1. · 1 CORPORATE FINANCIAL REPORTING Chapters 2, 3 & 4

2. Introduction2 H OW D ID A NDETONY C ORP. D O IN S EPTEMBER? What would we look at to decide?

3. Introduction3 H OW E ASY W OULD I T B E T O T RICK O UR A CCOUNTANT ?

4. Introduction4 O THER P OINTS T O D ISCUSS Redundancy in financial statements Bookkeeping stuff

5. The Balance Sheet5 T HE B ALANCE S HEET ASSETS LIABILITIES Current assets Current liabilities Noncurrent assets Non current liabilities (usually are “sub groups” OWNERS’ EQUITY like PP&E, intangibles, etc.) Paid in capital Retained earnings Other comprehensive income

6. The Balance Sheet6 F INANCIAL R EPORTING I S A LL A BOUT T HREE T HINGS: Recognition Valuation (measurement) Classification

7. The Balance Sheet7 A SSETS A RE: economic resources that will provide the company with future economic benefits. Assets have three characteristics:

8. The Balance Sheet8 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable,

9. The Balance Sheet9 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, $

10. The Balance Sheet10 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of

11. The Balance Sheet11 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of 3. a past transaction.

12. The Balance Sheet12 A SSET C HARACTERISTICS: 1. the future economic benefits are probable and measurable, 2. they were obtained or controlled by the entity as a result of economic 3. a past transaction. exchange

13. The Balance Sheet13 A SSET M EASUREMENT ( V ALUATION): Originally what the asset cost – after that it gets wild – FASB is moving toward fair value for all assets, but is not there yet.

14. The Balance Sheet14 L IABILITIES A RE: obligations to give an asset to, or perform a service for, another entity in the future. Liabilities have four characteristics:

15. The Balance Sheet15 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which

16. The Balance Sheet16 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable $

17. The Balance Sheet17 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and

18. The Balance Sheet18 L IABILITY C HARACTERISTICS: 1. it is a present obligation for which 2. the future sacrifice is measurable 3. probable, and 4. is the result of a past transaction. (economic exchange)

19. The Balance Sheet19 L IABILITY M EASUREMENT (V ALUATION ) Almost always “present value” – in theory, the economic amount the company would have to pay today to satisfy the debt.

20. The Balance Sheet20 C ONTINGUENT L IABILITY lawsuit warranties (guarantees) asset retirement obligations (ARO) sick & vacation pay etc.

21. The Balance Sheet21 C ONTINGUENT L IABILITY

22. The Balance Sheet22 O WNER’S E QUITY Whatever.

23. The Balance Sheet23 B OOK V ALUE A commonly used term meaning owners’ equity. Book value per share - also commonly used (owners’ equity ÷ no. of shares of stock)

24. The Balance Sheet24 B ALANCE S HEET “ F LAW” The balance sheet does not always show assets and liabilities well.

25. The Balance Sheet25 B ALANCE S HEET “ F LAW” Our company issues 1,000 shares of stock to investors for $100/share. The price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

26. The Balance Sheet26 B ALANCE S HEET “ F LAW” Our company issues buys 1,000 shares of CROX for $26/share. That price is the fair value of the stock. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

27. The Balance Sheet27 B ALANCE S HEET “ F LAW” The CROX stock goes up to $30/share, our accountant puts the gain in an account that increases Owners’ equity. What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

28. The Balance Sheet28 B ALANCE S HEET “ F LAW” Our company buys a piece of land for $20,000 and signs a 30 year mortgage for the entire amount (CROX stock unchanged). What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

29. The Balance Sheet29 B ALANCE S HEET “ F LAW” The land goes up in value to $50,000; our accountant ignores the increase in value completely (CROX stock unchanged). What would our balance sheet look like? What is our “book value”? What is our book value/share? What is our stock’s market value/share?

30. The Balance Sheet30 T HE B ALANCE S HEET Questions?

31. M EASURING I NCOME Economist’s approach Accountant’s approach (commonly): Cash basis Accrual basis 31Income & Cash Flow Statements

32. R EVENUE C ASH V S. A CCRUAL CASH BASIS: Revenue represents an increase in CASH as a result of providing goods or services to customers. ACCRUAL BASIS: Revenue is an increase in NET ASSETS (assets - liabilities) as a result of providing goods or services to customers. 32Income & Cash Flow Statements

33. R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS Cash basis: to show revenue on the income statement the company must have received cash from its customer as a result of providing goods or services to the customer. 33Income & Cash Flow Statements

34. R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS Accrual basis-the SEC says 4 criteria must be met: 1. there is persuasive evidence of an arrangement, 2. delivery has occurred or services have been rendered, 3. the seller’s price is fixed or determinable, & 4. collectability is reasonably assured. 34Income & Cash Flow Statements

35. R EVENUE C RITERIA F OR C ASH A ND A CCRUAL B ASIS We could condense those into two criteria: 1. The company has received a measurable asset from the customer (SEC’s criteria 1, 3 & 4) and 2. The revenue is earned - meaning that the company has done what the customer is paying it to do (SEC’s criterion 2). 35Income & Cash Flow Statements

36. R EVENUE C ASH V S. A CCRUAL YOU WORK GET PAID ON AMOUNT OctoberNov. 1, 2013 6,000 NovemberDec. 1, 2013 12,000 DecemberJan. 2. 2014 12,000 What is revenue in 2013 on the cash basis? on the accrual basis? 36Income & Cash Flow Statements

37. U SING T HE A CCRUAL B ASIS A N E XPENSE I S: a decrease in net assets (assets - liabilities) as a result of providing goods or services to customers. 37Income & Cash Flow Statements

38. R EVENUE A ND E XPENSES C ASH B ASIS VS A CCRUAL Our company engages in the following transactions: QTR1: buys inventory for $6,000 on account & sells 1/3 of the inventory for $7,000 cash QTR2: pays for the inventory purchased in QTR1 & sells the remaining inventory for $15,000 on account QTR3: collects the $15,000 from the QTR2 sale 38Income & Cash Flow Statements

39. T HERE A RE O THER M ETHODS U SED T O R ECOGNIZE R EVENUES / E XPENSES Cash basis Accrual basis Installment sales method Cost recovery Percentage completion Completed contract 39Income & Cash Flow Statements

40. I NCOME S TATEMENT F ORMAT Point of the income statement – give information about revenue/gains and expenses/and losses for the past year/quarter and to give that information in a way that helps predict future income. 40Income & Cash Flow Statements

41. I NCOME S TATEMENT F ORMAT Continuing operations +/-Discontinued operations ◊ income from operations prior to disposal ◊ gain or loss on disposal +/-Extraordinary items events that are unusual in nature and infrequent in occurrence +/-Cumulative effect of changes in accounting principles = Net income 41Income & Cash Flow Statements

42. I NCOME S TATEMENT F ORMAT And every publicly traded company must show earnings per share on its income statement. 42Income & Cash Flow Statements

43. I NCOME S TATEMENT F ORMAT C ROX, I NC. (simplified) Consolidated Statement of Operations Year Ended December 31 (in thousands) 2010 2009 2008 Revenues$789,695$645,767$721,589 Cost of sales (364,631) (337,720) (486,722) Gross profit 425,064 308,047 234,867 Selling, general and administrative expense (344,029) (359,231) (423,149) Income from operations 81,258( 51,184)(188,282) Interest expense ( 657)( 1,495)( 1,793) Other income (expense) - net 414 4,058 565 Income (loss) before income taxes 80,792( 48,621)(189,076) Income tax (expense) benefit (13,066)( 6,543)( 4,434) Net income $67,726($42,078) ($185,076) 43Income & Cash Flow Statements

44. I NCOME S TATEMENT F ORMAT C ROX, I NC. (simplified) Consolidated Statement of Operations Year Ended December 31 (in thousands) 2010 2009 2008 Revenues$789,695$645,767$721,589 Cost of sales (364,631) (337,720) (486,722) Gross profit 425,064 308,047 234,867 Selling, general and administrative expense (344,029) (359,231) (423,149) Income from operations 81,258( 51,184)(188,282) Interest expense ( 657)( 1,495)( 1,793) Other income (expense) - net 414 4,058 565 Income (loss) before income taxes 80,792( 48,621)(189,076) Income tax (expense) benefit (13,066)( 6,543)( 4,434) Net income $67,726($42,078) ($185,076) Income (loss) per common share: Basic $.78 $(0.49) $(2.24) Diluted $.76 $(0.49) $(2.24) 44Income & Cash Flow Statements

45. I NCOME S TATEMENT QUESTIONS? 45Income & Cash Flow Statements