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ch02jr4thed for students - Tools for Business Decision...

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Unformatted text preview: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso Financial Accounting: CHAPTER 2 A Further Look at Financial Statements 1 Chapter 2 A Further Look at Financial Statements Always bring the following "tools" to class: Your text book. The Tootsie Roll financial statements. (They can be obtained on the web.) The power point slides (or whatever note taking material you prefer). 2 Classified Balance Sheet Generally contains the following classifications: Assets Liabilities Current Assets LongTerm Investments Property, Plant, and Equipment Intangible Assets Other assets Current Liabilities LongTerm Liabilities Contributed capital Retained earnings Stockholders' Equity 3 Current Assets Assets that are expected to be converted to cash or used up within one year. Current assets are listed in order of liquidity. Examples (in order): Cash Short-term investments Receivables I nventories Supplies Prepaid expenses 4 LongTerm Investments Investments of stocks and bonds of other corporations which are normally held for many years. Investments in longterm assets such as land or buildings that are not currently being used in the company's operations 5 Property, Plant, and Equipment Assets with relatively long useful lives. Assets used in operating the business. Examples: land buildings machinery delivery equipment furniture and fixtures 6 Depreciation is... Practice of allocating an asset' s full purchase price to a number of years instead of expensing full cost in year of purchase. Accumulated Depreciation... Shows the total amount of depreciation that the company has expensed thus far in the asset' s life. 7 Assets That A Company Depreciates... Should be shown at cost less accumulated depreciation 8 Intangible Assets Intangible Assets have value because of the exclusive rights or privileges they give the company. Non-current assets Have no physical substance Examples: patents copyrights trademarks or trade names franchise 9 Other Assets Any assets that do not fit in any other category. For example: a piece of equipment no longer used in the business, awaiting sale. 10 Current Liabilities Obligations that are supposed to be paid within the coming year... accounts payable bank loans payable current maturities of long-term bank loans payable interest payable taxes payable wages payable 11 Long-Term Liabilities Debts expected to be paid after one year Examples... bonds payable mortgages payable long-term notes payable lease liabilities and obligations under employee pension plans 12 Stockholders' Equity Contributed capital Capital stock - investments of assets in the business by the stockholders Retained earnings - earnings kept for use in the business 13 Review For 2005 Stoneland Corporation reported net income $24,000; net sales $400,000; and average shares outstanding 6,000. There were no preferred stock dividends. What was 2005 earnings per share? a. $4.00 b. $ .06 c. $16.67 d. $66.67 14 Review For 2005 Stoneland Corporation reported net income $24,000; net sales $400,000; and average shares outstanding 6,000. There were no preferred stock dividends. What was 2005 earnings per share? a. $4.00 b. $ .06 c. $16.67 d. $66.67 15 3 11 Statement of Retained Earnings From Chapter 1: The Statement of Retained Earnings describes the changes in the retained earnings for the period . . . Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, Dec. 31 $ 0 6,800 6,800 600 $ 6,200 16 Statement of Stockholders' Equity Stockholders' equity has two parts: Common stock and Retained Earnings, Thus, The Statement of Stockholders' Equity reports ALL CHANGES in the common stock and retained earnings accounts... 17 4 11 Statement of Stockholders' Equity 18 Ratio Analysis Expresses relationship among selected items of financial statement data Relationship can be expressed in terms of... Percentage Rate Proportion 19 Ratio Analysis Profitability Ratios Measures the income or operating success of a company for a given period of time 20 2 11 Earnings Per Share How does the company's earning performance compare with that of previous years (on a per share basis)? EPS= Net incomePreferred stock dividends Average common shares outstanding Higher value = improved performance 21 Liquidity Ratios Measure of shortterm ability to pay maturing obligations and to meet unexpected needs for cash Working capital Current ratio 22 Working Capital Measure of short-term ability to pay obligations Difference between current assets and current liabilities Working Capital = Current Assets - Current Liabilities 23 Current Ratio Current Ratio = Current Assets Current Liabilities More dependable indicator Does not consider composition of current assets 24 Solvency Ratios Measures the ability of the company to survive over a long period of time 25 Solvency Ratios Measure the ability of a company to survive over a long period of time Debt to Total Asset Ratio = Total Debts Total Assets Measures percentage of assets financed by creditors rather than stockholders 26 Ratio Analysis Use Multiple Measures! Intracompany comparisons covering two Intracompany comparisons years of the same company Industry average comparisons based on Industry average comparisons average ratios for a particular industry Intercompany comparisons based on Intercompany comparisons comparisons with a competitor in the same industry 27 5 11 Review Statement of Cash Flows Provides information about sources and uses of cash, organized as: Operating Activities Investing Activities Financing Activities 28 Free Cash Flow Free Cash Flow Cash Provided _ Capital By Operations Expenditures _ Cash Dividends 29 6 11 Primary Accounting Setting Body in the U.S. Financial Accounting Standards Board 30 U.S. Government Agency That Oversees Financial Markets Securities Exchange Commission 31 GAAP Are the Rules The FASB makes the rules. The SEC enforces the rules. IASB = International Accounting Standards Board Review What organization issues United States accounting standards? a. Financial Accounting Standards Board b. Internal Accounting Standards Committee c. Internal Auditing Standards Committee d. Securities and Exchange Committee 33 Review What organization issues United States accounting standards? a. Financial Accounting Standards Board b. Internal Accounting Standards Committee c. Internal Auditing Standards Committee d. Securities and Exchange Committee 34 7 11 Basic Terms Relevance - information makes a difference in decisions Reliability - information must be free of error and bias Comparability - ability to compare information of different companies because they use the same accounting principles Consistency - use of same accounting principles and methods from year to year within the same company y y y y 35 Characteristics of Useful Information 36 Accounting Assumptions Accounting Principles Constraints In Accounting Illustration 23 Review What is the primary criterion by which accounting information can be judged? a. Consistency b. Predictive Value c. Usefulness for decision making d. Comparability 39 Review What is the primary criterion by which accounting information can be judged? a. Consistency b. Predictive Value c. Usefulness for decision making d. Comparability 40 Review What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and revenues? a. Comparability b. Materiality c. Conservatism d. Consistency 41 Review What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and revenues? a. Comparability b. Materiality c. Conservatism d. Consistency 42 Review Which is not an indicator of profitability? a. Current ratio b. Earnings per share c. Net income 43 Review Which is not an indicator of profitability? a. Current ratio b. Earnings per share c. Net income 44 Review The balance in retained earnings is not affected by: a. Net income. b. Issuance of common stock. c. Dividends. d. Net Loss. 45 Review The balance in retained earnings is not affected by: a. Net income. a. Issuance of common stock. a. Dividends. b. Net Loss. 46 Selected financial information for Drummond Company at 12/31/2006: Cash Receivables (net) Inventory Long-term assets Total Assets Current Liabilities Long-term debt Total Liabilities $60,000 $80,000 $70,000 $330,000 $540,000 $140,000 $130,000 $270,000 Review Let's compute current ratio . . . 47 Review Compute Current Ratio Cash Receivables (net) Inventory Long-term assets Total Assets Current Liabilities Long-term debt Total Liabilities $60,000 $80,000 $70,000 $330,000 $540,000 $140,000 $130,000 $270,000 $210,000 $140,000 = 1.5 : 1 48 Review Selected financial information for Drummond Company at 12/31/2006: Cash Receivables (net) Inventory Long-term assets Total Assets Current Liabilities Long-term debt Total Liabilities $60,000 $80,000 $70,000 $330,000 $540,000 $140,000 $130,000 $270,000 Compute debt to total assets . . . 49 Review Cash Receivables (net) Inventory Long-term assets Total Assets Current Liabilities Long-term debt Total Liabilities $60,000 $80,000 $70,000 $330,000 $540,000 $140,000 $130,000 $270,000 $270,000 $540,000 = 50% 50 ...
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This document was uploaded on 10/07/2008.

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