The Financial Statements Chapter 1

Accounting – The Language of Business Accounting is the information system that... measures business activities, processes data into reports, and communicates results to decision makers.

The Accounting Equation Assets are the economic resources of a business that are expected to produce a benefit in the future. Liabilities are “outsider claims,” or economic obligations payable to outsiders. Owners’ equity represents the “insider claims” of a business.

The Accounting Equation Economic Resources = Claims to Economic Resources Assets = Liabilities + Owners’ Equity

The Accounting Equation Assets Owners’ Equity Liabilities Assets = Liabilities + Owners’ Equity

The Accounting Equation For a corporation, stockholders’ equity is divided into two main categories. Paid-in capital Retained earnings Assets = Liabilities + Stockholders’ equity Assets = Liabilities + Paid-in capital + Retained earnings

The Accounting Equation Paid-in capital is the amount invested in the corporation by its owners. The basic component of paid-in capital is common stock. Retained earnings is the amount earned by income-producing activities and kept for use in the business.

The Accounting Equation Revenues are increases in retained earnings from delivering goods or services to customers. Expenses are decreases in retained earnings that result from operations.

Components of Retained Earnings Revenues for the period – Expenses for = Net income (or Net loss) for the period Start of the period Beginning balance of retained earnings + or – Ending balance of retained earnings End of the period – Dividends for the period =

Information Reported on the Financial Statements 1. How well did the company perform (or operate) during the period? Revenues – Expenses Net income (Net loss) Income statement Question Answer Financial Statement 2. Why did the company’s retained earnings change during the period? Beg. retained earnings + Net income (or – Net loss) Ending retained earnings Statement of retained earnings

Information Reported on the Financial Statements Question Answer Financial Statement 3. What is the company’s financial position at the end of the period? Assets = Liabilities + Owners’ equity Balance sheet 4. How much cash did the company generate and spend during the period? Operating cash flows ± Investing cash flows ± Financing cash flows Increase or decrease in cash Statement of cash flows

Fossil, Inc. Consolidated Statement of Income Net sales revenue $546 $504 Cost of goods sold 274 248 Gross profit 272 256 Operating expenses: Selling and distribution expense 150 126 General and administrative expense 45 36 Total operating expenses 195 162 Operating income 77 94 Years Ended December 31, 2001 2000 Amounts in millions

Fossil, Inc. Consolidated Statement of Income Amounts in millions Years Ended December 31, 2001 2000 Operating income 77 94 Other revenue (expense): Write-off of investment (5) – Other income (expense) net 1 1 Income before income tax 73 95 Income tax expense 29 39 Net income $ 44 $ 56

The Income Statement: Measuring Operating Performance The income statement, statement of operations, or statement of earnings reports the company’s revenues, expenses, and net income or net loss for the period. Comprehensive income includes net income from the income statement plus additional items which do not affect net income.

Fossil, Inc. Consolidated Statement of Retained Earnings Balance, beginning of year $208 $152 Net earnings for the year 44 56 Less: Cash dividends declared (0) (0) Balance, end of year $252 $208 Years Ended December 31, 2001 2000 Amounts in millions

Fossil, Inc. Consolidated Balance Sheet Assets: Current assets: Cash and cash equivalents $ 68 $ 80 Short-term investments 5 11 Accounts receivable 74 63 Inventories 104 81 Prepaid expenses 19 18 Total current assets $270 $253 Investments 1 6 Property, plant, and equipment, net 90 42 Intangible and other assets 20 7 Total assets $381 $308 December 31, 2001 2000 Amounts in millions

Fossil, Inc. Consolidated Balance Sheet Amounts in millions December 31, 2001 2000 Liabilities: Current liabilities: Notes payable, short-term $ 16 $ 5 Accounts payable 21 19 Advertising payable 15 14 Compensation (salary) payable 8 6 Other accrued expenses payable 28 19 Income taxes payable 18 20 Total current liabilities $106 $ 83 Long-term liabilities 11 4 Total liabilities $117 $ 87

Fossil, Inc. Consolidated Balance Sheet Amounts in millions December 31, 2001 2000 Stockholders’ equity: Common stock $ 16 $ 15 Retained earnings 252 208 Other equity (4) (2) Total stockholders’ equity $264 $221 Total liabilities and stockholders’ equity $381 $308

Fossil, Inc. Consolidated Balance Sheet Total assets $381 = Total liabilities Current $106 Long-term 11 Total liabilities 117 + Total stockholders’ equity 264 Total liabilities and stockholders’ equity $381 2001 Must equal

The Statement of Cash Flows The statement of cash flows reports the company’s cash inflows and outflows from operating, investing, and financing activities.

Fossil, Inc. Statement of Cash Flows Operating activities: Net income $44 $56 Adjustments to reconcile net income to net cash from operating activities 5 (16) Net cash provided by operating activities $49 $40 Amounts in millions December 31, 2001 2000

Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Investing activities: Business acquisitions $(16) (2) Additions to property, plant, and equipment (56) (20) Sale of investments 6 – Other investing activities (2) (2) Net cash used for investing activities $(68) $(24)

Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Financing activities: Issuance of common stock $3 $ 1 Purchase and retirement of common stock (4) (28) Issuance of notes payable (borrowing) 9 – Other financing activities (1) – Net cash provided by financing activities $7 $(27)

Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Net increase in cash and cash equivalents $(12) $(11) Cash and cash equivalents, beginning of year 80 91 Cash and cash equivalents, end of year $ 68 $ 80