Chapter 2 ebook - JWCL006_c02_033-072.qxd 3/18/08 11:39 PM...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
The Financial Statements CHAPTER 2 KEY POINTS The following key points are emphasized in this chapter: The three basic activities of a business and how they are reFected in the ±nancial statements. The balance sheet, income statement, statement of shareholders’ equity, and statement of cash Fows and how these ±nancial statements are used. JWCL006_c02_033-072.qxd 3/18/08 11:39 PM Page 33 TEAM-B 204:JWCL006:ch02:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
34 Part 1 An Overview of Financial Accounting In 2006, Borders Group, Inc., one of the nation’s largest book retailers, reported a loss from operations of $137 million, a signiFcant change from a $173 million operating proFt in the prior year. This deterioration occurred even with an increase in revenue of $34 million. ±rom January 2006 to early ±ebruary 2007, Borders’ liabilities increased by over $300 million. Over the same period the company’s cash position increased by nearly $40 million, even though the company used nearly $175 million in cash to pay its shareholders in the form of dividends and stock repurchases. These kinds of activities, so vital to Borders or any other company, are re²ected in different ways on the Fnancial statements—the balance sheet, income statement, statement of shareholders’ equity, and statement of cash ²ows. In this chapter we discuss the Fnan- cial statements in more detail. As you read this chapter, consider the following questions. How do operating, in- vesting, and Fnancing decisions affect the dollar amounts reported on the Fnancial statements? What information on the Fnancial statements can be used to assess sol- vency and earning power? How might investors and creditors use the dollar values shown on the Fnancial statements to control and monitor the business decisions of managers? Why and how do Frm stock prices react to reported Fnancial information? Is management able to in²uence the preparation of these statements so that solvency and earning power are depicted attractively? Such questions give economic meaning to Fnancial statements and cannot be ignored by savvy managers and investors. CAPITAL FLOWS AND OPERATING, INVESTING, AND FINANCIAL ACTIVITIES ±igure 2–1 illustrates the ²ow of capital through the Frm, highlighting a number of con- cepts that we rely on heavily throughout the text. Management must (1) attract money, often called capital, from two sources: shareholders by selling the ownership (equity) of the firms and debtholders (creditors) through borrowings. Management normally attracts this capital by presenting historical and prospective information to these potential investors, explaining how it expects to use the capital to create returns for the investors. Shareholders (equity investors) expect returns in the form of price appreciation of their investments and/or dividends. Debtholders (debt investors) expect returns in the form of interest.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 40

Chapter 2 ebook - JWCL006_c02_033-072.qxd 3/18/08 11:39 PM...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online