1. X100 Introduction to Business
Accounting - 'The Financial Statements'
X100 Introduction to Business
Accounting
‘The Financial
Statements’
Professor Kenneth EA Wendeln
X100
X100 Introduction to Business

2. Accounting - 'The Financial Statements'
Key Documents:
Balance Sheet
 Statement of Financial Position - at end of periods
Income Statement
 Profit and Loss Statement – between periods
Statement of Cash Flow
 Operating, Investing & Financing – between periods
Statement of Stockholders’ Equity
Annual Report
Including Footnotes & Management Discussion
SEC Filings – Publicly Traded Companies
 10-K (annual)  10-Q (quarterly)  8-K (changes)
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

3. Accounting - 'The Financial Statements'
The Balance Sheet
Summary of the FINANCIAL POSITION of a company on a PARTICULAR DATE.
Assets:
Company’s economic resources - cash, accounts receivable, inventory, land, buildings, equipment, and intangible items.
Liabilities:
creditor claims - accounts payable, notes payable, mortgages payable, ...
Owners’ Equity:
net assets ‘left over’ - for the owners after all obligations have been satisfied.
What are the resources of the company?
What are the company’s existing obligations?
What are the company’s net assets?
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

4. Key Terms Balance Sheet
Accounting - 'The Financial Statements'
Key Terms Balance Sheet
Assets: economic resources that are owned or controlled by the company.
Liabilities: claims of creditors on a company’s assets.
Accounts Receivable: a current asset representing money due for services performed or merchandise sold on credit.
Accounts Payable: dollar value owed by a firm to others.
Intangible Assets: long-lived assets with no physical substance that are used in the business such as acquired goodwill, licenses, patents and franchises.
Contributed Capital: portion of owners’ net equity contributed by investor (the owners) in exchange for shares of stock.
Dividends: profit distributions to the owners (stockholders).
Retained Earnings: portion of a company’s owners’ equity that has been earned from profitable operations but has not been distributed to shareholders as dividends.
Stockholders’ Equity: owners’ equity section–‘what’s left over’
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

5. Zimmer Holdings, Inc Consolidated Balance Sheets
Accounting - 'The Financial Statements'
Zimmer Holdings, Inc Consolidated Balance Sheets
Assets
Current
Long-term 
Liabilities
Current
Long-term 
Stockholders
Equity 
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

6. Balance Sheet Limitations
Accounting - 'The Financial Statements'
Balance Sheet Limitations
Assets are recorded at historical value.
Transaction must occur to recognize an asset.
Recognizes only assets that can be expressed in monetary terms.
Owners Equity on the Balance Sheet is usually LESS than company’s ACTUAL market value
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business 25

7. The Accounting Equation
Accounting - 'The Financial Statements'
The Accounting Equation
Resources
Sources of Funding
Assets = Liabilities + Owners’ Equity
Everything owned
Claims against assets
What’s left for owners/stockholders
Resources
to use to
generate
revenues
Creditors’
claims
against
resources
Owners’
Claims -
or ‘what’s
left over’ = +
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

8. Zimmer 2006 Balance Sheet - Assets
Accounting - 'The Financial Statements'
Zimmer Balance Sheet - Assets
On this date
On this year-end
Current assets < 1yr
In order of liquidity
Long-term assets > 1yr
Needed over extended period
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

9. Accounting - 'The Financial Statements'
Zimmer Balance Sheet Liabilities & Shareholders’ Equity
Accounting - 'The Financial Statements'
2006
2005
Current liabilities
Due in < 1 year
Long-term Liabilities
Over extended period
Contributed Capital =
Par value + paid in capital – treasury stock ( – 802.9)
Accumulated Earnings not paid as dividends to shareholders
A = L + OE
5, ,
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

10. Accounting - 'The Financial Statements'
The Accounting Equation
Effect of Transactions
A = L + OE
Invest in company
Borrow money
Pay off a note
Purchase equipment
Borrow funds to settle a debt
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business 12

11. Categories of Cash Flows
Accounting - 'The Financial Statements'
Categories of Cash Flows
Cash flow is the difference between cash coming in and cash going out of a business.
Cash flow statement reports cash flow as it relates to a firm’s three major activities:
Operations – cash transactions associated with running of the business. (Income statement adjusted for ‘non-cash’ items such as: changes in accounts receivable, accounts payable, inventory; depreciation; etc)
Investments – cash used in or provided by the firm’s investment activities in the company.
Financing – cash raised from the issuance of new debt or equity capital, or cash used to pay past debts and stockholder dividends.
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

12. Accounting - 'The Financial Statements'
Statement of Cash Flows
Investing
Activities
(Interest earned)
Financing
Activities
(sell stock, new loans)
Operating
Activities
(cash from sales)
CASH INFLOWS
CASH OUTFLOWS
Financing
Activities
(dividend, pay loans
buy back stock)
Investing
Activities
(buy equipment)
Operating
Activities
(expenses)
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

13. Accounting - 'The Financial Statements'
Zimmer Holdings, Inc Statement of Cash Flows
Accounting - 'The Financial Statements'
Operations
Net earnings from Income Statement adjusted for non-cash items 
Investing 
Financing
Transactions with Lenders & Owners 
Net change in cash =
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

14. Accounting - 'The Financial Statements'
Zimmer 2006 – Cash Flows Operating Activities
Accounting - 'The Financial Statements'
from Income Statement
Adjustments for ‘non-cash’ items 
Cash flow provided by operating activities =
net earnings adjusted for ‘non-cash’ items
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

15. Accounting - 'The Financial Statements'
Zimmer 2006 – Cash Flows Investing & Financing Activities
Accounting - 'The Financial Statements'
2006
2005
2004
Additions to
or proceeds from
sale of Assets 
Transactions with lenders & owners 
= net change in cash
Summary explains the ‘change in cash’ from Operating, Investing and Financing activities
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

16. Accounting - 'The Financial Statements'
The Cash Flow Cycle
Sales
Customers
Accounts Receivable
Inventory
Cash
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

17. Financial Statement Articulation
Accounting - 'The Financial Statements'
Financial Statement Articulation
Cash - Op. Act. $
Cash - Inv. Act. (287.0)
Cash - Fin. Act. (730.7)
Exch Rate Adj
Net increase
Beg. cash
End. cash $
Cash Flow Statement 2006
Cash $
Other
Assets $
Minority Int $
Liabilities
Cont’d Cap’l
R/E
Compr Inc
Liab & SE $
Balance Sheet
12/31/05
Zimmer Holdings, Inc
2006 Annual Report
Dollars in millions
Articulation is how the Financial Statements tie and ‘work together’
Balance Sheet 12/31/06
Revenues $
Expenses
Net income $
Income Statement 2006
Cash $
Other
Assets $
Minority Int $
Liabilities
Cont’d Cap’l
R/E
Compr Inc
Liab &SE $
R/E 12/31/05 $
Net income
Dividends
R/E 12/31/06 $
Stockholder Equity 2006
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business 52

18. Notes to the Financial Statements
Accounting - 'The Financial Statements'
Notes to the Financial Statements
Four general types of notes to financial statements:
Accounting policies: summary of significant assumptions, estimates, and judgments.
Additional information and details about the summary totals.
Supplementary information required by the FASB or the SEC.
Disclosure of important information that is NOT recognized in the financial statements.
Notes are an acceptable way to convey information to users when the information is too uncertain or needs further explanation.
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

19. Zimmer 2006 Notes to the Financial Statements
Accounting - 'The Financial Statements'
Zimmer Notes to the Financial Statements
Accounting Policies
Additional Details
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

20. Accounting - 'The Financial Statements'
Zimmer Notes to the Financial Statements
Accounting - 'The Financial Statements'
Required Supplementary Information
Important Non-financial Disclosures
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

21. Tax Accounting Important Considerations
Accounting - 'The Financial Statements'
Tax Accounting Important Considerations
Tax accounting is driven by IRS and other tax regulations - which are different than GAAP
Realization of Revenue
Valuation of Real Property & Intangible Assets
Depreciation and Amortization
Disallowed Expenses and Accruals
Credits and Other Incentives
Resulting in TEMPORARY & Permanent differences between tax and GAAP » Deferred tax assets & liabilities «
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

22. Financial Statements - Summary
Accounting - 'The Financial Statements'
Financial Statements - Summary
Audience – external as well as the internal users
Purpose – good information for intelligent decision making
Requires – ‘transactions’ & an accounting system in accordance with GAAP
GAAP – ‘authoritative’ guidelines for accounting in the US (FASB, AICPA)
Accrual-based – recorded as ‘earned’ or ‘incurred’ – GAAP
Requires – matching principle, revenue recognition & time period
Responsibility – the firm’s management
Opinion – provided by CPA
Results in – annual & financial reports, 10-K, 10-Q, 8-K . . .
Balance Sheet – statement of assets, liabilities & owners equity at ‘end of period’
Income Statement – firm’s revenues minus expenses over time – ‘between two periods’
Statement of Cash Flow – cash coming in & going out of a firm categorized by operating, investing & financing activities
Notes – integral to financial statements providing policy, disclosure & supplemental information
Tax Accounting – creates temporary differences from GAAP as ‘deferred’ tax assets & liabilities
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business

23. Zimmer Holdings, Inc Annual Reports and 10-K Filings
Accounting - 'The Financial Statements'
Zimmer Holdings, Inc Annual Reports and 10-K Filings
X100
Accounting - 'The Financial Statements'
X100 Introduction to Business