1. Financial Statements and the Annual Report
Chapter 2
Financial Statements and the Annual Report
Financial Accounting 4e by Porter and Norton 1 1

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

3. Secondary Objectives of Financial Reporting
Assess investor/
creditor cash
receipts A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Assess cash
flows to
company A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Assets = Liabilities + OE
Reflect
resources and
claims to
them 2 2

4. To those willing to take the time to understand it
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 to 3 3 3

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

6. Will it make a difference least optimistic alternative
Qualitative Characteristics
Will it make a difference
to the decision maker?
Materiality
Conservatism
All else equal, choose
least optimistic alternative 3 5 5

7. Typical Operating Cycle
CASH A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Time it takes to go from cash back to cash A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
ACCTS. RECEIVABLE
INVENTORY A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293 4 6 6

8. 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 5 7 7

9. Gateway, Inc. Consolidated Balance Sheets
A = L + SE
Gateway, Inc. Consolidated Balance Sheets
Realized, sold or consumed in
one year or operating cycle
(in thousands) A
Assets December 31 ,
Current assets:
Cash and cash equivalents $ 730, $ 483,997
Marketable securities , ,073
Accounts receivable, net , ,755
Inventory , ,069
Other , ,166
Total current assets 2,122, ,267,060
Property, plant and equipment, net , ,414
Intangibles, net , ,914
Other assets , ,257
$2,986, $4,180,645

10. Gateway, Inc. Consolidated Balance Sheets
A = L + SE
Gateway, Inc. Consolidated Balance Sheets
Satisfied within one
year or operating cycle
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ , $ 785,345
Accrued liabilities , ,323 Accrued royalties , ,446
Other current liabilities , ,021 Total current liabilities 1,146,028 1,659,135
Other long-term liabilities , ,171
Total liabilities 1,228, ,800,306
= L
+ SE
Stockholders' equity:
Series C preferred stock ,
Series A preferred stock ,
Common stock , ,239
Additional paid-in capital , ,646
Treasury stock ( 21,948)
Retained earnings , ,650,335
Accumulated other comprehensive loss ( 13,802) ,067
Total stockholders' equity 1,565, ,380,339
$2,986, $4,180,645 10

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

12. Gateway's Liquidity What's the trend?? (in 000’s) 2001 2000
Current assets $2,122,924 $2,267,060
Current liabilities 1,146, ,659,135
What's the
trend??
Working
Capital = C.A. less C.L $ 976,896 $ 607,925
Current = Current Assets : :1
Ratio Current Liabilities 8 9 9

13. Comparison of Liquidity
Some 2001 current ratios:
Tommy Hilfiger 3.27:1
Sprint :1
McDonald's 0.81:1
Can you compare
the ratios?
Consider composition
of current assets and
frequency of turnover

14. Income Statement Single Step Revenues $$$ Less: expenses ($$)
Net income $$ 16 16

15. Multi-Step Income Statement
Sales
– Cost of goods sold
= Gross profit
Operating expenses:
– Selling expenses
– General and
administrative expenses
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income
Four
important
subtotals 6 13 13

16. Gateway, Inc. Consolidated Statements of Operations
For the Years Ended December 31,
Net Sales $ 6,079, $9,600,600
Cost of goods sold 5,241, ,541,606 Gross profit ,192 2,058,994
Selling, general and administrative
expenses 2,022,122 1,547,701
Operating income (loss) (1,183,930) ,293
Other income (loss), net ( 106,383) (102,693)
Income (loss) before income taxes (1,290,313) ,600
Provision (benefit) for income taxes ( 275,908) ,266
Extraordinary gain ,
Change in accounting principle ( 23,851) ( 11,851) Net income (loss) $(1,033,915) $ 241,483

17. Analysis of Profitability
particular
interest
to current and
potential
investors
Gross
Profit %
Profit
Margin % 14 14

18. Gateway's Profitability
(in 000’s)
Net sales $6,079,524 $9,600,600 $8,964,900
Cost of sales 5,241, ,541, ,127,678
Gross profit $ 838,192 $2,058,994 $1,837,222
Gross profit % = % % %
Gross Profit (Margin) % = Gross Profit
Sales
(How many cents on every $ of sales are left over
after covering the cost of the product) 15 15

19. Gateway's Profitability
(in 000’s)
Net sales $ 6,079,524 $9,600,600 $8,964,900
Net income $(1,033,915) $ 241,483 $ 427,944
Profit margin % = % % %
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses) 16 16

20. Statement of Stockholders’ Equity
Shows changes in all equity accounts including:
Sales and purchases of capital stock
Statement of Retained Earnings
Beginning retained earnings
Add: net income
Deduct: dividends
= Ending retained earnings
Includes: 19 19

21. 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 20 20

22. 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 $$
Cash at end of year $$
Involve the purchase and sale
of products or services
Involve the acquisition and sale
of long-term assets
Involve the issuance and payment
of long-term liabilities and stock 20 20

23. Elements of an Annual Report
Report of independent accountants
Management discussion & analysis
Summary of financial data
Letter to stockholders
Financial statements
Notes to financial
statements 21 21

24. End of Chapter 2