CLASSIFIED FINANCIAL STATEMENTS MR. MOHAMMED BABIKER - SPRING-15/16 Chapter4 5–15–1

Classified Balance Sheet MR. MOHAMMED BABIKER - SPRING-15/16 Objective 5  Identify and describe the basic components of a classified balance sheet 2

Classified Financial Statements MR. MOHAMMED BABIKER - SPRING-15/16... are general purpose financial statements divided into useful subcategories Classifying often makes financial statements more useful Investors and creditors study the relationships among the subcategories 3

Classified Balance Sheet MR. MOHAMMED BABIKER - SPRING-15/16 Assets, liabilities, and stockholders’ equity sections are subdivided into useful categories Most companies use similar subdivisions, but subdivisions usually depend upon the type of business 4

Assets MR. MOHAMMED BABIKER - SPRING-15/16 Often divided into four categories  Current assets  Investments  Property, plant, and equipment  Intangible assets The categories are listed according to how easily they are assumed to be converted into cash Some companies may group investments, intangible assets, and other miscellaneous assets as “other assets” 5

Current Assets MR. MOHAMMED BABIKER - SPRING-15/16 … cash and other assets that are reasonably expected to be converted to cash, sold, or consumed within one year or within the normal operating cycle of the business, whichever is longer 6

Normal Operating Cycle MR. MOHAMMED BABIKER - SPRING-15/16 The average time needed to go from cash to cash  Spend cash to buy merchandise inventory  Sell inventory on account  Collect cash The normal operating cycle is usually less than one year  Exceptions  Products requiring more than one year to produce Tobacco  Companies selling on the installment basis Appliances 7

Investments MR. MOHAMMED BABIKER - SPRING-15/16 … are assets, usually long-term, that are not used in the normal operation of the business and that management does not plan to convert to cash within the next year 8

Types of Investments MR. MOHAMMED BABIKER - SPRING-15/16 Securities held for investment Long-term notes receivable Land held for future use Plant or equipment not used in the business Special funds established to  Pay off debt  Purchase a building Large permanent investments in another company  For the purpose of controlling that company 9

Property, Plant, and Equipment MR. MOHAMMED BABIKER - SPRING-15/16 … includes long-term assets used in the continuing operation of the business These assets represent a place to operate (land and buildings) and equipment to produce, sell, deliver, and service the company’s goods 10

Classifying Natural Resources MR. MOHAMMED BABIKER - SPRING-15/16 Natural resources used in the regular course of business are listed in the property, plant, and equipment category  Forest lands  Oil and gas properties  Coal mines If the natural resources are not used in the course of running the business, they are listed in the investments category 11

Property, Plant, and Equipment MR. MOHAMMED BABIKER - SPRING-15/16 Also called  Operating assets  Fixed assets  Tangible assets  Long-lived assets  Plant assets The costs of these assets are depreciated  Spread over the periods they benefit Past depreciation is recorded in the Accumulated Depreciation accounts 12

Balance Sheet Presentation for Property, Plant, and Equipment MR. MOHAMMED BABIKER - SPRING-15/16 The order in which property, plant, and equipment items are listed on the balance sheet is not the same for every company Accounts are often combined to make the financial statements less cluttered Many companies simply report a total for property, plant, and equipment –Details are provided in a note to the financial statements 13

Intangible Assets MR. MOHAMMED BABIKER - SPRING-15/16 … are long-term assets that have no physical substance but have a value based on rights or privileges that belong to their owner These assets are recorded at cost  The cost is spread over the expected life of the right or privilege 14

Intangible Assets (cont’d) MR. MOHAMMED BABIKER - SPRING-15/16 Examples  Patents  Copyrights  Goodwill  Franchises  Trademarks 15

Long-Term Liabilities (cont’d) MR. MOHAMMED BABIKER - SPRING-15/16 Examples  Mortgages payable  Long-term notes  Bonds payable  Employee pension obligations  Long-term lease liabilities 16

Stockholders’ Equity Corporations are separate legal entities owned by their stockholders Stockholders’ equity section of the balance sheet has two parts  Contributed capital  Par value of issued stock  Paid-in capital in excess of par value per share  Retained earnings 17 MR. MOHAMMED BABIKER - SPRING-15/16

Discussion Q. How would a mortgage that is paid monthly for 120 months be classified? A. Current liability  The portion due during the next year or the current operating cycle Long-term liability  The portion due after next year or the current operating cycle 18 MR. MOHAMMED BABIKER - SPRING-15/16

Both are useful in planning business operations Gross Margin (cont’d) Management is interested in both the amount of gross margin and the percentage of gross margin 19 MR. MOHAMMED BABIKER - SPRING-15/16

Operating Expenses … are the expenses other than cost of goods sold that are incurred in running a business Operating expenses are grouped into categories  Selling expenses  General and administrative expenses Careful planning and control of operating expenses can improve a company’s profitability 20 MR. MOHAMMED BABIKER - SPRING-15/16

Selling Expenses Include  Cost of storing goods  Cost of preparing goods for sale  Advertising and promoting sales  Delivering goods to the buyer  Called freight out expense or delivery expense  General occupancy expenses (may be allocated among selling expenses and general and administrative expenses)  Rent expense  Utilities expense  Insurance expense 21 MR. MOHAMMED BABIKER - SPRING-15/16

General and Administrative Expenses Include  General office expenses  Accounting  Personnel  Credit and collections  Expenses that apply to overall operations  General occupancy expenses (may be allocated among general and administrative expenses and selling expenses)  Rent expense  Utilities expense  Insurance expense 22 MR. MOHAMMED BABIKER - SPRING-15/16

Income from Operations … is what remains of gross margin after operating expenses are deducted Also called operating income Represents the income from a company's normal, or main, business 23 MR. MOHAMMED BABIKER - SPRING-15/16

Earnings per Share … is the net income earned on each share of common stock Often called net income per share Unique to corporate reporting  Reported immediately below net income on the income statement 24 MR. MOHAMMED BABIKER - SPRING-15/16

Earnings per Share (cont’d) Used by investors as a quick way of assessing a company's  Profit earning success  Earnings in relation to the market price of its stock Calculate Shafer’s earnings per share Shafer Auto Parts Corporation had net income of $14,500 and 5,000 shares of common stock outstanding 25 MR. MOHAMMED BABIKER - SPRING-15/16

Paul Zarowin26 EPS  weight shares outstanding by fraction of year;  changes due to share repos, issuances, option exercises, etc.. 26

Reading and Graphing Real Company Income Statements As with balance sheet presentations, rarely will two companies have income statements that are exactly alike Graphical presentations of the income statement help visualize  Relative amounts  Components of the statements in relation to other components  Changes in the financial statements  Increases and decreases in each component 27 MR. MOHAMMED BABIKER - SPRING-15/16

Income Statement for Dell Computer Corporation 28 MR. MOHAMMED BABIKER - SPRING-15/16