17
(0.01)
1.16
$
0.79
$
0.79
1.14
(0.01)
1.13
$
0.78
$
0.78
69,946
70,397
©71,412
2004 The McGraw-Hill71,214
Companies
5-42
Earnings Per Share
EPS =
Net Income Available to Common Shareholders
Weighted Average Number of Shares
Outstanding During the Reporting Period
Basic EPS
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-43
Earnings Per Share
EPS =
Net Income Available to Common Shareholders
Weighted Average Number of Shares
Outstanding During the Reporting Period
Diluted EPS
Stock options, debt securities,
equity securities are assumed to
be converted into common stock
at the beginning of the period.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-44
Consolidated Statement of Income
(in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Selling expenses
General & Admin. expenses
Research and development costs
Restructuring costs
Sumitomo transition costs
Income from operations
Interest and other income, net
Interest expense
Income before income taxes
Provision for income taxes
Cumulative effect of accounting change
Net income
Both basic and
diluted EPS are
reported here.
Earnings per common share
Basic
Income before accounting change
Cumulative effect of change
2000
$ 837,627 100% $
440,119
53%
397,508
47%
170,541
20%
70,333
8%
34,579
4%
122,055
15%
8,791
(1,524)
129,322
16%
47,366
(957)
$ 80,999
10% $
$
$
Diluted
Income before accounting change
Cumulative effect of change
$
$
McGraw-Hill/Irwin
Common equivalent shares
Basic
Diluted
1999
719,038 100%
384,265
53%
334,773
47%
128,565
18%
92,478
13%
34,002
5%
(5,894)
-1%
5,713
1%
79,909
11%
9,182
(3,594)
85,497
12%
30,175
55,322
8%
1.17
(0.01)
1.16
$
0.79
$
0.79
1.14
(0.01)
1.13
$
0.78
$
0.78
69,946
70,397
©71,412
2004 The McGraw-Hill71,214
Companies
5-45
Accounting-Based Executive Bonuses
Executives are frequently paid bonuses
based upon pretax earnings growth of
the company.
Pre-Tax Earnings
=
Growth Percent
McGraw-Hill/Irwin
Current Year
−
Pretax Earnings
Last Year
Pretax Earnings
Last Year Pretax Earnings
© 2004 The McGraw-Hill Companies
5-46
Statement of Cash Flows
Recall that the Statement of Cash Flows
is divided into three major sections.
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities.
We will examine the indirect method of
preparing the statement. This format
begins with a reconciliation of accrual
income to cash flows from operations.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-47
Consolidated Statement of Cash Flows
(in thousands)
2000
The operating
activities section of
Callaway using the
indirect method.
Begin with
accounting net
income and arrive
at cash provided by
operating activities.
McGraw-Hill/Irwin
Cash flows from operating activities:
Net income
$ 80,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization
40,249
Non-cash compensation
2,157
Tax benefit from exercise of stock options
6,806
Net non-cash foreign currency gains
(1,410)
Deferred taxes
4,906
Loss on disposal of assets
342
Increase (decrease) in cash resulting from
changes in:
Accounts receivable, net
(9,047)
Inventories, net
(39,402)
Other assets
(3,074)
Accounts payable and accrued expenses
2,638
Accrued employee compensation and benefits
1,623
Accrued warranty expense
3,258
Income taxes payable
4,088
Accrued restructuring costs
(1,379)
Deferred compensation
(1,691)
Net cash provided by operating activities
91,063
© 2004 The McGraw-Hill Companies
5-48
Consolidated Statement of Cash Flows
(in thousands)
2000
While these
items are on
the income
statement, they
have no
current cash
effect.
McGraw-Hill/Irwin
Cash flows from operating activities:
Net income
$ 80,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization
40,249
Non-cash compensation
2,157
Tax benefit from exercise of stock options
6,806
Net non-cash foreign currency gains
(1,410)
Deferred taxes
4,906
Loss on disposal of assets
342
Increase (decrease) in cash resulting from
changes in:
Accounts receivable, net
(9,047)
Inventories, net
(39,402)
Other assets
(3,074)
Accounts payable and accrued expenses
2,638
Accrued employee compensation and benefits
1,623
Accrued warranty expense
3,258
Income taxes payable
4,088
Accrued restructuring costs
(1,379)
Deferred compensation
(1,691)
Net cash provided by operating activities
91,063
© 2004 The McGraw-Hill Companies
5-49
Consolidated Statement of Cash Flows
(in thousands)
2000
Cash flows from operating activities:
Net income
$ 80,999
Adjustments to reconcile net income to net cash
provided
by operating
activities: Balance During Year
Change
in Account
Depreciation & amortization
40,249
Increase
Decrease
Non-cash compensation
2,157
Current TaxSubtract
from
net
Add
to
net
income.
benefit from exercise of stock options
6,806
Assets Net non-cash
income.
foreign currency gains
(1,410)
Current Deferred
Add to
net income.
Subtract from net4,906
taxes
This table Liabilities Loss on disposal of assets
342
income.
Increase (decrease) in cash resulting from
provides
changes in:
guidance for
Accounts receivable, net
(9,047)
Inventories, net
(39,402)
adjustments
Other assets
(3,074)
related to
Accounts payable and accrued expenses
2,638
changes in
Accrued employee compensation and benefits
1,623
Accrued warranty expense
3,258
current assets
Income taxes payable
4,088
and current
Accrued restructuring costs
(1,379)
Deferred compensation
(1,691)
liabilities.
Net cash provided by operating activities
91,063
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-50
Consolidated Statement of Cash Flows
(in thousands)
2000
Here is the rest
of Callaway’s
Statement of
Cash Flows
showing the
cash balance
on the
company’s
balance sheet.
McGraw-Hill/Irwin
Cash flows from investing activities
Capital expenditures
Acquisition, net of cash acquired
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock
Acquisition of treasury stock
Proceeds from sale-leaseback of equipment
Dividends paid, net
Net cash used in financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash
equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure:
Cash paid for interest and fees
Cash paid for income taxes
$ (28,386)
(444)
244
(28,586)
28,233
(80,469)
1,268
(19,538)
(70,506)
(1,977)
(10,006)
112,602
$ 102,596
$
805
29,245
© 2004 The McGraw-Hill Companies
5-51
Notes to Financial Statements
Descriptions of the key accounting rules
applies to the company’s statements.
Additional detail supporting reported
numbers.
Relevant financial information not
disclosed on the statements.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-52
Return on Equity (ROE)
Return
=
on
Equity
Net Income
Average Stockholder’s Equity1
ROE measures how much the firm
earned for each dollar of
stockholders’ investment.
1(beginning
equity + ending equity) ÷ 2
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies
5-53
ROE Profit Driver Analysis
McGraw-Hill/Irwin
=
Net Profit
Margin
Net Income
Net Sales
×
×
Net Income
Average
Stockholders’
Equity
=
Asset
Turnover
Net Sales
Average
Total Assets
×
Financial
Leverage
×
ROE
Average
Total Assets
Average
Stockholders’
Equity
© 2004 The McGraw-Hill Companies
5-54
The End of Chapter 5
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies