A Further Look at Financial Statements Handout

A FURTHER LOOK AT FINANCIAL STATEMENTS Nature of the Classified Balance Sheet  Present a snapshot at a point in time  To improve understanding, companies group similar assets and similar liabilities together Standard Categories with their new subcategories: Assets Liabilities 1. Current assets 1. Current liabilities 2. Long-term liabilities 2. Long-term investments 3. Property, plant, and equipment Stockholders’ equity 4. Intangible assets None at this point in the class A FURTHER LOOK AT FINANCIAL STATEMENTS Assets Section: Current Asset Definition to Current Assets: Definition to Operating cycle:  Common types of Current Assets: o Cash o Short term Investments: sell within one year of the BS date o Accounts receivable; Notes receivable o Inventories o Supplies o Prepaid Insurance; Prepaid Rent  Companies list current asset accounts in the order they expect to convert them into cash called liquidity. Long-Term Investments –do not sell within one year of the BS date Property, Plant, and Equipment (PPE)  Long useful life  Currently used in operations  Includes land, buildings, equipment, delivery vehicles, and furniture  Depreciation – allocating the cost of assets to a number of years  Accumulated depreciation – total amount of depreciation expensed thus far in the asset’s life – contra asset Reporting Property, Plant, and Equipment: Intangibles  Assets that do not have a physical substance  Includes goodwill, patents, copyrights, and trademarks or trade name  Sometimes Intangible assets are called “Other assets” PRACTICE: Baxter Hoffman recently received the following information related to Hoffman Corporation’s December 31, 2017, balance sheet. Short-term Investment 1,000 CA Prepaid insurance 2,300 CA Inventory 3,400 CA Patents 7,800 I Cash 800 CA Accumulated depreciation—Equipment 10,700 PPE Equipment Accounts receivable Stock Investment Liabilities Section 12,700 PPE 1,100 2,100 LTI CA Current Liabilities  Obligations the company to be paid within the next year or operating cycle, whichever is longer  Common examples are o Accounts payable o Salaries and wages payable o Notes payable o Interest payable o Income taxes payable o Unearned revenue o Current maturities of long-term obligations – definition: payments to be made within the next year on long-term obligations Reporting Current Liabilities Long-Term Liabilities  Obligations a company expect to pay after one year  Includes the following accounting titles  Bonds payable  Mortgages payable  Long-term notes payable  Lease payable  Pension payable Reporting Long Term Liabilities Which of the following is not a long-term liability? a. Bonds payable. b. c. d. Current maturities of long-term debt. Long-term notes payable. Mortgages payable. STOCKHOLDERS’ EQUITY • Common stock - investments of assets into the business by the stockholders • Retained earnings - income retained for use in the business BE2.1 The following are the major balance sheet classifications: Current liabilities (CL) Current assets (CA) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Common stock (CS) Intangible assets (IA) Retained earnings (RE) Match each of the following accounts to its proper balance sheet classification. Accounts payable Buildings Unearned Sales Revenue Supplies Accumulated depreciation Income taxes payable Land Cash Mortgage Payable (due in 3 years) Goodwill Patents Inventory Notes Payable Common Stock Retained earnings Salaries and Wages Expense Trademarks Interest revenue Bonds payable Mortgage Payable (due in 6 months) Stock investments (to be sold in 7 months) Prepaid Rent E2.7 Suppose the following items were taken from the 2022 financial statements of Texas Instruments, Inc. (All dollars are in millions.) Prepare a classified balance sheet. Common Stock SHE 2,826 Debt investments (short) CA 1,743 3,547 Retained earnings SHE 6,896 Accumulated Depreciation – equipment ( PPE) Prepaid rent CA 164 Income taxes payable CL 128 Accounts payable CL 1,459 Accounts receivable CA 1,823 Equipment PPE 6,705 Cash CA 1,182 Patents IA 2,210 Inventory CA 1,202 Stock investments (long term) LTi 637 Notes payable (long term) LTL 810 Instructions prepare a classified balance sheet in good form as of December 31, 2022. Ratio Analysis • • • • Ratio analysis expresses the relationship among selected items of financial statement data A ratio expresses the mathematical relationship between one quantity and another A single ratio by itself is not very meaningful Percentage, ratio 2:1, $2.10; two times 1. Earnings per share • Earnings per share • Often referred to as EPS • Is a profitability ratio, numbers come the Income Statement • Measures the net income earned on each share of common stock. • Earnings per Share = Net Income – Preferred Dividends Weighted-Average Common Shares Outstanding WACSO computation: Beginning cs outstanding + ending cs outstanding 2 Practice: For 2020 Stoneland Corporation reported net income $26,000; net sales $400,000; and average shares outstanding 6,000. There were preferred stock dividends of $2,000. What was the 2020 earnings per share? a. $4.00 b. $0.06 c. $16.67 d. $66.67 v 2. Working Capital: 3. Current Ratio 4. Debt to assets Ratio: DO IT! 2.2 (LO 2), AP The following information is available for Nguoi Corporation. Compute ratios and analyze. 2022 2021 Current assets $ 54,000 $ 36,000 Total assets 240,000 205,000 Current liabilities 22,000 30,000 Total liabilities 72,000 100,000 Net income 80,000 40,000 Net cash provided by operating activities 90,000 56,000 Preferred dividends 6,000 6,000 Common dividends 3,000 1,500 Expenditures on property, plant, and equipment 27,000 12,000 Common shares outstanding at beginning of year 40,000 30,000 Common shares outstanding at end of year 75,000 40,000 a. Compute earnings per share for 2022 and 2021 for Nguoi, and comment on the change. Nguoi’s primary competitor, Matisse Corporation, had earnings per share of $1 per share in 2022. Comment on the difference in the ratios of the two companies. Net Income – Preferred Dividends = EPS Ave Common Shares Outstanding 2022 2021 b. Compute the current ratio and debt to assets ratio for each year, and comment on the changes. 2022 Current Assets = Current ratio Current liabilities Total liabilities = Debt to asset ratio Total assets Accounting Principles - Chapter 2 Terms 2021 THE STANDARD-SETTING ENVIRONMENT: Generally Accepted Accounting Principles (GAAP) – A set of rules and practices, having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purpose. Standard-setting bodies determine these guidelines:  Securities and Exchange Commission (SEC)  Financial Accounting Standards Board (FASB)  International Accounting Standards Board (IASB)  Public Company Accounting Oversight Board (PCAOB) QUALITIES OF USEFUL INFORMATION: According to FASB – useful information should possess two fundamental qualities: Relevance and faithful representation RELEVANCE: Relevance – accounting information that would make a difference in a business decision  Predictive value – Accounting information that helps provide accurate expectations about the future.  Confirmatory value – accounting information that confirms or corrects prior expectations  Materiality – is a company-specific aspect. An item is material when its size makes it likely to influence the decision of an investor or a creditor. FAITHFUL REPRESENTATION: Faithful representation – information accurately depicts what really happened.  Complete – nothing important has been omitted  Neutral – is not biased toward one position or another  Free from error – explanatory on its own ENHANCING QUALITIES: 1. Comparability – results when different companies use the same accounting principles. 2. Verifiable – information is verifiable if independent observers, using the same methods, obtain similar results. 3. Understandability – information is presented in a clear and concise fashion. 4. Consistency – a company uses the same accounting principles and methods from year to year. 5. Timely – for accounting information to have relevance, it must be timely. ASSUMPTIONS: Monetary Unit – requires that only those things that can be expressed in money are included in the accounting records. Economic Entity – States that every economic entity can be separately identified and accounted for. Periodicity Assumption - States that the life of a business can be divided into artificial time periods. Going Concern Assumption - The business will remain in operation for the foreseeable future. PRINCIPLES: Historical Cost – or cost principle, dictates that companies record assets at their cost. Fair Value – indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Full Disclosure Principle – requires that companies disclose all circumstances and events that would make a difference to financial statement users. Cost Constraint – Accounting standard-setters weigh the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available. DO IT! 2.3 The following characteristics, assumptions, principles, and constraint guide the FASB when it creates accounting standards. Identify financial accounting concepts and principles. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Historical cost principle Consistency Full disclosure principle Monetary unit assumption Materiality Economic entity assumption Cost constraint Match each item above with a description below. 1. Items not easily quantified in dollar terms are not reported in the financial statements. 2. Accounting information must be complete, neutral, and free from error. 3. Personal transactions are not mixed with the company’s transactions. 4. The cost to provide information should be weighed against the benefit that users will gain from having the information available. 5. A company’s use of the same accounting principles from year to year. 6. Assets are recorded and reported at original purchase price. 7. Accounting information should help users predict future events, and should confirm or correct prior expectations. 8. The life of a business can be divided into artificial segments of time. 9. The reporting of all information that would make a difference to financial statement users. 10. The judgment concerning whether an item’s size makes it likely to influence a decisionmaker. 11. Assumes a business will remain in operation for the foreseeable future. 12. Different companies use the same accounting principles. E2.13 Presented below are the assumptions and principles discussed in this chapter. Identify accounting assumptions and principles.  1. Full disclosure principle  2. Going concern assumption  3. Monetary unit assumption  4. Periodicity assumption  5. Historical cost principle  6. Economic entity assumption  Instructions - Identify by number the accounting assumption or principle that is described below. Do not use a number more than once. a. Belief that a company will remain in business for the foreseeable future. (Note: Do not use the historical cost principle.) b. Indicates that personal and business recordkeeping should be separately maintained. c. Only those things that can be expressed in money are included in the accounting records. d. Separates financial information into time periods for reporting purposes. e. Measurement basis used when a reliable estimate of fair value is not available. f. Dictates that companies should disclose all circumstances and events that make a difference to financial statement users.