Chapter 5
Communicating and
Interpreting Accounting
Information
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Financial Statement Formats
Let’s look at
the asset
section of a
classified
balance
sheet.
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Intrawest Corporation
Consolidated Balance Sheet
June 30,
2001
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other assets
Resort properties
Discontinued operations
Future income tax
Total current assets
Ski and resort operations
Resort properties
Discontinued properties
Accounts receivable
Other assets
Goodwill
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$
2000
86,430 $
78,985
82,536
72,233
105,545
78,966
329,177
254,801
103
4,168
4,445
607,856
489,533
813,741
784,725
371,451
314,481
7,080
9,521
50,416
35,262
86,640
67,999
19,128
15,834
$ 1,956,312
$ Ryerson
1,717,355
© McGraw-Hill
Limited, 2003
Intrawest Corporation
Consolidated Balance Sheet
June 30,
2001
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other assets
Resort properties
Discontinued operations
Future income tax
Total current assets
Ski and resort operations
Resort properties
Discontinued properties
Accounts receivable
Other assets
Goodwill
2000
Current
assets
86,430 $
78,985
are82,536
assets that
72,233
105,545
78,966
will
be turned
329,177
254,801
into
cash
or
103
expire
(be used
4,168
4,445
489,533
up)607,856
within one
813,741
784,725
year
or
the
371,451
314,481
operating
cycle,
7,080
9,521
50,416
35,262
whichever
is
86,640
67,999
longer. 15,834
19,128
$
$ 1,956,312 $ 1,717,355
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Intrawest Corporation
Consolidated Balance Sheet
June 30,
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other assets
Resort properties
Discontinued operations
Future income tax
Total current assets
Ski and resort operations
Resort properties
Discontinued properties
Accounts receivable
Other assets
Goodwill
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Property,
plant
2001
2000
and equipment
includes assets
$
86,430 $
78,985
with
82,536useful
72,233
105,545
78,966
lives
of more
329,177
254,801
than one
year
103
4,168
4,445
acquired
for
607,856
489,533
use
813,741in the
784,725
371,451
314,481
business
rather
7,080
9,521
than50,416
for resale.
35,262
86,640
67,999
19,128
15,834
$ 1,956,312 $ 1,717,355
© McGraw-Hill Ryerson Limited, 2003
Intrawest Corporation
Consolidated Balance Sheet
June 30,
2001
(in thousands, except share data and per shate data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other assets
Resort properties
Discontinued operations
Future income tax
Total current assets
Ski and resort operations
Resort properties
Discontinued properties
Accounts receivable
Other assets
Goodwill
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2000
$
86,430 $
78,985
82,536
72,233
105,545
78,966
329,177
254,801
103
4,168
4,445
607,856
489,533
813,741
784,725
371,451
314,481
7,080
9,521
50,416
35,262
86,640
67,999
19,128
15,834
$ 1,956,312
$ 1,717,355
© McGraw-Hill Ryerson
Limited, 2003
Other assets
may include
intangible
assets such as
patents,
copyrights, etc.
Let’s look at
the liability
section of a
classified
balance
sheet.
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Consolidated Balance Sheet
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
Deferred Revenue
Bank and Other Indebtedness
Resort
Discontinued Operations
Total Current Liabilities
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June 30
2001
2000
$ 146,464
81,537
$146,648
70,832
201,558
82
158,144
84
429,641
375,708
© McGraw-Hill Ryerson Limited, 2003
Consolidated Balance Sheet
(in thousands)
June 30,
2001
2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
$ 146,464
Deferred Revenue
81,537
Bank and Other Indebtedness
Resort
201,558
Discontinued Operations
82
Total Current Liabilities
429,641
$ 146,648
70,832
158,144
84
375,708
Current liabilities are obligations
that will be paid with current
assets, normally within one year.
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Consolidated Balance Sheet
June 30
(in thousands)
2001
2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
$ 146,464 $ 146,648
Long-term
liabilities
are
debts
that
Deferred Revenue
81,537
70,832
have
maturity
dates extending
Bank
and Other
Indebtedness
Resort
201,558
158,144
beyond
one year from the
balance
Discontinued Operations
82
84
sheet
date.
Total Current Liabilities
429,641
375,708
Long Term Liabilities:
Bank and Other Indebtedness
Resort
804,991
670,539
Discontinued Operations
3,363
4,394
Total Long Term Liabilities
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808,354
674,933
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Let’s look at
the
shareholders’
equity section
of a classified
balance sheet.
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Consolidated Balance Sheet
June 30
(in thousands)
2001
2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to Joint Venture Partner
Deferred Revenue
Future Income Tax
Non-Controlling Interest in Subsidiares
$
8,818 $
16,963
Share capital (or capital stock)
reflects
26,750
26,974
the monetary value of contributions
83,771
82,522
30,616
28,983
made by shareholders.
149,955
155,442
Shareholders' Equity
Capital Stock
Retained Earnings
Foreign Currency Translation Adjustment
Total shareholders' equity
LIABILITIES AND SHAREHOLDERS' EQUITY
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414,220
187,922
(33,780)
413,719
131,953
(34,400)
568,362
511,272
$ 1,956,312 $ 1,717,355
© McGraw-Hill Ryerson Limited, 2003
Consolidated Balance Sheet
June 30
(in thousands)
2001
2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to Joint Venture Partner
$
8,818 $ 16,963
Retained earnings are the accumulated
Deferred Revenue
26,750
26,974
of the company 83,771
less the82,522
Futureearnings
Income Tax
Non-Controlling
Interest in Subsidiares
30,616
28,983
accumulated
dividends declared.
149,955
155,442
Shareholders' Equity
Capital Stock
414,220
413,719
Retained Earnings
187,922
131,953
Foreign Currency Translation Adjustment
(33,780)
(34,400)
Total Shareholders' Equity
LIABILITIES AND SHAREHOLDERS' EQUITY
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568,362
511,272
$ 1,956,312 $ 1,717,355
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Liquidity
Liquidity refers to a
company’s ability
to meet its current
maturing debts.
Tests ofAssets
liquidity
Current
- Currentinclude:
Liabilities
= Working Capital
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Current Assets
 Current Liabilities
= Current Ratio
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Debt Contracts
When companies enter into a debt
contract, they often agree to specific
restrictions to protect the creditors.
Examples include maintaining a
specified cash balance or current
ratio.
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Classified Income Statement
Income statements have up to
four major sections:
 Continuing operations
 Discontinued operations
 Extraordinary items
 Earnings per share
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Continuing Operations
Now, let us look at two common
formats for presenting the
continuing operations section.
Single-step
Multiple-step
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DANIER LEATHER INC.
Consolidated Statement of Earnings
For the year ended June 30, 2001
(thousands of dollars)
Single Step
Revenue
$
Expenses:
Cost of sales
Selling, general and administrative
Interest
Provision for income taxes
82,818
60,902
583
9,037
Total expenses
Net earnings
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165,418
153,340
$
12,078
In the single-step
format, all
revenues and
gains are listed
first.
All expenses and
losses are listed
next and
subtracted from
total revenues to
compute net
income.
© McGraw-Hill Ryerson Limited, 2003
Revenue or net sales are gross
sales minus any discounts and
returns and during the period.
Cost of sales is the cost of
inventory sold during the
period.
Selling expenses include all
amounts incurred related to
sales activities.
General and admini. expenses
include all amounts incurred
for the overall business.
The provision for income taxes
represents the tax expense
related to the continuing
operations of the company.
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DANIER LEATHER INC.
Consolidated Statement of Earnings
For the year ended June 30, 2001
(thousands of dollars)
Multiple Step
Revenue
Cost of sales
$ 165,418
82,818
Gross profit
Selling, general and administrative
82,600
60,902
Earnings before interest and taxes
Interest expense - net
21,698
583
Earnings before income taxes
Provision for income taxes
21,115
9,037
Net earnings
$ 12,078
© McGraw-Hill Ryerson Limited, 2003
Classified Income Statement
Now that we have
discussed the
continuing
operations section,
let us discuss the
other major
sections of the
income statement.
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Discontinued Operations
Sale or abandonment of a segment of
a business.
Income or loss on the
segment’s operation for
the period.
Gain or loss on
disposal of the
segment.
Show net of tax effect.
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Extraordinary Items
Unusual
and
Infrequent
Outside
Management’s
Control
Show net of tax effect.
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Return on Equity (ROE)
Net
Average
ROE =
÷
Income
Shareholders' Equity
= $132,704 ÷
$421,846
=
31.5%
*($481,425 + 362,267)
÷ 2the 2001 ROE for Intrawest.
Compute
Intrawest’s 2001 net income is
$60,587. Beginning shareholders’
equity is $511,272. Ending
shareholders’ equity is $568,362.
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Return on Equity (ROE)
Net
Average
ROE
=
÷
Income
Shareholders' Equity
= $60,587 ÷
$539,817
=
11.2%
($511,272 + 568,362) ÷ 2
Compute the 2001 ROE for IntraWest.
IntraWest’s 2001 net income is
$60,587. Beginning shareholders’
equity is $511,272. Ending
shareholders’ equity is $568,362.
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Earnings Per Share (EPS)
EPS
Weighted Average
Net Income Available
Number of Shares
=
to Common
÷
Outstanding During the
Shareholders
Reporting Period
See Example
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DANIER LEATHER INC.
Consolidated Statement of Earnings
For the year ended June 30, 2001
(thousands of dollars, except per share amounts)
Revenue
Cost of sales
Gross profit
Selling, general and administrative
Earnings before interest and taxes
Interest expense - net
Earnings
per share
Earnings before income taxes
Provision for income taxes
Net earnings
Net earnings per share
Basic
Fully diluted
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$ 165,418
82,818
82,600
60,902
21,698
583
21,115
9,037
$
12,078
$1.75
$1.73
© McGraw-Hill Ryerson Limited, 2003
INTRAWEST CORPORATION
Consolidated Statements of Retained Earnings
For the years ended June 30, 2001 and 2000
(in thousands of dollars)
2001
Retained earnings, beginning of year
Net income
Reduction in redemption price of
non-resort preferred shares
Dividends
$
Retained earnings, end of year
$
2000
131,953
60,587
(4,618)
187,922
$
77,088
51,992
7,588
(4,715)
$ 131,953
This statement reports the change in retained earnings
that results from the net income (or loss) for the period
less any distribution of dividends.
Other changes that do not affect the operations of the
current period are also reported in this statement.
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Here is the
operating
activities
section of the
cash flow
statement.
Intrawest uses
the indirect
method. This
method
eliminates all
non-cash
components of
income.
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INTRAWEST CORPORATION
Consolidated Statement of Cash Flows
For the year ended June 30, 2001
(in thousands of dollars)
Cash provided by (used in):
Operations:
Income from continuing operations
$ 63,529
Items not affecting cash:
Depreciation and amortization
57,934
Future income taxes
1,027
Income from equity accounted investment
(2,790)
Gain on other disposals, net of write-offs
(2,671)
Non-controlling interest
9,904
Funds from continuing operations
126,933
Recovery of costs through real estate sales
Acquisition and development of properties
Increase in amounts receivable, net
Changes in non-cash operating working capital
Cash provided by continuing operations
Cash provided by discontinued operations
Net cash provided by operating activities
338,856
(469,816)
(13,670)
(29,948)
(47,645)
2,323
(45,322)
© McGraw-Hill Ryerson Limited, 2003
INTRAWEST CORPORATION
Consolidated Statement of Cash Flows
For the year ended June 30, 2001
(in thousands of dollars)
Here is the
rest of
Intrawest’s
cash flow
statement.
Investments:
Revenue producing properties
Ski and resort operation assets
Other assets
Business acquisitions, net of cash acquired
Proceeds from asset disposals
Net cash used in investing activities
Financing:
Proceeds from bank and other borrowings
Repayments on bank and other borrowings
Issue of common shares, net of issuance costs
Redemption and repurchase of preferred shares
Dividends paid
Distribtutions to non-controlling interests
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
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Cash and cash equivalents, end of year
$
(5,642)
(93,986)
(19,545)
(10,951)
8,216
(121,908)
994,902
(810,337)
4,467
(3,966)
(4,618)
(5,773)
174,675
7,445
78,985
$ Limited,
86,430
© McGraw-Hill Ryerson
2003
Notes to Financial Statements
Significant accounting policies used
by the company
Additional detail concerning the data
shown on the financial statements
Other relevant financial information
concerning long-term assets, longterm debt, pension funds, share
capital, subsequent events, etc.
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Players in the
Accounting
Communication
Process
Management
Preparation
CFO, CEO, Accounting Staff
Guided by GAAP
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.
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Players in the
Accounting
Communication
Process
Management
Preparation
CFO, CEO, Accounting Staff
Guided by GAAP
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
Information
Intermediaries
Analysis and Advice
Financial analysis,
Information services
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Financial analysts
make predictions
concerning
companies’ future
earnings and stock
prices.
© McGraw-Hill Ryerson Limited, 2003
Players in the
Accounting
Communication
Process
Management
Preparation
CFO, CEO, Accounting Staff
Guided by GAAP
Independent Auditors
Verification
Partners, Managers, Staff
Guided by GAAS
Information
Intermediaries
Analysis and Advice
Financial analysis,
Information services
Government Regulators
Verification
Provincial securities staff
Guided by securities
regulations
Users
Analysis and Decision
Investors, Lenders, etc.
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Public
companies only
© McGraw-Hill Ryerson Limited, 2003
Guiding Principles for
Communicating Useful Information
Primary Objective of External Financial Reporting
To provide
economic
information principle
to external users for
The
full-disclosure
decision making.
requires
(a) a complete set of
financial
statements
Relevance: Timely,
Predictive
and has Feedback Value
Reliability: Accurate, and
Unbiased, and Verifiable
(b) notes to the financial
Secondary Qualitative Characteristics
statements.
Comparability: Across businesses
Primary Qualitative Characteristics
Consistency: Over time
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The Disclosure Process
Press Releases are used to announce quarterly
and annual earnings as soon as the verified
figures are available.
Real World Excerpt
The Financial Post, September 11, 2001, C7
Intrawest keeps profit growth streak alive
VANCOUVER-Intrawest Corp., operator of such major North
American mountain resorts as British Columbia’s Whistler
Blackcomb, yesterday posted a 16.5% rise in profit for the past
fiscal year. . . . On the Toronto stock market yesterday, Intrawest
shares closed at $28.05, down 30 cents.
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Annual Reports
For privately held companies,
annual reports are simple
documents that include:



Four basic financial
statements
Related footnotes
Report of independent
accountants (auditor’s
opinion)
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Annual Reports
For public companies, annual reports
are more elaborate with greater SEC
requirements:

A Nonfinancial Section
A letter to the shareholders, a description of
management’s philosophy, products,
successes, etc.

A Financial Section
See next slide for a detailed listing . . .
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Annual Reports
The Financial Section of a public
company’s annual report includes:
• Summarized financial
data
• Management Discussion
and Analysis
• The four basic financial
statements
• Notes
• Independent Accountant’s
Report
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• Recent stock price
information
• Summaries of the
unaudited quarterly
financial data
• Lists of directors and
officers of the company
and relevant addresses
© McGraw-Hill Ryerson Limited, 2003
The End of Chapter 5
Maybe I should issue a
press release to disclose
my identity!
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