Ch'2 Financial Statements and the Annual Report

1
Ch.2 Financial Statements and the Annual Report

• Prof. Jamie Wang

2
What Financial Statements Tell about a Business

• B/S
• How much of the assets was borrowed, and how much
  provided by its shareholders
• What obligations will be due in the near future
  and what assets will be available to satisfy them
• I/S
• Revenues and expenses for the period
• Statement of Cash Flows
• Where cash came from and how it was used

3
Objective of financial reportingProvide useful
information

• To be useful, the information must be
• Relevant
• Reliable
• Understandable
• Comparable across companies
• Consistent over time

4
Classified Balance Sheet

• Classification of assets
• Current assets expected to be realized in cash
  or sold or consumed in one year (or an operating
  cycle if longer)
• Noncurrent assets
• Investments
• Property, plant, and equipment
• Intangible assets

5
Classified Balance Sheet

• Classification of liabilities and shareholders
  equity
• Liabilities
• Current liabilities obligations that will be
  satisfied within one year (or one operating cycle
  if longer)
• Long term liabilities
• Shareholders equity
• Contributed capital
• Retained earnings

6
Use of classified balance sheet

• Working capital
• Working capital Current assets current
  liabilities
• Current ratio
• Current ratio (current assets) (current
  liabilities)

7
Income Statement

• What appears on the I/S?
• Revenues
• Expenses
• Objective of I/S users predict future
  performance
• One time/incidental events v. events related to
  continuing operations

8
Multiple v. Single Step

• Single step I/S
• P.72
• Multiple step I/S
• P.73

9
Major ratios for evaluating a companys operating
performance and financial condition

• Operating performance
• Return on shareholders equity (ROE)
• Liquidity ability to pay short-term obligations
• Current ratio
• Solvency ability to pay all the debts
• Total Liability to total assets ratio

10
Financial Statement Analysis

• Comparing ratios of the company being analyzed
  with those of its competitors, with industry
  average, and with past performances