1 / 62

Understanding the Corporate Annual Report: Nuts, Bolts, and a Few Loose Screws

Understanding the Corporate Annual Report: Nuts, Bolts, and a Few Loose Screws. Chapter 3. Chapter 3 will cover:. Statement of financial condition (balance sheet) Statement of shareholders’ equity. Statement of Financial Condition Shows:. What a firm o wns (assets) What a firm owes

justis
Download Presentation

Understanding the Corporate Annual Report: Nuts, Bolts, and a Few Loose Screws

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Understanding the Corporate Annual Report: Nuts, Bolts, and a Few Loose Screws Chapter 3 Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  2. Chapter 3 will cover: • Statement of financial condition (balance sheet) • Statement of shareholders’ equity Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  3. Statement of Financial Condition Shows: • What a firm owns (assets) • What a firm owes • to outsiders (liabilities) • to owners (shareholders’ equity) Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  4. Statement of Financial Condition is: Prepared at a specific point in time: • End of year • End of quarter Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  5. At all times. . . The balance sheet must balance • Assets = Liabilities + Shareholders’ Equity Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  6. Assets Current assets include: • Cash • Cash equivalents • Other assets expected to be converted into cash within one year or one operating cycle, whichever is longer Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  7. Operating Cycle • Time required to purchase/manufacture goods, sell the goods, and collect the cash Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  8. Cash Cash is cash in any form: • Awaiting deposit • On deposit Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  9. Cash Equivalents • Short-term, highly liquid investments • Readily convertible into cash Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  10. Marketable Securities • Short-term investments • Earn a return on cash not needed immediately • Valuation depends upon the intent of investment Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  11. Receivables (Accounts Receivable) • Customer balances outstanding on credit sales • Carried at net realizable value Net realizable value: • Actual amount less allowance for estimated uncollectible accounts Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  12. Allowance Account • Important in assessing earnings quality • There should be a consistent relationship among the changes in sales, accounts receivable, & the allowance account Caution flag raised if sales & accounts receivable are increasing, but allowance account is decreasing Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  13. Inventories Are items that are: • Held for sale • Used in the manufacture of products Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  14. A Retail Company • Has only one type of inventory • Merchandise inventories purchased for resale Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  15. A Manufacturing Company Has three types of inventory: • Raw materials • Work in process • Finished goods Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  16. Cost Flow Assumption for Inventory Determines: • Value on balance sheet • Expense of cost of goods sold on income statement Is important for analysis Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  17. Commonly Used Cost Flow Assumptions • LIFO (last in, first out) • FIFO (first in, first out) • Average cost Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  18. LIFO • Matches current costs with current revenue on income statement • Undervaluesbalance sheet inventory during inflation • Overvalues balance sheet inventory during deflation Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  19. FIFO • Values balance sheet inventory close to current cost • Understates cost of goods sold during inflation • Overstates cost of goods sold during deflation Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  20. For Taxes & Reporting Purposes: • Companies must use the same method if LIFO is chosen for tax purposes • Many companies have switched to LIFO during inflation to pay lower taxes (with higher cost of goods sold expense) Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  21. Accounting Convention of Conservatism If actual value falls below cost: • Inventory written down Inventory never written up in value Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  22. Common Size Balance Sheet • Expresses all items on balance sheet as percent of total assets • Useful in trend & structural analysis Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  23. Deferred Income Taxes Result from temporary differences in recognizing revenue & expense for: • Tax purposes (payments to I.R.S.) • Reporting purposes (preparation of financial statements) Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  24. Examples of Temporary Differences Accounting for: • Depreciation expense • Installment sales • Leases • Warranty & service contracts • Pensions & other employee benefits • Subsidiary investment earnings Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  25. Permanent Differences Do not affect deferred taxes Example: • Accounting for municipal bond revenue • Recognized as income for reporting but not tax Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  26. Deferred Taxes Can appear on balance sheet as: • Asset and/or liability • Current and/or noncurrent Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  27. Property, Plant, & Equipment • Tangible, long-lived assets • Also called fixed assets or capital assets • Produce benefit for more than one year Carrying value on balance sheet: • Cost less accumulated depreciation Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  28. Land is an Exception • Carried at cost; not depreciated • Assumed to have unlimited useful life Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  29. Goodwill • Results from one company acquiring another • Price paid more than fair market value of net identifiable assets (Identifiable assets less liabilities assumed) Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  30. Carrying Value of Goodwill • Company evaluates value • Decreased value requires write-off • Increased value is not recorded Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  31. Liabilities • Represent claims against assets Current liabilities: • Payment expected within one year (or one operating cycle, whichever is longer) Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  32. Accounts Payable • Short-term obligation • Arise from supplier credit Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  33. Short-term Borrowings Are promissory notes to: • Suppliers • Financial institutions Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  34. Taxes Payable Taxes expensed but not yet paid Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  35. Dividends Payable Dividends declared but not yet paid Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  36. Long-term Borrowings Obligations with maturities beyond one year: • Bonds • Long-term notes payable • Mortgages • Obligations under leases Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  37. Long-term Borrowings Continued: The current portion (amount due within one year) • Is included in current liabilities Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  38. Postemployment Liabilities Includes certain postemployment obligations For example: • Accrued amount for expected medical bills of retired employees & spouses Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  39. Pension Accounting Two types of plans: 1. Defined benefit: employer specifies amount contributed Example: • 401 (k) Pension expense is amount contributed Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  40. Pension Accounting Continued: 2. Defined benefit: specifies amount that will be paid to employees after retirement Pension expense is estimated based on assumptions Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  41. Information About Defined Benefit Plans • Is disclosed in notes • You may need several accounting courses to understand notes Or read this book Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  42. Leases Operating lease • Conventional rental agreement Capital lease • Treated as if it were a purchase of asset Requires recognition of asset & liability on balance sheet Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  43. Hybrid Securities Example: • Mandatorily redeemable preferred stock • Have characteristics of debt & equity • Carried between liabilities & equity on balance sheet Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  44. Shareholders’ Equity or Stockholders’ Equity • Ownership interests in company • Residual interest in assets that would remain after satisfying all of the liabilities Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  45. Preferred Stock • Usually carries fixed annual dividend • But no voting rights Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  46. Common Stock • Usually does not receive a fixed return (Dividends declared at discretion of company’s directors) • But has voting rights Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  47. Common Stock Continued: • Carried at par or stated value • Number of shares sold multiplied by par or stated value • Bears no relationship to market price Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  48. Retained Earnings • Sum of all company profits less any payments made to shareholders in cash or stock dividends • Are not piles of unused cash Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  49. Accumulated Other Comprehensive Income or Loss • Items “like” a revenue or expense but are not the same • “Unrealized gains & losses” • Not counted as part of earnings • Changes go to equity Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

  50. Accumulated Other Comprehensive Income or Loss Include: • Unrealized gains/losses in marketable securities classified as available for sale • Specific type of pension liability adjustment • Gains & losses on derivative financial instruments • Foreign currency translation adjustments Fraser/Ormiston: Understanding the Corporate Annual Report (C) 2002 Prentice Hall Business Publishing

More Related