· 1 CORPORATE FINANCIAL REPORTING Chapters 2, 3 & 4

Introduction2 H OW D ID A NDETONY C ORP. D O IN S EPTEMBER? What would we look at to decide?

Introduction3 H OW E ASY W OULD I T B E T O T RICK O UR A CCOUNTANT ?

Introduction4 O THER P OINTS T O D ISCUSS Redundancy in financial statements Bookkeeping stuff

The Balance Sheet5 T HE B ALANCE S HEET ASSETS LIABILITIES Current assets Current liabilities Noncurrent assets Non current liabilities (usually are “sub groups” OWNERS’ EQUITY like PP&E, intangibles, etc.) Paid in capital Retained earnings Other comprehensive income

The Balance Sheet6 F INANCIAL R EPORTING I S A LL A BOUT T HREE T HINGS: Recognition Valuation (measurement) Classification

The Balance Sheet7 A SSETS A RE: economic resources that will provide the company with future economic benefits. Assets have three characteristics:

The Balance Sheet8 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable,

The Balance Sheet9 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, $

The Balance Sheet10 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of

The Balance Sheet11 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of 3. a past transaction.

The Balance Sheet12 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of economic 3. a past transaction. exchange

The Balance Sheet13 A SSET M EASUREMENT ( V ALUATION): Originally what the asset cost – after that it gets wild – FASB is moving toward fair value for all assets, but is not there yet.

The Balance Sheet14 L IABILITIES A RE: obligations to give an asset to, or perform a service for, another entity in the future. Liabilities have four characteristics:

The Balance Sheet15 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which

The Balance Sheet16 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable $

The Balance Sheet17 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and

The Balance Sheet18 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and 4. is the result of a past transaction. (economic exchange)

The Balance Sheet19 L IABILITY M EASUREMENT (V ALUATION ) Almost always “present value” – in theory, the economic amount the company would have to pay today to satisfy the debt.

The Balance Sheet20 C ONTINGUENT L IABILITY lawsuit warranties (guarantees) asset retirement obligations (ARO) sick & vacation pay etc.

The Balance Sheet21 C ONTINGUENT L IABILITY

The Balance Sheet22 O WNER’S E QUITY Whatever.

The Balance Sheet23 B OOK V ALUE A commonly used term meaning owners’ equity. Book value per share - also commonly used (owners’ equity ÷ no. of shares of stock)

The Balance Sheet24 B ALANCE S HEET “ F LAW” The balance sheet does not always show assets and liabilities well.

The Balance Sheet25 B ALANCE S HEET “ F LAW” Our company issues 1,000 shares of stock to investors for $100/share. The price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

The Balance Sheet26 B ALANCE S HEET “ F LAW” Our company issues buys 1,000 shares of CROX for $26/share. That price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

The Balance Sheet27 B ALANCE S HEET “ F LAW” The CROX stock goes up to $30/share, our accountant puts the gain in an account that increases Owners’ equity. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

The Balance Sheet28 B ALANCE S HEET “ F LAW” Our company buys a piece of land for $20,000 and signs a 30 year mortgage for the entire amount (CROX stock unchanged). What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

The Balance Sheet29 B ALANCE S HEET “ F LAW” The land goes up in value to $50,000; our accountant ignores the increase in value completely (CROX stock unchanged). What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

The Balance Sheet30 T HE B ALANCE S HEET Questions?

M EASURING I NCOME Economist’s approach Accountant’s approach (commonly): Cash basis Accrual basis 31Income & Cash Flow Statements

R EVENUE C ASH V S. A CCRUAL CASH BASIS: Revenue represents an increase in CASH as a result of providing goods or services to customers. ACCRUAL BASIS: Revenue is an increase in NET ASSETS (assets - liabilities) as a result of providing goods or services to customers. 32Income & Cash Flow Statements

R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS Cash basis: to show revenue on the income statement the company must have received cash from its customer as a result of providing goods or services to the customer. 33Income & Cash Flow Statements

R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS Accrual basis-the SEC says 4 criteria must be met: 1. there is persuasive evidence of an arrangement, 2. delivery has occurred or services have been rendered, 3. the seller’s price is fixed or determinable, & 4. collectability is reasonably assured. 34Income & Cash Flow Statements

R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS We could condense those into two criteria: 1. The company has received a measurable asset from the customer (SEC’s criteria 1, 3 & 4) and 2. The revenue is earned - meaning that the company has done what the customer is paying it to do (SEC’s criterion 2). 35Income & Cash Flow Statements

R EVENUE C ASH V S. A CCRUAL YOU WORK GET PAID ON AMOUNT OctoberNov. 1, ,000 NovemberDec. 1, ,000 DecemberJan ,000 What is revenue in 2013 on the cash basis? on the accrual basis? 36Income & Cash Flow Statements

U SING T HE A CCRUAL B ASIS A N E XPENSE I S: a decrease in net assets (assets - liabilities) as a result of providing goods or services to customers. 37Income & Cash Flow Statements

R EVENUE A ND E XPENSES C ASH B ASIS VS A CCRUAL Our company engages in the following transactions: QTR1: buys inventory for $6,000 on account & sells 1/3 of the inventory for $7,000 cash QTR2: pays for the inventory purchased in QTR1 & sells the remaining inventory for $15,000 on account QTR3: collects the $15,000 from the QTR2 sale 38Income & Cash Flow Statements

T HERE A RE O THER M ETHODS U SED T O R ECOGNIZE R EVENUES / E XPENSES Cash basis Accrual basis Installment sales method Cost recovery Percentage completion Completed contract 39Income & Cash Flow Statements

I NCOME S TATEMENT F ORMAT Point of the income statement – give information about revenue/gains and expenses/and losses for the past year/quarter and to give that information in a way that helps predict future income. 40Income & Cash Flow Statements

I NCOME S TATEMENT F ORMAT Continuing operations +/-Discontinued operations ◊ income from operations prior to disposal ◊ gain or loss on disposal +/-Extraordinary items events that are unusual in nature and infrequent in occurrence +/-Cumulative effect of changes in accounting principles = Net income 41Income & Cash Flow Statements

I NCOME S TATEMENT F ORMAT And every publicly traded company must show earnings per share on its income statement. 42Income & Cash Flow Statements

I NCOME S TATEMENT F ORMAT C ROX, I NC. (simplified) Consolidated Statement of Operations Year Ended December 31 (in thousands) Revenues$789,695$645,767$721,589 Cost of sales (364,631) (337,720) (486,722) Gross profit 425, , ,867 Selling, general and administrative expense (344,029) (359,231) (423,149) Income from operations 81,258( 51,184)(188,282) Interest expense ( 657)( 1,495)( 1,793) Other income (expense) - net 414 4, Income (loss) before income taxes 80,792( 48,621)(189,076) Income tax (expense) benefit (13,066)( 6,543)( 4,434) Net income $67,726($42,078) ($185,076) 43Income & Cash Flow Statements

I NCOME S TATEMENT F ORMAT C ROX, I NC. (simplified) Consolidated Statement of Operations Year Ended December 31 (in thousands) Revenues$789,695$645,767$721,589 Cost of sales (364,631) (337,720) (486,722) Gross profit 425, , ,867 Selling, general and administrative expense (344,029) (359,231) (423,149) Income from operations 81,258( 51,184)(188,282) Interest expense ( 657)( 1,495)( 1,793) Other income (expense) - net 414 4, Income (loss) before income taxes 80,792( 48,621)(189,076) Income tax (expense) benefit (13,066)( 6,543)( 4,434) Net income $67,726($42,078) ($185,076) Income (loss) per common share: Basic $.78 $(0.49) $(2.24) Diluted $.76 $(0.49) $(2.24) 44Income & Cash Flow Statements

I NCOME S TATEMENT QUESTIONS? 45Income & Cash Flow Statements