X100 Introduction to Business Accounting - 'The Financial Statements' X100 Introduction to Business Accounting ‘The Financial Statements’ Professor Kenneth EA Wendeln X100 X100 Introduction to Business

Accounting - 'The Financial Statements' Key Documents: Balance Sheet  Statement of Financial Position - at end of periods Income Statement  Profit and Loss Statement – between periods Statement of Cash Flow  Operating, Investing & Financing – between periods Statement of Stockholders’ Equity Annual Report Including Footnotes & Management Discussion SEC Filings – Publicly Traded Companies  10-K (annual)  10-Q (quarterly)  8-K (changes) X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' The Balance Sheet Summary of the FINANCIAL POSITION of a company . . . . on a PARTICULAR DATE. Assets: Company’s economic resources - cash, accounts receivable, inventory, land, buildings, equipment, and intangible items. Liabilities: creditor claims - accounts payable, notes payable, mortgages payable, ... Owners’ Equity: net assets ‘left over’ - for the owners after all obligations have been satisfied. What are the resources of the company? What are the company’s existing obligations? What are the company’s net assets? X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Key Terms Balance Sheet Accounting - 'The Financial Statements' Key Terms Balance Sheet Assets: economic resources that are owned or controlled by the company. Liabilities: claims of creditors on a company’s assets. Accounts Receivable: a current asset representing money due for services performed or merchandise sold on credit. Accounts Payable: dollar value owed by a firm to others. Intangible Assets: long-lived assets with no physical substance that are used in the business such as acquired goodwill, licenses, patents and franchises. Contributed Capital: portion of owners’ net equity contributed by investor (the owners) in exchange for shares of stock. Dividends: profit distributions to the owners (stockholders). Retained Earnings: portion of a company’s owners’ equity that has been earned from profitable operations but has not been distributed to shareholders as dividends. Stockholders’ Equity: owners’ equity section–‘what’s left over’ X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Zimmer Holdings, Inc Consolidated Balance Sheets Accounting - 'The Financial Statements' Zimmer Holdings, Inc Consolidated Balance Sheets Assets Current Long-term  Liabilities Current Long-term  Stockholders Equity  http://www.zimmer.com X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Balance Sheet Limitations Accounting - 'The Financial Statements' Balance Sheet Limitations Assets are recorded at historical value. Transaction must occur to recognize an asset. Recognizes only assets that can be expressed in monetary terms. Owners Equity on the Balance Sheet is usually LESS than company’s ACTUAL market value X100 Accounting - 'The Financial Statements' X100 Introduction to Business 25

The Accounting Equation Accounting - 'The Financial Statements' The Accounting Equation Resources Sources of Funding Assets = Liabilities + Owners’ Equity Everything owned Claims against assets What’s left for owners/stockholders Resources to use to generate revenues Creditors’ claims against resources Owners’ Claims - or ‘what’s left over’ = + X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Zimmer 2006 Balance Sheet - Assets Accounting - 'The Financial Statements' Zimmer 2006 Balance Sheet - Assets On this date On this year-end Current assets < 1yr In order of liquidity Long-term assets > 1yr Needed over extended period X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Zimmer 2006 - Balance Sheet Liabilities & Shareholders’ Equity Accounting - 'The Financial Statements' 2006 2005 Current liabilities Due in < 1 year Long-term Liabilities Over extended period Contributed Capital = 1942.8 Par value + paid in capital – treasury stock (2.5 + 2743.2 – 802.9) Accumulated Earnings not paid as dividends to shareholders A = L + OE 5,974.4 1,051.2 4923.5 X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' The Accounting Equation Effect of Transactions A = L + OE Invest in company Borrow money Pay off a note Purchase equipment Borrow funds to settle a debt X100 Accounting - 'The Financial Statements' X100 Introduction to Business 12

Categories of Cash Flows Accounting - 'The Financial Statements' Categories of Cash Flows Cash flow is the difference between cash coming in and cash going out of a business. Cash flow statement reports cash flow as it relates to a firm’s three major activities: Operations – cash transactions associated with running of the business. (Income statement adjusted for ‘non-cash’ items such as: changes in accounts receivable, accounts payable, inventory; depreciation; etc) Investments – cash used in or provided by the firm’s investment activities in the company. Financing – cash raised from the issuance of new debt or equity capital, or cash used to pay past debts and stockholder dividends. X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Statement of Cash Flows Investing Activities (Interest earned) Financing Activities (sell stock, new loans) Operating Activities (cash from sales) CASH INFLOWS CASH OUTFLOWS Financing Activities (dividend, pay loans buy back stock) Investing Activities (buy equipment) Operating Activities (expenses) X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Zimmer Holdings, Inc Statement of Cash Flows Accounting - 'The Financial Statements' Operations Net earnings from Income Statement adjusted for non-cash items  Investing  Financing Transactions with Lenders & Owners  Net change in cash = X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Zimmer 2006 – Cash Flows Operating Activities Accounting - 'The Financial Statements' from Income Statement Adjustments for ‘non-cash’ items  Cash flow provided by operating activities = net earnings adjusted for ‘non-cash’ items X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Zimmer 2006 – Cash Flows Investing & Financing Activities Accounting - 'The Financial Statements' 2006 2005 2004 Additions to or proceeds from sale of Assets  Transactions with lenders & owners  = net change in cash Summary explains the ‘change in cash’ from Operating, Investing and Financing activities X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' The Cash Flow Cycle Sales Customers Accounts Receivable Inventory Cash X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Financial Statement Articulation Accounting - 'The Financial Statements' Financial Statement Articulation Cash - Op. Act. $ 1040.7 Cash - Inv. Act. (287.0) Cash - Fin. Act. (730.7) Exch Rate Adj. 9.5 Net increase 32.5 Beg. cash 233.2 End. cash $ 265.7 Cash Flow Statement 2006 Cash $ 233.2 Other 5488.7 Assets $ 5721.9 Minority Int $ 2.3 Liabilities 1036.8 Cont’d Cap’l 2599.5 R/E 1934.0 Compr Inc 149.3 Liab & SE $ 5721.9 Balance Sheet 12/31/05 Zimmer Holdings, Inc 2006 Annual Report Dollars in millions Articulation is how the Financial Statements tie and ‘work together’ Balance Sheet 12/31/06 Revenues $ 3495.4 Expenses 2660.9 Net income $ 834.5 Income Statement 2006 Cash $ 265.7 Other 5708.7 Assets $ 5974.4 Minority Int $ 2.7 Liabilities 1051.2 Cont’d Cap’l 1942.8 R/E 2768.5 Compr Inc 209.2 Liab &SE $ 5974.4 R/E 12/31/05 $ 1934.0 Net income 834.5 Dividends 0.0 R/E 12/31/06 $ 2768.5 Stockholder Equity 2006 X100 Accounting - 'The Financial Statements' X100 Introduction to Business 52

Notes to the Financial Statements Accounting - 'The Financial Statements' Notes to the Financial Statements Four general types of notes to financial statements: Accounting policies: summary of significant assumptions, estimates, and judgments. Additional information and details about the summary totals. Supplementary information required by the FASB or the SEC. Disclosure of important information that is NOT recognized in the financial statements. Notes are an acceptable way to convey information to users when the information is too uncertain or needs further explanation. X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Zimmer 2006 Notes to the Financial Statements Accounting - 'The Financial Statements' Zimmer 2006 Notes to the Financial Statements Accounting Policies Additional Details X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Accounting - 'The Financial Statements' Zimmer 2006 Notes to the Financial Statements Accounting - 'The Financial Statements' Required Supplementary Information Important Non-financial Disclosures X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Tax Accounting Important Considerations Accounting - 'The Financial Statements' Tax Accounting Important Considerations Tax accounting is driven by IRS and other tax regulations - which are different than GAAP Realization of Revenue Valuation of Real Property & Intangible Assets Depreciation and Amortization Disallowed Expenses and Accruals Credits and Other Incentives Resulting in TEMPORARY & Permanent differences between tax and GAAP » Deferred tax assets & liabilities « X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Financial Statements - Summary Accounting - 'The Financial Statements' Financial Statements - Summary Audience – external as well as the internal users Purpose – good information for intelligent decision making Requires – ‘transactions’ & an accounting system in accordance with GAAP GAAP – ‘authoritative’ guidelines for accounting in the US (FASB, AICPA) Accrual-based – recorded as ‘earned’ or ‘incurred’ – GAAP Requires – matching principle, revenue recognition & time period Responsibility – the firm’s management Opinion – provided by CPA Results in – annual & financial reports, 10-K, 10-Q, 8-K . . . Balance Sheet – statement of assets, liabilities & owners equity at ‘end of period’ Income Statement – firm’s revenues minus expenses over time – ‘between two periods’ Statement of Cash Flow – cash coming in & going out of a firm categorized by operating, investing & financing activities Notes – integral to financial statements providing policy, disclosure & supplemental information Tax Accounting – creates temporary differences from GAAP as ‘deferred’ tax assets & liabilities X100 Accounting - 'The Financial Statements' X100 Introduction to Business

Zimmer Holdings, Inc Annual Reports and 10-K Filings Accounting - 'The Financial Statements' Zimmer Holdings, Inc Annual Reports and 10-K Filings http://www.zimmer.com http://www.sec.gov/edgar.shtml X100 Accounting - 'The Financial Statements' X100 Introduction to Business