Managerial Accounting Structure of Financial Statements

Topic Coverage 1. Consolidated balance sheet 2. Consolidated income statement 3. Consolidated cash flow statement 4. Monthly cash flow statement and LOC needs 5. Linkages between financial statements 6. Self test of statement linkage understanding

Annual Consolidated Balance Sheet

Basic Structure of the Balance Sheet Assets:Liabilities and Net Worth: Current assetsCurrent liabilities plus Intermediate assetsplus Intermediate liabilities plus Long term assetsplus long term liabilities plus Net worth equals Total assetsequals Total liabilities and net worth Assets:Liabilities and Net Worth: Current assetsCurrent liabilities plus Intermediate assetsplus Intermediate liabilities plus Long term assetsplus long term liabilities plus Net worth equals Total assetsequals Total liabilities and net worth Often referred to as equity Often referred to as equity Page 4

Current Asset Segment Current assets: Cash_________ Savings and time deposits_________ Marketable securities_________ Accounts receivable_________ Short term notes receivable_________ Unsold production inventories_________ Supplies on hand_________ Prepaid expenses_________ Other Total current assets_________

Non-Current Asset Segment Intermediate assets: Intermediate notes receivable__________ Equipment__________ Machinery and motor vehicles__________ Other intermediate assets Total intermediate assets__________ Long term assets: Long term notes receivable__________ Buildings and other structures__________ Land__________ Other long term assets Total long term assets__________

Current Liabilities Segment Current liabilities Accounts payable__________ Short term notes payable__________ Current payment on term loans__________ Accrued interest__________ Accrued taxes__________ Accrued rents and leases__________ Contingent tax on current assets Total current liabilities__________

Non-Current Liabilities Segment Intermediate liabilities Intermediate notes less current payment__________ Sales contract less current payment__________ Contingent tax in intermediate assets__________ Other Total intermediate liabilities__________ Long term liabilities Mortgages less current payments__________ Land contracts less current payment__________ Contingent liability on long term assets__________ Other Total long term liabilities__________

Annual Consolidated Income Statement

Basic Structure of Income Statement Cash receipts from product sales Minus Operating expenses Equals Net cash income from operations Plus Gain (loss) on sale of intermediate and long term assets Plus Cash subsidies received Equals Income (loss) before taxes and extraordinary items Minus Provision for income taxes Equals Income before extraordinary items Plus Extraordinary items Equals Net cash income Cash receipts from product sales Minus Operating expenses Equals Net cash income from operations Plus Gain (loss) on sale of intermediate and long term assets Plus Cash subsidies received Equals Income (loss) before taxes and extraordinary items Minus Provision for income taxes Equals Income before extraordinary items Plus Extraordinary items Equals Net cash income Page 5

Annual and Monthly Cash Flow Statements

Basic Structure of Cash Flow Statement Cash available Minus Cash required Equals Cash available less cash required Plus Savings withdrawals Equals Cash position Plus Net borrowing Minus Other uses of cash Minus Additions to savings Equals Ending cash balance Cash available Minus Cash required Equals Cash available less cash required Plus Savings withdrawals Equals Cash position Plus Net borrowing Minus Other uses of cash Minus Additions to savings Equals Ending cash balance Page 6

Cash Available Segment Cash available Beginning cash balance__________ Cash receipts from product sales__________ Net gain on sale of assets__________ Cash subsidies received__________ Other cash available Total cash available__________

Cash Required Segment Cash required Cash operating expenses__________ Income and property tax payments__________ Insurance policy payments__________ Current payment on operating loans Current payment on intermediate loans__________ Current payment on long term loans__________ Capital expenditures__________ Other cash required Total cash required__________

Annual Ending Cash Balance Cash available minus cash required + Savings withdrawal$0 = Cash position + New borrowing:$0 Intermediate term loans$0 Long term loans$0 Short term loans$0 Total new borrowing - Other uses of cash:$0 Short term loan payments:$0 Interest payments$0 Principal payments$0 Additions to saving$0 = Ending cash $0

Monthly Cash Available January February March …….. Cash available Beginning cash balance__________________ Cash receipts from product sales__________________ Net gain on sale of assets__________________ Cash subsidies received__________________ Other cash available Total cash available__________________

Monthly Cash Required January February March …….. Cash required Cash operating expenses ______ ______ ______ Income and property tax payments ______ ______ ______ Insurance policy payments ______ ______ ______ Current payment on operating loans ______ ______ ______ Current payment on intermediate loans ______ ______ ______ Current payment on long term loans ______ ______ ______ Capital expenditures ______ ______ ______ Other cash required Total cash required ______ ______ ______

Monthly Cash Position January February March …….. Cash available______ ______ ______ Cash required______ ______ ______ Savings withdrawal Cash position______ ______ ______ Indicates monthly cash flow surpluses or deficits before borrowing on a Line of Credit or LOC… Indicates monthly cash flow surpluses or deficits before borrowing on a Line of Credit or LOC…

Monthly and Annual Balances NovemberDecemberYear Total debt outstanding Operating loan balance Intermediate term loan balance Long term loan balance Accrued interest $0Operating loans $0Intermediate term loans Long term loans Cash position $0 Ending cash balance

Financial Statement Linkages

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

2007 Cash Flow Statement Sources of cash: Beginning cash balance Cash receipts from product sales Other sources of cash Total sources of cash Uses of cash: Cash operating expenses Interest payments Principal payments Capital expenditures Withdrawals of cash Other selected uses of cash Ending cash balance Total uses of cash Basic structure: Total sources = total uses 2007 Income Statement Cash receipts from product sales Other income Total income Cash operating expenses Interest payments Other cash expenses Depreciation Total expenses Net income from operations Allowance for taxes Net income Basic structure: EBIT = total income – total expenses + interest payments Interrelationships Between Financial Statements Balance Sheet 12/31/07 Ending cash balance Other current assets Total current assets Machinery and equipment Buildings and improvements Land Total assets Accounts payable Current loan payment Allowance for taxes Other current liabilities Total current liabilities Remaining balance on loans Total liabilities Equity Basic Structure: Equity = total assets – total Liabilities  Equity = Retained net Income + asset revaluations Other statements and schedules: Statement of Change in Owner Equity Depreciable asset schedules

Sample Question What is this firm’s net income and equity?

Sample Question What is this firm’s net income and equity? Current assets Current liabilities Current liabilities

Sample Question What is this firm’s net income and equity? Total assets Total liabilities Total liabilities

Sample Question What is this firm’s net income and equity? Variable expenses Fixed expenses Fixed expenses

Calculation of equity Calculation of equity: Total current assets = 10, , ,000 = 43,000 Total current liabilities = 1, , ,213 = 15,913 Total assets = total current assets + 76, , ,500 = 233,000 Total liabilities = total current liabilities + 29, ,200 = 46,613 Equity = 233,000 – 46,613 = 186,387

Calculation of equity Calculation of equity: Total current assets = 10, , ,000 = 43,000 Total current liabilities = 1, , ,213 = 15,913 Total assets = total current assets + 76, , ,500 = 233,000 Total liabilities = total current liabilities + 29, ,200 = 46,613 Equity = 233,000 – 46,613 = 186,387 Calculation of net income Calculation of net income: Cash receipts from product sales = 73,000 Total operating expenses = 51, , ,400 = 61,100 Net income from operations = 73,000 – 61,100 = 11,900 Net income before taxes = 11,900 Net income = 11,900 – 7,213 = 4,687 Net cash income = 4, ,400 = 12,087