Primary Objective of Financial Reporting Invest?? Borrow $$?? Sell stocks or bonds?? Start new business?? Loan $$?? Extend credit $$?? LO1 Provide information for decision making

Secondary Objectives of Financial Reporting Reflect prospective cash receipts to investors and creditors Reflect prospective cash flows to the company Reflect the company’s resources and claims to its resources Assets = Liabilities + OE

Qualitative Characteristics Understandability – Relevance – Reliability – LO2 Represents what it purports Has capacity to make a difference To those willing to take the time to understand it

Qualitative Characteristics From one period to the next Consistency between companies Comparability

Qualitative Characteristics Materiality Conservatism Will it make a difference To the decision maker? All else equal, choose Least optimistic estimate

Basic Structure of a Classified Balance Sheet Current assets + Noncurrent (long-term) assets Total assets Current liabilities + Noncurrent (long-term) liabilities + Stockholders’ equity Total liabilities and stockholders’ equity LO3

The Operating Cycle Inventory Accounts Receivable Cash

Analysis of Liquidity Of particular interest to bankers and other creditors Working Capital Ability of company to pay debts as they become due LO4

Single-Step Income Statement Revenues $$ Less: expenses ($$) Net income $$ LO5

Sales – Cost of Goods Sold = Gross Profit Operating expenses: – General and administrative expenses – Selling expenses = Income from operations +/–Other revenues and expenses = Income before taxes – Income tax expense = Net income Four important subtotals Multiple-Step Income Statement

Analysis of Profitability Profit Margin % Of particular interest to current and potential investors LO6

Statement of Retained Earnings  Explains changes in the components of owners’ equity during a period Net income (net loss) and Dividends  Provides an important link between the income statement and the balance sheet LO7 Statement of Retained Earnings Beginning retained earnings Add: Net income Deduct: Dividends Equal Ending retained earnings

Cash flows from operating activities: $$ Cash flows from investing activities: $$ Cash flows from financing activities: $$ Net increase in cash $$ Cash at beginning of year $$ Cash at end of year $$ Basic Format of the Statement of Cash Flows Reconciles change in cash for the period LO8

Cash flows from operating activities: $$ Cash flows from investing activities: $$ Cash flows from financing activities: $$ Net increase in cash $$ Cash at beginning of year $$ Cash at end of year $$ Basic Format for the Statement of Cash Flows Involves the purchase and sale of products or services Involves the acquisition and sale of long-term or noncurrent assets Involves the issuance and repayment of long-term liabilities and stock

 Letter to stockholders  Description of company’s products and markets  Financial statements  Notes to financial statements  Report of independent accountants  Management discussion and analysis  Summary of significant accounting policies Other Elements of an Annual Report

End of Chapter 2