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  • 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Transcript

    • 1.  
    • 2. <ul><li>A Further Look at </li></ul><ul><li>Financial Statements </li></ul>Accounting, Third Edition
    • 3. <ul><li>Identify the sections of a classified balance sheet. </li></ul><ul><li>Identify and compute ratios for analyzing a company’s profitability. </li></ul><ul><li>Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. </li></ul><ul><li>Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. </li></ul><ul><li>Use the statement of cash flows to evaluate solvency. </li></ul><ul><li>Explain the meaning of generally accepted accounting principles. </li></ul><ul><li>Discuss financial reporting concepts. </li></ul>Study Objectives
    • 4. <ul><li>Ratio analysis </li></ul><ul><li>Using the income statement </li></ul><ul><li>Using the statement of stockholders’ equity </li></ul><ul><li>Using a classified balance sheet </li></ul><ul><li>Using the statement of cash flows </li></ul>The Classified Balance Sheet <ul><li>Current assets </li></ul><ul><li>Long-term investments </li></ul><ul><li>Property, plant, and equipment </li></ul><ul><li>Intangible assets </li></ul><ul><li>Current liabilities </li></ul><ul><li>Long-term liabilities </li></ul><ul><li>Stockholders’ equity </li></ul><ul><li>The standard-setting environment </li></ul><ul><li>Characteristics of useful information </li></ul><ul><li>Assumptions and principles </li></ul><ul><li>Constraints </li></ul>Using the Financial Statements Financial Reporting Concepts A Further Look At Financial Statements
    • 5. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Presents a snapshot at a point in time. </li></ul></ul><ul><ul><li>To improve understanding, companies group similar assets and similar liabilities together. </li></ul></ul>Assets Liabilities and Owner’s Equity Current assets Current liabilities Long-term investments Long-term liabilities Property, plant, and equipment Stockholders’ equity Intangible assets Illustration 2-1 Standard Classifications
    • 6. The Classified Balance Sheet Illustration 2-2
    • 7. The Classified Balance Sheet Illustration 2-2
    • 8. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Assets that a company expects to convert to cash or use up within one year or the operating cycle , whichever is longer. </li></ul></ul><ul><ul><li>Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers. </li></ul></ul>Current Assets
    • 9. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Companies usually list current asset accounts in the order they expect to convert them into cash. </li></ul></ul>Current Assets Illustration 2-3
    • 10. The Classified Balance Sheet <ul><li>Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called: </li></ul><ul><ul><li>Current assets. </li></ul></ul><ul><ul><li>Intangible assets. </li></ul></ul><ul><ul><li>Long-term investments. </li></ul></ul><ul><ul><li>Property, plant, and equipment. </li></ul></ul>Review Question SO 1 Identify the sections of a classified balance sheet.
    • 11. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Investments in stocks and bonds of other companies. </li></ul></ul><ul><ul><li>Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities. </li></ul></ul>Long-Term Investments Illustration 2-4
    • 12. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Long useful lives. </li></ul></ul><ul><ul><li>Currently used in operations. </li></ul></ul><ul><ul><li>Depreciation - allocating the cost of assets to a number of years. </li></ul></ul><ul><ul><li>Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life. </li></ul></ul>Property, Plant, and Equipment
    • 13. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Property, Plant, and Equipment Illustration 2-5
    • 14. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Assets that do not have physical substance. </li></ul></ul>Intangible Assets Illustration 2-6
    • 15. The Classified Balance Sheet <ul><li>Patents and copyrights are </li></ul><ul><ul><li>Current assets. </li></ul></ul><ul><ul><li>Intangible assets. </li></ul></ul><ul><ul><li>Long-term investments. </li></ul></ul><ul><ul><li>Property, plant, and equipment. </li></ul></ul>Review Question SO 1 Identify the sections of a classified balance sheet.
    • 16. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Obligations the company is to pay within the coming year. </li></ul></ul><ul><ul><li>Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude. </li></ul></ul><ul><ul><li>Liquidity - ability to pay obligations expected to be due within the next year. </li></ul></ul>Current Liabilities
    • 17. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Current Liabilities Illustration 2-7
    • 18. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. <ul><ul><li>Obligations a company expects to pay after one year. </li></ul></ul>Long-Term Liabilities Illustration 2-8
    • 19. The Classified Balance Sheet <ul><li>Which of the following is not a long-term liability? </li></ul><ul><ul><li>Bonds payable </li></ul></ul><ul><ul><li>Current maturities of long-term obligations </li></ul></ul><ul><ul><li>Long-term notes payable </li></ul></ul><ul><ul><li>Mortgages payable </li></ul></ul>Review Question SO 1 Identify the sections of a classified balance sheet.
    • 20. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Stockholders’ Equity Illustration 2-2 <ul><li>Common stock - investments of assets into the business by the stockholders. </li></ul><ul><li>Retained earnings - income retained for use in the business. </li></ul>
    • 21. Using the Financial Statements Ratio Analysis <ul><ul><li>Expresses relationship among selected items of financial statement data. </li></ul></ul><ul><ul><li>Relationship expressed in terms of either a percentage, a rate, or a simple proportion. </li></ul></ul>
    • 22. Using the Financial Statements Illustration: Best Buy has current assets of $9,081 million and current liabilities of $6,301 million. We can determine a relationship between these accounts by dividing current assets by current liabilities, to get 1.44. The alternative means of expression are: Percentage: Current assets are 144% of current liabilities. Rate: Current assets are 1.44 times as great as current liabilities. Proportion: The relationship of current assets to current liabilities is 1.44:1.
    • 23. Using the Financial Statements
    • 24. Using the Financial Statements Circuit City reported a net loss of $10.2 million for the year ended Feb. 28, 2007. Using the Income Statement Illustration 2-10 SO 2 Identify and compute ratios for analyzing a company’s profitability.
    • 25. Using the Financial Statements Illustration: Earnings per share (EPS) measures the net income earned on each share of common stock. Profitability Ratio $1,377 (481 - $0 + 485) 2 = $2.85 $1,140 (485 - $0 + 493) 2 = $2.33 Best Buy Illustration 2-11
    • 26. Using the Financial Statements <ul><li>For 2010 Stoneland Corporation reported net </li></ul><ul><li>income $26,000; net sales $400,000; and average shares outstanding 6,000. There were preferred stock dividends of $2,000. What was the 2010 earnings per share? </li></ul><ul><ul><li>$4.00 </li></ul></ul><ul><ul><li>$0.06 </li></ul></ul><ul><ul><li>$16.67 </li></ul></ul><ul><ul><li>$66.67 </li></ul></ul>Review Question SO 2 Identify and compute ratios for analyzing a company’s profitability. $26,000 - $2,000 6,000 = $4.00
    • 27. Using the Financial Statements Using the Statement of Stockholders’ Equity SO 3 Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. Most companies use a statement of stockholders’ equity , rather than a retained earnings statement, so that they can report all changes in stockholders’ equity accounts. Illustration 2-12
    • 28. Using the Financial Statements Using the Statement of Stockholders’ Equity SO 3 Explain the relationship between a retained earnings statement and a statement of stockholders’ equity. <ul><li>Observations from this financial statement of Best Buy : </li></ul><ul><ul><li>Common stock increased during the first year as the result of issuance of common stock. </li></ul></ul><ul><ul><li>Common stock declined in the second and third years as the result of repurchasing shares of stock. </li></ul></ul><ul><ul><li>Best Buy paid an increasing amount of dividends each year. </li></ul></ul><ul><ul><li>Prior to 2003, Best Buy did not pay dividends, even though it was profitable and could do so. </li></ul></ul><ul><ul><li>Why didn’t Best Buy pay dividends prior to 2003? </li></ul></ul>
    • 29. Using the Financial Statements <ul><li>The balance in retained earnings is not affected by: </li></ul><ul><ul><li>net income </li></ul></ul><ul><ul><li>net loss </li></ul></ul><ul><ul><li>issuance of common stock </li></ul></ul><ul><ul><li>dividends </li></ul></ul>Review Question SO 3 Explain the relationship between a retained earnings statement and a statement of stockholders’ equity.
    • 30. Using the Financial Statements Using a Classified Balance Sheet Illustration 2-13
    • 31. Using the Financial Statements Using a Classified Balance Sheet SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Liquidity —the ability to pay obligations expected to become due within the next year or operating cycle. Illustration 2-14 When working capital is positive, there is greater likelihood that the company will pay its liabilities. Best Buy had working capital in 2007 of $2,780 million.
    • 32. Using the Financial Statements Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Illustration 2-15 Liquidity Ratio $6,301 = 1.44:1 $9,081 $6,056 = 1.32:1 $7,985 1.68:1 1.75:1 1.21:1 For every dollar of current liabilities, Best Buy has $1.44 of current assets SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. NA
    • 33.  
    • 34. Using the Financial Statements Using a Classified Balance Sheet SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Solvency —the ability to pay interest as it comes due and to repay the balance of a debt due at its maturity. Solvency ratios measure the ability of the company to survive over a long period of time.
    • 35. Using the Financial Statements Debt to total assets ratio measures the percentage of total financing provided by creditors rather than stockholders. Illustration 2-16 Solvency Ratio $13,570 = 54% $7,369 $11,864 = 56% $6,607 55% 52% 21% The 2007 ratio means that every dollar of assets was financed by 54 cents of debt. SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. NA
    • 36. Using the Financial Statements SO 4 Identify and compute ratios for analyzing a company’s liquidity and solvency using a balance sheet. Review Question <ul><li>The following ratios are available for Leer Inc. and Stable Inc. </li></ul><ul><li>Compared to Stable Inc., Leer Inc. has: </li></ul><ul><li>higher liquidity, higher solvency, and higher profitability. </li></ul><ul><li>lower liquidity, higher solvency, and higher profitability. </li></ul><ul><li>higher liquidity, lower solvency, and higher profitability. </li></ul><ul><li>higher liquidity and lower solvency, but profitability cannot be compared based on information provided. </li></ul>
    • 37.  
    • 38. Using the Financial Statements Using the Statement of Cash Flows SO 5 Use the statement of cash flows to evaluate solvency. <ul><li>To aid in the analysis of cash, the statement of cash flows reports the cash effects of </li></ul><ul><ul><li>a company’s operating activities, </li></ul></ul><ul><ul><li>its investing activities, and </li></ul></ul><ul><ul><li>its financing activities. </li></ul></ul>
    • 39. Using the Financial Statements Using the Statement of Cash Flows SO 5 Use the statement of cash flows to evaluate solvency. Illustration 2-17 Would you feel better about a company’s health if you knew that most of its cash was generated by operating its business rather than by borrowing cash from lenders? ) ) ( (
    • 40. Using the Financial Statements SO 5 Use the statement of cash flows to evaluate solvency. Cash provided by operating activities fails to take into account that a company must invest in new PP&E and must maintain dividends at current levels to satisfy investors. Answers on notes page.
    • 41. Financial Reports Concepts The Standard-Setting Environment SO 6 Explain the meaning of generally accepted accounting principles. Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. <ul><li>Various standard-setting bodies determine these guidelines: </li></ul><ul><ul><li>Securities and Exchange Commission (SEC) </li></ul></ul><ul><ul><li>Public Company Accounting Oversight Board (PCAOB) </li></ul></ul><ul><ul><li>Financial Accounting Standards Board (FASB) </li></ul></ul><ul><ul><li>International Accounting Standards Board (IASB) </li></ul></ul>
    • 42. Financial Reports Concepts <ul><li>Generally accepted accounting principles are: </li></ul><ul><ul><li>a set of standards and rules that are recognized as a general guide for financial reporting. </li></ul></ul><ul><ul><li>usually established by the Internal Revenue Service. </li></ul></ul><ul><ul><li>the guidelines used to resolve ethical dilemmas. </li></ul></ul><ul><ul><li>fundamental truths that can be derived from the laws of nature. </li></ul></ul>Review Question SO 6 Explain the meaning of generally accepted accounting principles.
    • 43.  
    • 44. Financial Reports Concepts Characteristics of Useful Information SO 7 Discuss financial reporting concepts. Illustration 2-18
    • 45.  
    • 46. Financial Reports Concepts Assumptions in Financial Reporting Illustration 2-19 Monetary Unit Time Period Economic Entity Going Concern SO 7 Discuss financial reporting concepts.
    • 47. Financial Reports Concepts Principles in Financial Reporting Illustration 2-20 Cost Full Disclosure SO 7 Discuss financial reporting concepts.
    • 48. Financial Reports Concepts Constraints in Financial Reporting Illustration 2-20 Materiality Conservatism SO 7 Discuss financial reporting concepts.
    • 49. Financial Reports Concepts Comparability Going concern <ul><li>Ability to easily evaluate one company’s results relative to another’s. </li></ul><ul><li>Belief that a company will continue to operate for the foreseeable future. </li></ul><ul><li>The judgment concerning whether an item is large enough to matter to decision makers. </li></ul>Materiality SO 7 Discuss financial reporting concepts.
    • 50. Financial Reports Concepts Full disclosure Time period <ul><li>The reporting of all information that would make a difference to financial statement users. </li></ul><ul><li>The practice of preparing financial statements at regular intervals. </li></ul><ul><li>The quality of information that indicates the information makes a difference in a decision. </li></ul>Relevance SO 7 Discuss financial reporting concepts.
    • 51. Financial Reports Concepts Cost Consistency <ul><li>A belief that items should be reported on the balance sheet at the price that was paid to acquire the item. </li></ul><ul><li>A company’s use of the same accounting principles and methods from year to year. </li></ul><ul><li>The use of accounting methods that do not overstate assets or income. </li></ul>Conservatism SO 7 Discuss financial reporting concepts.
    • 52. Financial Reports Concepts Economic entity Reliability <ul><li>Tracing accounting events to particular companies. </li></ul><ul><li>The desire to minimize errors and bias in financial statements. </li></ul><ul><li>Reporting only those things that can be measured in dollars. </li></ul>Monetary unit SO 7 Discuss financial reporting concepts.
    • 53. Financial Reports Concepts <ul><li>What is the primary criterion by which accounting information can be judged? </li></ul><ul><ul><li>Consistency. </li></ul></ul><ul><ul><li>Predictive value. </li></ul></ul><ul><ul><li>Usefulness for decision making. </li></ul></ul><ul><ul><li>Comparability. </li></ul></ul>Review Question SO 7 Discuss financial reporting concepts.
    • 54. Copyright Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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