1. The Financial Statements
Chapter 1

2. Accounting – The Language of Business
Accounting is the information system that...
measures business activities,
processes data into reports, and
communicates results to decision makers.

3. The Accounting Equation
Assets are the economic resources
of a business that are expected to
produce a benefit in the future.
Liabilities are “outsider claims,”
or economic obligations
payable to outsiders.
Owners’ equity represents the
“insider claims” of a business.

4. The Accounting Equation
Economic Resources = Claims to Economic Resources
Assets = Liabilities + Owners’ Equity

5. The Accounting Equation
Assets
Owners’
Equity
Liabilities
Assets = Liabilities + Owners’ Equity

6. The Accounting Equation
For a corporation, stockholders’ equity
is divided into two main categories.
Paid-in capital
Retained earnings
Assets = Liabilities + Stockholders’ equity
Assets = Liabilities + Paid-in capital + Retained earnings

7. The Accounting Equation
Paid-in capital is the amount invested
in the corporation by its owners.
The basic component of paid-in
capital is common stock.
Retained earnings is the amount earned
by income-producing activities and
kept for use in the business.

8. The Accounting Equation
Revenues are increases in retained
earnings from delivering goods
or services to customers.
Expenses are decreases in retained
earnings that result from operations.

9. Components of Retained Earnings
Revenues for
the period –
Expenses for =
Net income
(or Net loss)
for the
period
Start of
the period
Beginning
balance of
retained
earnings + or –
Ending
balance of
retained
earnings
End of
the period –
Dividends
for the
period =

10. Information Reported on the Financial Statements
1. How well did the
company perform
(or operate) during
the period?
Revenues
– Expenses
Net income (Net loss)
Income
statement
Question
Answer
Financial
Statement
2. Why did the company’s
retained earnings
change during the
period?
Beg. retained earnings
+ Net income (or – Net loss)
Ending retained earnings
Statement of
retained
earnings

11. Information Reported on the Financial Statements
Question
Answer
Financial
Statement
3. What is the company’s
financial position at the
end of the period?
Assets
= Liabilities
+ Owners’ equity
Balance
sheet
4. How much cash did
the company generate
and spend during
the period?
Operating cash flows
± Investing cash flows
± Financing cash flows
Increase or decrease in cash
Statement of
cash
flows

12. Fossil, Inc. Consolidated Statement of Income
Net sales revenue $546 $504
Cost of goods sold
Gross profit
Operating expenses:
Selling and distribution expense
General and administrative expense
Total operating expenses
Operating income
Years Ended
December 31,
Amounts in millions

13. Fossil, Inc. Consolidated Statement of Income
Amounts in millions
Years Ended
December 31,
Operating income
Other revenue (expense):
Write-off of investment (5) –
Other income (expense) net
Income before income tax
Income tax expense
Net income $ 44 $ 56

14. The Income Statement: Measuring Operating Performance
The income statement, statement of
operations, or statement of earnings
reports the company’s revenues,
expenses, and net income
or net loss for the period.
Comprehensive income includes net
income from the income statement
plus additional items which
do not affect net income.

15. Fossil, Inc. Consolidated Statement of Retained Earnings
Balance, beginning of year $208 $152
Net earnings for the year
Less: Cash dividends declared (0) (0)
Balance, end of year $252 $208
Years Ended
December 31,
Amounts in millions

16. Fossil, Inc. Consolidated Balance Sheet
Assets:
Current assets:
Cash and cash equivalents $ $ 80
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Total current assets $270 $253
Investments
Property, plant, and equipment, net
Intangible and other assets
Total assets $381 $308
December 31,
Amounts in millions

17. Fossil, Inc. Consolidated Balance Sheet
Amounts in millions
December 31,
Liabilities:
Current liabilities:
Notes payable, short-term $ $ 5
Accounts payable
Advertising payable
Compensation (salary) payable
Other accrued expenses payable
Income taxes payable
Total current liabilities $106 $ 83
Long-term liabilities
Total liabilities $117 $ 87

18. Fossil, Inc. Consolidated Balance Sheet
Amounts in millions
December 31,
Stockholders’ equity:
Common stock $ $ 15
Retained earnings
Other equity (4) (2)
Total stockholders’ equity $264 $221
Total liabilities and stockholders’ equity $381 $308

19. Fossil, Inc. Consolidated Balance Sheet
Total assets $381
= Total liabilities
Current $106
Long-term
Total liabilities
+ Total stockholders’ equity
Total liabilities and stockholders’ equity $381
2001
Must
equal

20. The Statement of Cash Flows
The statement of cash flows reports
the company’s cash inflows and
outflows from operating, investing,
and financing activities.

21. Fossil, Inc. Statement of Cash Flows
Operating activities:
Net income $44 $56
Adjustments to reconcile net income
to net cash from operating activities (16)
Net cash provided by operating activities $49 $40
Amounts in millions
December 31,

22. Fossil, Inc. Statement of Cash Flows
Amounts in millions
December 31,
Investing activities:
Business acquisitions $(16) (2)
Additions to property, plant, and equipment (56) (20)
Sale of investments –
Other investing activities (2) (2)
Net cash used for investing activities $(68) $(24)

23. Fossil, Inc. Statement of Cash Flows
Amounts in millions
December 31,
Financing activities:
Issuance of common stock $3 $ 1
Purchase and retirement of common stock (4) (28)
Issuance of notes payable (borrowing) –
Other financing activities (1) –
Net cash provided by financing activities $7 $(27)

24. Fossil, Inc. Statement of Cash Flows
Amounts in millions
December 31,
Net increase in cash and cash equivalents $(12) $(11)
Cash and cash equivalents,
beginning of year
Cash and cash equivalents, end of year $ $ 80