Foundations of Business

1
Foundations of Business

• Introduction to Financial Reporting
• The Balance Sheet

Financial Application Assignment
2
Basic Elements of Financial Statements

• What a business owns
• What a business owes
• Owners economic position in the business

• Assets
• Liabilities
• Equity

3
Balance Sheet Equation

• Assets
• (What a company owns)
• A

• Liabilities
• Stockholders Equity
• L OE

(Funds to purchase what a company owns)
4
Balance Sheet

• Funds to purchase what a company owns
• L OE

• What a Company owns
• A

5
Champ Creemee CompanyBalance Sheet (as of
12/31/10)
Shows the companys position on a fixed date
snapshot in time

• Accounts Payable 2,000
• Wages Payable 500 Current Liabilities
  2,500
• Notes Payable (L.T.) 5,000
• Total Liabilities 7,500
• Common Stock 10,000
• Retained Earnings 690 Total
  Shareholders
  Equity 10,690
• Total Liab. SH Equity 18,190

• Cash 8,690
• Accounts Receivable 3,000
• Inventory 3,500
• Current Assets 15,190
• Equipment 3,000
• Total Assets 18,190

6
How Transactions Impact Financial Statements

• Increase in something owned
• Increase in something owed
• Sale of Common stock
• Increase in Sales
• Increased Expenses associated with sales
• Increase in Net Income
• Pay dividend

• Asset
• Liability
• Common Stock
• Sales
• Net Income
• Expenses
• - Net Income
• Retained Earnings
• - Retained Earnings

7
Owners Equity

• Example Owning a house with a mortgage
• Value of the house ( asset) 300,000
• - Mortgage ( liability) 200,000
• Owners Equity 100,000
• Assets - Liabilities Equity
• (House) - (Mortgage) Equity
• 300,000 - 200,000 100,000

8
The 30 Companies in the Dow Jones Industrial
Average (DJIA)
3M Company (MMM) Alcoa Inc. (AA) Amer. Express (AXP) ATT (T) Bank of America (BAC)
Boeing (BA) Caterpillar Inc. (CAT) Chevron Corporation (CVX) Cisco Systems (CSCO) Coca-Cola (KO)
DuPont (DD) Exxon Mobil Corp. (XOM) Gen'l Electric (GE) Hewlett - Packard (HPQ) Home Depot (HD)
Intel (INTC) Int'l Business Mach. (IBM) Johnson Johnson (JNJ) JPMorgan Chase (JPM) Kraft Foods (KFT)
McDonald's Corp. (MCD) Merck Co. (MRK) Microsoft Corp. (MSFT) Pfizer, Inc. (PFE) Procter Gamble (PG)
Travelers (TRV) United Technologies (UTX) Verizon Communic. (VZ) Wal-Mart Stores (WMT) Walt Disney (DIS)
Spring 2011
9
The Dow Jones Industrial Average (The DJIA or
the Dow)
Dow Jones
Source Google Finance
10
The Dow vs. the SP 500 (Standard Poors 500)
SP 500
Dow Jones
Source Google Finance
11
3 major market indexesthe DJIA, SP 500, NASDAQ
NASDAQ
Source Google Finance
12
BP vs. Exxon Mobil vs. the SP 500
Source Google Finance
Link to Financial Application Assignment
13
A major company eventJan. 13, 2011Effect on
company stock price?
headline

• Merck clot drug seen unfit for stroke
• Top experimental drug found unfit for stroke
  patients
• Vorapaxar acquired in Merck's buy of
  Schering-Plough
• Dashed drug hopes pose challenge to new CEO
• Merck shares drop 6.6 pct (Adds Merck drag on
  Dow, drug sales potential, stroke statistics)
• By Ransdell Pierson
• NEW YORK, Jan 13 (Reuters) - One of Merck Co's
  (MRK) most important experimental drugs, blood
  clot preventer Vorapaxar, has been deemed
  inappropriate for patients who have suffered a
  stroke, dashing investor hopes and erasing nearly
  8 billion from its market value.
• Vorapaxar, meant to prevent heart attacks and
  strokes or their recurrence, was considered a
  crown jewel in Merck's 41 billion acquisition in
  late 2009 of Schering-Plough Corp and deemed
  capable of generating annual sales of more than
  3 billion.
• Jan. 13, 2011

Date, source
Company announcement
14
Comparison chart The impact of a company event
on the companys stock price
Event Announcement by Merck of Vorapaxars
ineffectiveness
15
Effect of a company announcement on the companys
stock price
MRKs stock price underperforms the SP500
slightly before the event but then experiences a
sharp decline on the day of the event and
continues to underperform the SP 500 for the
next 5 days.
Date of Announcement
16
Creating an Index
Base value 2
Base value 1
Index new value / base value 100
DATE SP 500 ACTUAL VALUE(Close) S P 500 INDEX VALUE (calculated) MERCK ACTUAL STOCK PRICE (Close) MERCK INDEX VALUE(calculated)
1/10/11 1269.75 100 37.20 100
1/11/11 1274.48 1274.48 / 1269.75 x 100 100.37 36.95 36.95 / 37.20 x 100 99.33
1/12/11 1285.96 1285.96 / 1269.75 x 100 101.28 37.15 37.15 / 37.20 x 100 99.87
1/13/11 1283.76 1283.76 / 1269.75 x 100 101.10 34.69 34.69 / 37.20 x 100 93.25
1/14/11 1293.24 1293.24 / 1269.75 x 100 101.85 34.23 34.23 / 37.20 x 100 92.02
1/18/11 1295.02 1295.02 / 1269.75 x 100 101.99 33.87 33.87 / 37.20 x 100 91.05
1/19/11 1281.92 1281.92 / 1269.75 x 100 100.96 33.91 33.91 / 37.20 x 100 91.16
1/20/11 1280.26 1280.26 / 1269.75 x 100 100.83 34.05 34.05 / 37.20 x 100 91.53
1/21/11 1283.35 1283.35 / 1269.75 x 100 101.07 33.90 33.90 / 37.20 x 100 91.13
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Champ Creemee CompanyInventory
2 gallons of ice cream
cones
napkins