1. MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

2. Balance Sheet Assets: Cash Receivables Inventory Fixed Assets Other Assets Liabilities & Equity: Liabilities Equity Income Statement Revenues Expenses Net Income Statement of Cash Flows

3. Balance Sheet Assets: Cash Receivables Inventory Fixed Assets Other Assets Liabilities & Equity: Liabilities Equity Statement of Stock- holders’ Equity

4. Rockyfellow, Inc. Income Statement For the Year Ended December 31, 2001 The heading. The Income Statement The Income Statement

5. Sales revenue$186,230 Cost of goods sold 73,350 Gross profit112,880 Operating expenses: Wages$42,700 Utilities6,430 Depreciation9,650 Insurance3,420 Supplies8,390 Advertising7,120 Patent 3,000 Total operating expenses 80,710

6. The Income Statement The Income Statement Sales revenue$186,230 Cost of goods sold 73,350 Gross profit112,880 Total operating expenses 80,710 Operating income32,170 Interest expense 10,300 Pretax income21,870 Income tax expense 5,600 Net income$ 16,270

7. The Income Statement The Income Statement Sales revenue$186,230 Cost of goods sold 73,350 Gross profit112,880 Total operating expenses 80,710 Operating income32,170 Interest expense 10,300 Pretax income21,870 Income tax expense 5,600 Net income$ 16,270 Earnings per share of common stock$1.30 ($16,270  12,500 shares)

8. The Income Statement The Income Statement Earnings per Share (Net Income  Shares of Stock)  = Net Income  =

9. Rockyfellow, Inc. Balance Sheet December 31, 2001 The Balance Sheet The heading.

10. The Balance Sheet Rockyfellow, Inc. Balance Sheet December 31, 2001 2001 2000 Assets Current assets: Cash$ 15,600$ 11,700 Accounts receivable22,43013,850 Merchandise inventory43,50044,450 Supplies12,6709,920 Prepaid insurance 8,290 5,950 Total current assets$102,490$ 85,870

11. 2001 2000 Property, plant, and equipment: Equipment$ 93,070$ 79,570 Building275,000235,000 368,070314,570 Less: Accumulated depreciation105,860 96,210 262,210218,360 Land 36,810 45,000 Total property, plant, and equipment299,020263,360 Other assets: Patents 32,000 35,000 Total assets$433,510$384,230

12. 2001 2000 Liabilities Current liabilities: Accounts payable$ 24,790$ 22,630 Wages payable4,1005,510 Interest payable11,2509,920 Income taxes payable2,4003,000 Notes payable, current portion 14,400 9,320 Total current liabilities56,94050,380 Long-term liabilities: Notes payable, long-term177,600171,150 Total liabilities234,540221,530

13. 2001 2000 Stockholders’ Equity Contributed capital$125,000$100,000 Retained earnings 73,970 62,700 Total stockholders’ equity198,970162,700 Total liabilities and stockholders’ equity$433,510$384,230

14. The Statement of Stockholders’ Equity Rockyfellow, Inc. Statement of Stockholders’ Equity For the Year Ended December 31, 2001 ContributedRetained CapitalEarningsTotal Balance, December 31, 2000 $100,000$62,700 $162,700 Common stock issued25,00025,000 Net income16,270 16,270 Dividends declared(5,000)(5,000) Balance, December 31, 2001$125,000$73,970 $198,970 Contributed capital is the amount of direct investment by owners in a corporation. Retained earnings is the cumulative amount of net income earned that has been reinvested in the corporation. Dividends are not reported on the income statement because they are not expenses.

15. The Statement of Stockholders’ Equity Income Statement Net income Income Statement Net income Statement of Stockholders’ Equity Beginning stockholders’ Equity +Net income -Dividends +Stock issued -Stock repurchased Ending stockholders’ equity Statement of Stockholders’ Equity Beginning stockholders’ Equity +Net income -Dividends +Stock issued -Stock repurchased Ending stockholders’ equity Balance Sheet Stockholders’ equity Balance Sheet Stockholders’ equity The “link”

16. This statement reports events that resulted in cash inflows and outflows for a fiscal period. The Statement of Cash Flows

17. In other words, this statement explains the changes in a company’s cash balance during the fiscal period.

18. Operating Activities Operating activities involve the use of resources to design, produce, distribute, and market goods and services.

19. Cash Flow from Operating Activities Cash Received from Operating Activities  Cash Paid for Operating Activities - Net Cash from (for) Operating Activities = Direct Format Direct Format

20. Cash flow from operating activities: Receipts: Collections from customers$177,550 Payments: To suppliers of inventory$(70,240) To employees(44,110) For utilities(6,430) For insurance(5,760) For supplies(11,140) For interest(8,970) For advertising(7,120) For income taxes (6,200) Total cash payments(159,170) Net cash flow from operating activities17,680 Rockyfellow, Inc. Statement of Cash Flows For the Year Ended December 31, 2001 (Direct Method)

21. Investing Activities Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

22.  How much financing does an organization need?  Where should an organization obtain its financing?  When should an organization obtain funding?  What effect will financing have on profitability and survival? Financing Decisions

23. Cash flow from investing activities: Purchase of plant assets$(53,500) Sale of plant assets 8,190 Net cash flow from investing activities$(45,310) Cash flow for financing activities: Proceeds from issuing common stock$25,000 Proceeds from issuing long-term debt32,000 Payment of long-term debt(20,470) Payment of dividends (5,000) Net cash flow from financing activities 31,530 Net increase in cash3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001$ 15,600

24. Indirect Format The indirect format reconciles net income on an accrual basis with cash flow from operating activities on a cash basis.

25. Cash flow from operating activities: Net income$ 16,270 Adjusted for: Depreciation and amortization12,650 Increase in receivables(8,580) Decrease in merchandise950 Increase in supplies(2,750) Increase in prepaid insurance(2,340) Increase in accounts payable2,160 Decrease in wages payable(1,410) Increase in interest payable1,330 Decrease in income tax payable (600) Net cash from operating activities17,680 Rockyfellow, Inc. Statement of Cash Flows For the Year Ended December 31, 2001 (Indirect Method) 2001 2000 Change $22,430$13,850 $8,580 From Income Statement From Balance Sheet

26. Summary of Adjustments for the Indirect Format  Noncash expenses, such as depreciation and amortization, are added to net income in computing cash flow from operating activities.  Increases in current asset balances are subtracted from net income. Decreases in current asset balances are added to net income.  Increases in current liability balances are added to net income. Decreases in current liability balances are subtracted from net income. The following adjustments are made to net income using the indirect format in computing cash flow from operating activities.

27. Indirect Format Net income +Depreciation and Amortization Expense - Increases in Current Asset Accounts +Decreases in Current Asset Accounts +Increases in Current Liability Accounts -Decreases in Current Liability Accounts =Cash Flow from Operating Activities

28. Cash flow from investing activities: Purchase of plant assets$(53,500) Sale of plant assets 8,190 Net cash flow from investing activities$(45,310) Cash flow for financing activities: Proceeds from issuing common stock$25,000 Proceeds from issuing long-term debt32,000 Payment of long-term debt(20,470) Payment of dividends (5,000) Net cash flow from financing activities 31,530 Net increase in cash3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001$ 15,600 The investing and financing sections are identical for the direct and indirect formats.

29. Interrelationships Among Financial Statements Amounts on the Balance Sheet Beginning of Fiscal Period Amounts on the Balance Sheet Beginning of Fiscal Period Changes Reported on the Income Statement and Statement of Cash Flows +-+- Amount on the Balance Sheet End of Fiscal Period Amount on the Balance Sheet End of Fiscal Period =