1. Financial Accounting: Tools for Business Decision Making, 4th Ed.
Kimmel, Weygandt, Kieso
CHAPTER 2
Prepared by
Ellen L. Sweatt
Georgia Perimeter College

2. A FURTHER LOOK AT FINANCIAL STATMENTS
Chapter 2
A FURTHER LOOK AT FINANCIAL STATMENTS

3. Chapter 2 A Further Look at Financial Statements
Identify the sections of a classified balance sheet.
Identify and compute ratios for analyzing a company's profitability.
Explain the relationship between a retained earnings statement and a statement of stockholders' equity.
Identify and compute ratios for analyzing a company's liquidity and solvency using a balance sheet. 2

4. Chapter 2 A Further Look at Financial Statements
Explain the meaning of generally accepted accounting principles.
Discuss financial reporting concepts. 2

5. Identify the Sections of a Classified Balance Sheet11 1
Identify the Sections of a Classified Balance Sheet
Helps users see if company has enough assets to pay debts
Can determine the short-term and long-term claims on total assets

6. Classified Balance Sheet
Generally contains the following standard classifications:
Current Assets
Long-Term Investments
Property, Plant, and Equipment
Intangible Assets
Current Liabilities
Long-Term Liabilities
Stockholders' Equity 21

7. Current Assets
Assets that are expected to be converted to cash or used up within one year.
Current assets are listed in order of liquidity.
Examples:
Cash
Short-term investments
Receivables
Inventories
Supplies
Prepaid expenses 22

8. Long-Term Investments
Investments of stocks and bonds of other corporations which are normally held for many years.
Investments in long-term assets such as land or buildings that are not currently being used in the company’s operations 23

9. Property, Plant, and Equipment
Assets with relatively long useful lives.
Assets used in operating the business.
Examples:
land
buildings
machinery
delivery equipment
furniture and fixtures 24

10. Depreciation is...
Practice of allocating an asset’s full purchase price to a number of years instead of expensing full cost in year of purchase. 24

11. Accumulated Depreciation...
Shows the total amount of depreciation that the company has expensed thus far in the asset’s life. 24

12. Assets That A Company Depreciates...
Should be shown at cost less accumulated depreciation 24

13. Intangible Assets Non-current assets Have no physical substance
Examples:
patents
copyrights
trademarks or trade names
franchise
Intangible Assets have value because of the exclusive
rights or privileges they give the company.

14. Current Liabilities accounts payable wages payable bank loans payable
Obligations that are supposed to be paid within the coming year...
accounts payable
wages payable
bank loans payable
interest payable
taxes payable
current maturities of long-term bank loans payable

15. Long-Term Liabilities
Debts expected to be paid after one year
Examples…
bonds payable
mortgages payable
long-term notes payable
lease liabilities and
obligations under employee pension plans 27

16. Stockholders' Equity
Capital stock - investments of assets in the business by the stockholders
Retained earnings - earnings kept for use in the business 28

17. Ratio Analysis
Expresses relationship among selected items of financial statement data
Relationship can be expressed in terms of…
Percentage
Rate
Proportion

18. Ratio Analysis
Profitability Ratios - Measures the income or operating success of a company for a given period of time

19. Ratio Analysis
Liquidity Ratios - Measures short-term ability of company to pay its maturing obligations and meet unexpected needs for cash

20. Ratio Analysis
Solvency Ratios - Measures the ability of the company to survive over a long period of time

21. Ratio Analysis – Use Multiple Measures!
Intracompany comparisons - covering two years of the same company
Industry average comparisons - based on average ratios for a particular industry
Intercompany comparisons - based on comparisons with a competitor in the same industry

22. 11 2
Earnings Per Share
How does the company’s earning performance compare with that of previous years (on a per share basis)?
Net income-Preferred stock dividends
Average common shares outstanding
EPS=
Higher value = improved performance 18

23. Review
For 2005 Stoneland Corporation reported net income $24,000; net sales $400,000; and average shares outstanding 6,000. There were no preferred stock dividends. What was 2005 earnings per share?
a. $4.00
c. $16.67
d. $66.67
b. $ .06

24. Review
For 2005 Stoneland Corporation reported net income $24,000; net sales $400,000; and average shares outstanding 6,000. There were no preferred stock dividends. What was 2005 earnings per share?
a. $4.00
c. $16.67
d. $66.67
b. $ .06

25. Statement of Retained Earnings11 3
Statement of Retained Earnings
From Chapter 1: The Statement of Retained Earnings describes the changes in the retained earnings for the period . . .
Retained earnings, January 1 $
Add: Net income ,800
6,800
Less: Dividends
Retained earnings, Dec $ 6,200 20

26. Statement of Retained Earnings11 3
Statement of Retained Earnings
From Chapter 1: The Statement of Retained Earnings describes the changes in the retained earnings for the period . . .
Retained earnings, January 1 $
Add: Net income ,800
6,800
Less: Dividends
Retained earnings, Dec $ 6,200 20

27. Statement of Stockholders’ Equity
Stockholders’ equity has two parts:
Common Stock and
Retained Earnings,
Thus, The Statement of Stockholders’ Equity reports ALL CHANGES in the common stock and retained earnings accounts… 20

28. Statement of Stockholders’ Equity11 4
Statement of Stockholders’ Equity

29. Liquidity Ratios
Measure of short-term ability to pay maturing obligations and to meet unexpected needs for cash
Working capital
Current ratio

30. Working Capital = Current Assets - Current Liabilities
Measure of short-term ability to pay obligations
Difference between current assets and current liabilities
Working Capital = Current Assets - Current Liabilities 31

31. Current Ratio Current Assets Current Ratio = Current Liabilities
More dependable indicator
Does not consider composition of current assets 32

32. Solvency Ratios
Measure the ability of a company to survive over a long period of time
Total Debts
Total Assets
Debt to Total Asset Ratio =
Measures percentage of assets financed by creditors rather than stockholders

33. Review Statement of Cash Flows11 5
Review Statement of Cash Flows
Provides information about sources and uses of cash, organized as:
Operating Activities
Investing Activities
Financing Activities

34. Free Cash Flow Free Cash Flow _ _ Cash Provided By Operations Capital
Expenditures _
Cash
Dividends

35. Primary Accounting Setting Body in the U.S.11 6
Primary Accounting Setting Body in the U.S.
Financial
Accounting
Standards
Board 4

36. U.S. Government Agency That Oversees Financial Markets
Securities
Exchange
Commission 4

37. IASB = International Accounting Standards Board
GAAP Are the Rules
The FASB makes the rules.
The SEC enforces the rules.
IASB = International Accounting Standards Board

38. Review What organization issues United States accounting standards?
a. Financial Accounting Standards Board
b. Internal Accounting Standards Committee
c. Internal Auditing Standards Committee
d. Securities and Exchange Committee

39. Review What organization issues United States accounting standards?
a. Financial Accounting Standards Board
b. Internal Accounting Standards Committee
c. Internal Auditing Standards Committee
d. Securities and Exchange Committee

40. Basic Terms 7 Relevance - information makes a difference in decisions11 7
Basic Terms
Relevance - information makes a difference in decisions
Reliability - information must be free of error and bias
Comparability - ability to compare information of different companies because they use the same accounting principles
Consistency - use of same accounting principles and methods from year to year within the same company

41. Characteristics of Useful Information41

42. Accounting Assumptions

43. Accounting Principles
Constraints In Accounting
Illustration 23 10

44. Review
What is the primary criterion by which accounting information can be judged?
a. Consistency
b. Predictive Value
c. Usefulness for decision making
d. Comparability

45. Review
What is the primary criterion by which accounting information can be judged?
a. Consistency
b. Predictive Value
c. Usefulness for decision making
d. Comparability

46. Review
What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and revenues?
a. Comparability
b. Materiality
c. Conservatism
d. Consistency

47. Review
What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and revenues?
a. Comparability
b. Materiality
c. Conservatism
d. Consistency

48. Review Which is not an indicator of profitability? a. Current ratio
b. Earnings per share
c. Net income

49. Review Which is not an indicator of profitability? a. Current ratio
b. Earnings per share
c. Net income

50. Review The balance in retained earnings is not affected by:
Net income.
Issuance of common stock.
Dividends.
Net Loss.

51. Review The balance in retained earnings is not affected by:
Net income.
Issuance of common stock.
Dividends.
Net Loss.

52. Review Let’s compute current ratio . . .
Selected financial information for Drummond Company at 12/31/2006:
Let’s compute current ratio . . .

53. Review Compute Current Ratio
$210,000 
$140,000 =
1.5 : 1

54. Review Compute debt to total assets . . .
Selected financial information for Drummond Company at 12/31/2006:
Compute debt to total assets . . .

55. Review
$270,000  $540,000 = 50%

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