CORPORATE FINANCIAL
REPORTING
·1
Chapters
2, 3 & 4
HOW DID ANDETONY CORP.
DO IN SEPTEMBER?
What would we look at to decide?
Introduction
2
HOW EASY WOULD IT BE TO
TRICK OUR ACCOUNTANT?
Introduction
3
OTHER POINTS TO DISCUSS
Redundancy in financial statements
Bookkeeping stuff
Introduction
4
THE BALANCE SHEET
ASSETS
LIABILITIES
Current assets
Current liabilities
Noncurrent assets
Non current liabilities
(usually are “sub groups”
like PP&E, intangibles, etc.)
OWNERS’ EQUITY
Paid in capital
Retained earnings
Other comprehensive income
The Balance Sheet
5
FINANCIAL REPORTING IS
ALL ABOUT THREE THINGS:
Recognition
Valuation (measurement)
Classification
The Balance Sheet
6
ASSETS ARE:
economic resources
that will provide the company
with future economic benefits.
Assets have three characteristics:
The Balance Sheet
7
ASSET CHARACTERISTICS:
1. the future economic benefits
are probable and measurable,
The Balance Sheet
8
ASSET CHARACTERISTICS:
1. the future economic benefits
are probable and measurable,
$
The Balance Sheet
9
ASSET CHARACTERISTICS:
1. the future economic benefits
are probable and measurable,
2. they were obtained or
controlled by the entity as a
result of
The Balance Sheet
10
ASSET CHARACTERISTICS:
1. the future economic benefits
are probable and measurable,
2. they were obtained or
controlled by the entity as a
result of
3. a past transaction.
The Balance Sheet
11
ASSET CHARACTERISTICS:
1. the future economic benefits
are probable and measurable,
2. they were obtained or
controlled by the entity as a
result of
economic
3. a past transaction. exchange
The Balance Sheet
12
ASSET MEASUREMENT (VALUATION):
Originally what the asset cost –
after that it gets wild – FASB is
moving toward fair value for all
assets, but is not there yet.
The Balance Sheet
13
LIABILITIES ARE:
obligations to give an asset to,
or perform a service for,
another entity in the future.
Liabilities have four characteristics:
The Balance Sheet
14
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which
The Balance Sheet
15
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which
2. the future sacrifice is measurable
$
The Balance Sheet
16
LIABILITY CHARACTERISTICS:
1. it is a present obligation for which
2. the future sacrifice is measurable
3. probable, and
The Balance Sheet
17
LIABILITY CHARACTERISTICS:
1.
2.
3.
4.
it is a present obligation for which
the future sacrifice is measurable
probable, and
is the result of a past transaction.
(economic exchange)
The Balance Sheet
18
LIABILITY MEASUREMENT (VALUATION)
Almost always “present value” – in
theory, the economic amount the
company would have to pay today
to satisfy the debt.
The Balance Sheet
19
CONTINGUENT LIABILITY
lawsuit
warranties (guarantees)
asset retirement obligations (ARO)
sick & vacation pay
etc.
The Balance Sheet
20
CONTINGUENT LIABILITY
The Balance Sheet
21
OWNER’S EQUITY
Whatever.
The Balance Sheet
22
BOOK VALUE
A commonly used term meaning
owners’ equity.
Book value per share - also
commonly used (owners’ equity ÷
no. of shares of stock)
The Balance Sheet
23
BALANCE SHEET “FLAW”
The balance sheet does not always
show assets and liabilities well.
The Balance Sheet
24
BALANCE SHEET “FLAW”
Our company issues 1,000 shares of
stock to investors for $100/share. The
price is the fair value of the stock.
What
What
What
What
would our balance sheet look like?
is our “book value”?
is our book value/share?
is our stock’s market value/share?
The Balance Sheet
25
BALANCE SHEET “FLAW”
Our company issues buys 1,000 shares
of CROX for $26/share. That price is
the fair value of the stock.
What
What
What
What
would our balance sheet look like?
is our “book value”?
is our book value/share?
is our stock’s market value/share?
The Balance Sheet
26
BALANCE SHEET “FLAW”
The CROX stock goes up to $30/share,
our accountant puts the gain in an
account that increases Owners’ equity.
What
What
What
What
would our balance sheet look like?
is our “book value”?
is our book value/share?
is our stock’s market value/share?
The Balance Sheet
27
BALANCE SHEET “FLAW”
Our company buys a piece of land for
$20,000 and signs a 30 year mortgage
for the entire amount (CROX stock unchanged).
What
What
What
What
would our balance sheet look like?
is our “book value”?
is our book value/share?
is our stock’s market value/share?
The Balance Sheet
28
BALANCE SHEET “FLAW”
The land goes up in value to $50,000;
our accountant ignores the increase in
value completely (CROX stock unchanged).
What
What
What
What
would our balance sheet look like?
is our “book value”?
is our book value/share?
is our stock’s market value/share?
The Balance Sheet
29
THE BALANCE SHEET
Questions?
The Balance Sheet
30
MEASURING INCOME
Economist’s approach
Accountant’s approach (commonly):
Cash basis
Accrual basis
Income & Cash Flow Statements
31
REVENUE
CASH VS. ACCRUAL
CASH BASIS: Revenue represents an
increase in CASH as a result of
providing goods or services to
customers.
ACCRUAL BASIS: Revenue is an
increase in NET ASSETS (assets liabilities) as a result of providing
goods or services to customers.
Income & Cash Flow Statements
32
REVENUE CRITERIA FOR
CASH AND ACCRUAL BASIS
Cash basis: to show revenue on the income
statement the company must have received
cash from its customer as a result of
providing goods or services to the customer.
Income & Cash Flow Statements
33
REVENUE CRITERIA FOR
CASH AND ACCRUAL BASIS
Accrual basis-the SEC says 4 criteria must be
met:
1. there is persuasive evidence of an
arrangement,
2. delivery has occurred or services have been
rendered,
3. the seller’s price is fixed or determinable, &
4. collectability is reasonably assured.
Income & Cash Flow Statements
34
REVENUE CRITERIA FOR
CASH AND ACCRUAL BASIS
We could condense those into two criteria:
1. The company has received a measurable
asset from the customer (SEC’s criteria
1, 3 & 4) and
2. The revenue is earned - meaning that the
company has done what the customer is
paying it to do (SEC’s criterion 2).
Income & Cash Flow Statements
35
REVENUE
CASH VS. ACCRUAL
YOU WORK
GET PAID ON
AMOUNT
October
Nov. 1, 2013
November
Dec. 1, 2013
December
Jan. 2. 2014
What is revenue in 2013
on the cash basis?
on the accrual basis?
6,000
12,000
12,000
Income & Cash Flow Statements
36
USING THE ACCRUAL BASIS
AN EXPENSE IS:
a decrease in net assets
(assets - liabilities) as a
result of providing goods
or services to customers.
Income & Cash Flow Statements
37
REVENUE AND EXPENSES
CASH BASIS VS ACCRUAL
Our company engages in the following transactions:
QTR1: buys inventory for $6,000 on account
& sells 1/3 of the inventory for $7,000 cash
QTR2: pays for the inventory purchased in QTR1
& sells the remaining inventory for $15,000
on account
QTR3: collects the $15,000 from the QTR2 sale
Income & Cash Flow Statements
38
THERE ARE OTHER METHODS USED
TO RECOGNIZE REVENUES / EXPENSES
Cash basis
Accrual basis
Installment sales method
Cost recovery
Percentage completion
Completed contract
Income & Cash Flow Statements
39
INCOME STATEMENT FORMAT
Point of the income statement –
give information about revenue/gains
and expenses/and losses for the
past year/quarter and to give that
information in a way that helps
predict future income.
Income & Cash Flow Statements
40
INCOME STATEMENT FORMAT
Continuing operations
+/-Discontinued operations
◊ income from operations prior to disposal
◊ gain or loss on disposal
+/-Extraordinary items
events that are unusual in nature and infrequent
in occurrence
+/-Cumulative effect of changes in accounting
principles
= Net income
Income & Cash Flow Statements
41
INCOME STATEMENT FORMAT
And every publicly traded company
must show earnings per share on its
income statement.
Income & Cash Flow Statements
42
INCOME STATEMENT FORMAT
CROX, INC. (simplified)
Consolidated Statement of Operations
Year Ended December 31 (in thousands)
2010
2009
2008
Revenues
$789,695
$645,767
$721,589
Cost of sales
(364,631)
(337,720)
(486,722)
Gross profit
425,064
308,047
234,867
Selling, general and administrative expense
(344,029)
(359,231)
(423,149)
Income from operations
81,258
( 51,184)
(188,282)
Interest expense
(
657)
( 1,495)
( 1,793)
Other income (expense) - net
414
4,058
565
Income (loss) before income taxes
80,792
( 48,621)
(189,076)
Income tax (expense) benefit
(13,066)
( 6,543)
( 4,434)
Net income
$67,726
($42,078)
($185,076)
Income & Cash Flow Statements
43
INCOME STATEMENT FORMAT
CROX, INC. (simplified)
Consolidated Statement of Operations
Year Ended December 31 (in thousands)
2010
2009
2008
Revenues
$789,695
$645,767
$721,589
Cost of sales
(364,631)
(337,720)
(486,722)
Gross profit
425,064
308,047
234,867
Selling, general and administrative expense
(344,029)
(359,231)
(423,149)
Income from operations
81,258
( 51,184)
(188,282)
Interest expense
(
657)
( 1,495)
( 1,793)
Other income (expense) - net
414
4,058
565
Income (loss) before income taxes
80,792
( 48,621)
(189,076)
Income tax (expense) benefit
(13,066)
( 6,543)
( 4,434)
Net income
$67,726
($42,078)
($185,076)
Income (loss) per common share:
Basic
$ .78
$(0.49)
$(2.24)
Diluted
$ .76
$(0.49)
$(2.24)
Income & Cash Flow Statements
44
INCOME STATEMENT
QUESTIONS?
Income & Cash Flow Statements
45