1. Chapter 2 Financial Statements and the Annual Report
Financial Accounting: The Impact on Decision Makers 6/e by
Gary A. Porter and Curtis L. Norton
Copyright © 2009 South-Western, a part of Cengage Learning.

2. Primary Objective of Financial Reporting
Provide information for decision making
Extend credit $$??
Loan $$??
Borrow $$??
Sell stocks or bonds??
Invest??
Start new business??
LO1 2 2

3. Secondary Objectives of Financial Reporting
Reflect the
company’s
resources
and claims to its
Reflect prospective
cash receipts to
investors and creditors
Reflect prospective
cash flows to
the company
Assets = Liabilities + OE 2 2

4. Qualitative Characteristics
Understandability –
Relevance –
Reliability –
To those willing to take
The time to understand it
Has capacity to
Make a difference
Represents what
it purports
LO2 3 3 3

5. Qualitative Characteristics From one period to the next
Comparability
between companies
Consistency
From one period to the next 3 4 4

6. Qualitative Characteristics
Materiality
Will it make a difference
To the decision maker?
Conservatism
All else equal, choose
Least optimistic estimate 3 5 5

7. 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 5 7 7

8. Dixon Sporting Goods Balance Sheet
A = L + SE
Dixon Sporting Goods Balance Sheet
Realized, sold, or consumed in
one year or operating cycle A
Assets
Current assets
Cash $ 5,000
Marketable securities ,000
Accounts receivable ,000
Merchandise inventory ,500
Prepaid insurance ,800
Supplies
Total current assets $118,000
Investments
Land held for future expansion ,000
Property, plant, and equipment
Land $100,000
Buildings $150,000
Less: Accumulated depreciation (60,000) ,000
Store furniture and fixtures $ 42,000
Less: Accumulated depreciation (12,600) ,400
Total property, plant and equipment ,400
Intangible assets
Franchise agreement ,000
Total assets $542,400

9. Dixon Sporting Goods Balance Sheet
A = L + SE
Satisfied within one
year or operating cycle
Liabilities and Stockholders’ Equity
= L
Current liabilities
Accounts payable $ 15,700
Salaries and wages payable ,500
Income taxes payable ,200
Interest payable ,500
Bank loan payable ,000
Total current liabilities $ 59,900
Long-term debt
Notes payable $ 120,000
Total liabilities $179,900
Contributed capital
Capital stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Paid-in capital in excess of par value ,000
Total contributed capital $ 75,000
Retained earnings ,500
Total stockholders' equity $ 362,500
+ SE
Total liabilities and stockholders’ equity $542,400

10. Of particular interest
Analysis of Liquidity
Of particular interest
to bankers and other
creditors
Ability of
company to
pay debts
as they
become due
Working
Capital
Current
Ratio
LO4 7 8 8

11. Dixon Sporting Good’s Liquidity
What's the
trend??
Current assets $2,000
Current liabilities ,600
Working = Current Assets
Capital (Current Liabilities) $58,100
Current = Current Assets
Ratio Current Liabilities :1 8 9 9

12. Single-Step Income Statement
Revenues $$
Less: expenses ($$)
Net income $$
LO5 16 16

13. Multiple-Step Income Statement
Three
important
subtotals
Operating revenues
Operating expenses:
– General and
administrative expenses
– Selling expenses
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income 6 13 13

14. Dixon Sporting Goods Multiple Step - Income Statement
For the Year Ended December 31, 2008
Sales $357,500
Cost of Goods Sold ,300
Gross Profit $139,200
Operating expenses:
Selling expenses
Depreciation on store furniture and fixtures $ 4,000
Advertising ,750
Salaries and wages ,000
Total selling expenses $ 39,950
General and administrative expenses
Depreciation of buildings and amortization
of trademark $ 6,000
Salaries and wages ,000
Insurance ,600
Supplies ,050
Total general and administrative expenses ,650
Total operating expenses ,600
Income from operations $ 73,600
Other revenues and expenses:
Interest revenue $ 1,500
Interest expense ,900
Excess of other revenues over other expenses ,400
Income before taxes $ 58,200
Income tax expense ,200
Net income $ 41,000

15. Analysis of Profitability
particular
interest
to current and
potential
investors
Profit
Margin %
LO6 14 14

16. Dixon Sporting Goods– Profit Margin
Profit Margin % = Net Income
Operating Revenues
Profit Margin % = $41,000 = 11% $357,500
(The amount of every sales dollar that results in income)

17. Statement of Retained Earnings
Shows changes in the components of owners’ equity
Net income (net loss) and Dividends
Provides an important link between the
income statement and the balance sheet
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Deduct: Dividends
= Ending retained earnings
LO7 19 19

18. Statement of Cash Flows
Basic Format of the
Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Reconciles change
in cash for
the period
LO8 20 20

19. Statement of Cash Flows
Basic Format for the
Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
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 20 20

20. Financial Statements for a Real Company: General Mills
LO9

21. General Mills’s Liquidity
(in millions)
Current assets $ 38, $ 46,572
Current liabilities , ,912
Working capital $ ( 2,962) $(1,129)
Current ratio = : :1
Current = Current Assets
Ratio Current Liabilities
(How many $ of current assets for every $ of current liabilities) 15 15

22. General Mills’s Profitability
(in million’s)
Net sales $ 11, $11, $11,070
Net income $ 1, $ 1, $ 1,055
Profit margin % = 9.4% % 9.5%
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses) 16 16

23. Other Elements of an Annual Report
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 21 21

24. End of Chapter 2