7 Managerial Accounting 7 Financial Statements.pptx

1 2 3 4 5 6 7 8 9 10 11 12
1 2 3 4
Annual
1 2
Month
Quarter
Semiannual
Exh.
3.1
Assoc. Prof. Murat Akkaya

Basic Financial Statements
 The balance sheet, which summarizes what a
firm owns and owes at a point in time.
 The income statement, which reports on how
much a firm earned in the period of analysis
 The statement of cash flows, which reports on
cash inflows and outflows to the firm during the
period of analysis

Financial analysis involves the use of various financial
statements. These statements do several things.
First, the balance sheet summarizes the assets,
liabilities, and owners’ equity of a business at a moment
in time, usually the end of a year or a quarter.
Second, the income statement summarizes the revenues
and expenses of the firm over a particular period of
time, again usually a year or a quarter.

Balance sheet is a summary of a firm’s
financial position on a given date that shows
total assets = total liabilities + owners’ equity.
The balance sheet represents a snapshot of the
firm’s financial position at a moment in time,

Resources owned by the business
◦ Cash
◦ Accounts receivable
◦ Inventories
◦ Building
◦ Furniture and fixtures
◦ Equipment
◦ Supplies

Obligations or debts of business
◦ Notes payable
◦ Accounts payable
◦ Interest payable
◦ Salaries payable
◦ Unearned revenue

 Ownership claims on assets
 Paid-in capital
 Common stock
 Retained earnings

Assets = Liabilities + Owners’ Equity
Sources of Funding
Creditors’
claims
against
resources
= +
Owners’
claims
against
resources
Resources
Resources
to use to
generate
revenues

Assets
Cash $ 40
Accounts receivable 100
Land 200
Total assets $340
Liabilities
Accounts payable $ 50
Notes payable 150
$200
Owners’ Equity
Capital stock $100
Retained earnings 40
$140
Total liabilities
and owners’ equity $340
Must
Equal

Aldine Manufacturing Company Balance Sheets (in thousands)

Balance Sheet Limitations:
 Assets recorded at historical value
 Only recognizes assets that can be expressed
in monetary terms
 Owners’ equity is usually less than the
company’s market value

Table shows the balance sheets of Aldine
Manufacturing Company for the fiscal years
ending March 31, 20X2, and March 31, 20X1.
The assets are listed in the upper panel according
to their relative degree of liquidity (i.e., their
closeness to cash).
Cash is the ultimate in liquidity, and appears first.

The further an asset is removed from cash, the
less liquid it is. Accounts receivable are one
step from cash, and inventories are two steps.
Because fixed assets, long-term investment,
and other long-term assets are the least liquid,
they appear last.

The bottom panel of the table shows the liabilities
and shareholders’ equity of the company.
These items are ordered according to the nearness
with which they are likely to be paid.
All current liabilities are payable within one year,
whereas the long-term debt is payable
beyond one year.

Shareholders’ equity will be “paid” only through regular
cash dividends, common stock repurchases, and,
perhaps, a final liquidation dividend.
Shareholders’ equity, or net worth as it is sometimes
called, consists of several subcategories. Common stock
(at par) and additional paid-in capital together represent
the total amount of money paid into the company in
exchange for shares of common stock.

Retained earnings represent a company’s
cumulative profits after dividends since the
firm’s inception: thus these are earnings that
have been retained (or reinvested) in the firm.

We see in the table that total assets equal – or
balance – total liabilities plus
shareholders’equity.
Indeed, that is an accounting identity. Also, it
follows that assets minus liabilities equal
shareholders’ equity.

Income statement is a summary of a firm’s
revenues and expenses over a specified period,
ending with net income or loss for the period.
The income statement depicts a summary of the
firm’s profitability over time.

Income statements Shows the results of a
company’s operations over a period of time.
 What goods were sold or services performed
that provided revenue for the company?
 What costs were incurred in normal
operations to generate these revenues?
 What are the earnings or company profit?

The Example Company
Income Statement
For the Years Ended December 31, 2010 and 2011
2011 2010
Revenues:
Sales $100 $ 85
Other revenue 30 15
Total revenues $130 $100
Expenses:
Cost of goods sold $ 62 $ 58
Operating & admin. 16 12
Income tax 20 18
Total expenses $ 98 $ 88
Net Income $ 32 $ 12

Aldine Manufacturing Company Income Statement (in thousands)

The income (earnings, or profit and loss) statement in
Table shows Aldine’s revenues, expenses, and net
profits for the two fiscal years under discussion.
The cost of goods sold represents the cost of actually
producing the products that were sold during the period.
Included here are the cost of raw materials, labor costs
associated with production, and manufacturing overhead
related to products sold.

Selling, general, and administrative expenses as
well as interest expense are shown separately
from the cost of goods sold because they are
viewed as period expenses rather than product
costs.

For a manufacturing company, as in this case,
depreciation expense is generally considered one
component of the cost of goods manufactured and
thus becomes part of the cost of goods sold.
For a merchandising firm (wholesaler or retailer),
depreciation is generally listed separately as
another period expense (like interest expense)
below the gross profit figure.

The last three rows of the income statement
shown in Table represent a simplified statement
of retained earnings. Dividends are deducted
from earnings after taxes to give the increase in
retained earnings.

An additional financial
statement that identifies
changes in retained
earnings from one
accounting period to the
next.
Beginning retained earnings
+ Net income
– Dividends paid
= Ending retained earnings
Net income results in:
Increase in net assets
Increase in retained earnings
Increase in owners’ equity
Dividends result in:
Decrease in net assets
Decrease in retained
earnings
Decrease in owners’ equity

Cash is the most liquid of assets. Cash offers both
liquidity and flexibility.
Cash includes cash and cash equivalents. Cash
equivalents:
 treasury bills maturing in 90 days or less;
 investment funds;
 foreign currency on hand;
 checking account and free savings account
Asst. Prof. Murat Akkaya

A cash flow statement presents information
about the cash flows associated with the
company’s main operations and those associated
with its investing and financing activities of the
period.
A cash flow statement functions in conjunction
with both the income statement (performance
dimension) and the balance sheet (financial
position).

 Provides information regarding the liquidity of a
firm
 explains the reasons for increase or decrease in cash
balance from one balance sheet date to the next
 classifies the reasons for the change as an operating,
investing or financing activity.
 amount of net income in a period is usually different
than the amount of increase in cash in the same
period
 reconciles net income with cash flow from
operations.

• The SCF reports cash receipts and cash payments by
operating, financing, and investing activities:
• Operating activities are the earning-related activities of a
company.
Beyond revenue and expense activities represented in
an income statement, they include the net inflows and
outflows of cash resulting from related operating
activities like extending credit to customers, investing
in inventories, and obtaining credit from suppliers.

Investing activities are means of acquiring and
disposing of noncash assets. They involve assets
expected to generate income; lending funds and
collecting the principal on these loans.
Financing activities are means of contributing,
withdrawing, and servicing funds to support
business activities. They include borrowing and
repaying funds with bonds and other loans;
contributions and withdrawals by owners and their
return on investment.

Statement of cash flows (SCF) helps address questions such as:
 How much cash is generated from or used in operations?
 What expenditures are made with cash from operations?
 How are dividends paid when confronting an operating
loss?
 What is the source of cash for debt payments?
 How is the increase in investments financed?
 What is the source of cash for new plant assets?
 Why is cash lower when income increased?
 What is the use of cash received from new financing?

External Uses of CFS
 To assess the ability of a firm to manage cash flows
 To assess the ability of a firm to generate cash through
its operations
 To assess the company’s ability to meet its obligations
and its dividend policy
 To provide information about the effectiveness of the
firm to convert its revenues to cash
 To provide information to estimate or anticipate the
company’s need for additional financing

Internal Uses of CFS
 To assess liquidity - determining if short-
term financing is necessary
 To determine dividend policy - deciding to
distribute; or increase or decrease
 To evaluate the investment and financing
decisions

Classification of Cash in-flows and outflows
From sales of goods and
services to customers
From receipt of customer
advances
From receipt of interest
revenue or dividends or
rent revenue or similar
revenue items
Operating Activities
To wages salary
payments
To suppliers for
purchases of inventories
To other operating
expenses
To interest payments
To tax payments
To advance payments to
suppliers
From sale of PPE and other
long-term assets
From collection of loans
Investing Activities
To purchase PPE and
other long-term assets
To make loans and to
collect such loans
From sale of common or
preferred stock
From issuance of short
or long term debt
Financing Activities To repay debt
To pay dividends

Format of the Cash Flow Statement
Name of the Company
Cash Flow Statement
For the period …
Cash from operating activities A
Cash from investing activities B
Cash from financing activities C
Net Change in Cash D = (A+B+C) increase or (decrease)
+ Beginning Cash balance CB, from the beginning balance sheet
Ending Cash balance =CB + D should equal to ending cash
balance in the ending balance sheet
Non-cash Investing and Financing Activities

45
Format of Statement of
Cash Flows

Net Income
+ Depreciation and Amortization
± Deferred Taxes
± Gains/Losses
± Changes in Working Capital
= Cash Flow from Operating Activities
- Purchases of Long Term Assets
+ Sales of Long Term Assets
= Cash Flow from Investing Activities
+ Sale of Stock
+ New Borrowing
- Debt Payments
- Dividends
- Stock Repurchases
= Cash Flow from Financing Activities
Cash Flow from Operating Activities
+ Cash Flow from Investing Activities
+ Cash Flow from Financing Activities
= Net Change in Cash

Notes to the Financial Statements
Notes are used to convey information required
by GAAP or to provide further explanation.

Four general types of notes:
 Summary of significant accounting policies:
assumptions and estimates.
 Additional information about the summary
totals.
 Disclosure of important information that is not
recognized in the financial statements.
 Supplementary information required by the KAP
or the SPK.

7 Managerial Accounting 7 Financial Statements.pptx

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7 Managerial Accounting 7 Financial Statements.pptx