The Balance Sheet and Financial Disclosures
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
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The Balance Sheet
Describe the purpose of the balance sheet and understand its usefulness and limitations.
Usefulness: p The balance sheet describes many of the resources a company has available for generating future cash flows.
Limitations: p The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value.
p It provides liquidity
p Resources such as employee skills and reputation are not recorded in the balance sheet.
information useful in assessing a company’s ability to pay its current obligations.
p It provides long-term
solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.
The purpose of the balance sheet is to report a company’s financial position on a particular date.
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Balance Sheet
Claims against resources (Liabilities)
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Learning Objectives
Resources (Assets) Remaining claims accruing to owners (Owners’ Equity)
Distinguish between current and noncurrent assets and liabilities.
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Identify and describe the various balance sheet asset classifications.
FedEx Corporation Balance Sheet 31-May
2004
2003
$ $
1,046 3,027 249 489 159 4,970
$ $
538 2,627 228 416 132 3,941
$
7,001
$
6,624
(In millions) Assets: Current assets: Cash and cash equivalents Receivables, less allowances Spare parts, supplies, and fuel Deferred income taxes Prepaid expenses and other Total current a ssets Property and equipment, at cost: Aircraft and rela ted equipment Package handling & ground support equipment and vehicles Computer & ele ctronic equipment Other
5,296 3,537 4,477 20,311 11,274 9,037
5,013 3,180 4,200 19,017 10,317 8,700
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Less accumulated depreciation Net property and equipment Other long-term assets: Goodwill Prepaid pension cost Intangible and other assets Total other long-term assets Total Assets
$
2,802 1,127 1,198 5,127 19,134
$
1,063 1,269 412 2,744 15,385
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Current Assets
Current Current Assets Assets
CashCash Cash Equivalents Cash Equivalents Short--term Investments term Investments Short Receivables Receivables Inventories Inventories Prepayments Prepayments
Cash equivalents include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills.
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Current Assets
Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer.
Current Current Assets Assets
CashCash Cash Equivalents Cash Equivalents term Investments Short--term Investments Short Receivables Receivables Inventories Inventories Prepayments Prepayments
Cash that is restricted for a special purpose and not available for current operations should not be classified as a current asset.
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Operating Cycle of a Typical Manufacturing Company
Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer.
Use cash to acquire raw materials
Convert raw materials to finished product
Deliver product to customer
Collect cash from customer
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Noncurrent Assets
Noncurrent Noncurrent Assets Assets
Investments and Investments and Funds Funds Property, Plant, & Property, Plant, & Equipment Equipment Intangibles Intangibles OtherOther
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Noncurrent Assets
Not expected to Not expected to be converted to be converted to cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer longer
Investments and Funds
Intangible Assets
©
1. Not used in the operations of the
1. Used in the operations of the
business
business but have no physical substance
2.
2.
Includes patents, copyrights, and franchises
Includes both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes
3. Reported net of accumulated
amortization
Property, Plant and Equipment
1. Are tangible, long-lived, and used in the
Other Assets
operations of the business
1.
2.
Includes long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications
Includes land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells
3. Reported at original cost less
accumulated depreciation (or depletion for natural resources)
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Learning Objectives
Identify and describe the two balance sheet liability classifications.
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FedEx Corporation Balance Sheet 31-May
2004
2003
$
750 1,062 1,615 1,305 4,732 2,837
$
308 724 1,168 1,135 3,335 1,709
1,181
882
768 591 503
657 536 466
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.
(In milions) Liabilities: Current liabilities: Current portion of long-term debt Accrued salaries & employee benefits Accounts payable Accrued expenses Total current liabilities Long-term debt, less current portion Other long-term liabilities Deferred income taxes Pension, postretirement healthcare and other benefit obligations Self-insurance accruals Deferred lease obligations Deferred gains, principally related to aircraft transactions Other liabilities Total other long-term liabilities Total liabilities
426 60 3,529 11,098
455 57 3,053 8,097
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Current Liabilities
Current Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt
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Long-term Liabilities
Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer
Long-Term Liabilities Notes Payable Mortgages Bonds Payable Pension Obligations Lease Obligations
Obligations that will not be satisfied within one year or operating cycle, whichever is longer
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FedEx Corporation Balance Sheet 31-May
2004
2003
$
30
$
30
(In millions, except shares) Common Stockholders' Investment: Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares issued for 2003 Additional paid-in capital Retained earnings Accumulated other comprehensive loss
1,079 7,001 (46) 8,064
1,088 6,250 (30) 7,338
Less deferred compensation and treasury stock at cost Total common stockholders' investment
$
28 8,036
$
50 7,288
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Shareholders’ Equity
Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting liabilities.
Deferred Compensation Capital Stock
Retained Earnings Treasury Stock
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Learning Objectives
Accumulated Other Comprehensive Income
Explain the purpose of financial statement disclosures.
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Disclosure Notes
Conveys valuable information about the company’s choices from among various alternative accounting methods.
Summary of Significant Accounting Policies
Subsequent Events
A significant development that takes place after the company’s fiscal year-end but before the financial statements are issued.
Noteworthy Events and Transactions
Transactions or events that are potentially important to evaluating a company’s financial statements, e.g., related parties, errors and irregularities, and illegal acts.
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Learning Objectives
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Management Discussion and Analysis
Explain the purpose of management’s discussion and analysis.
Provides a biased but Provides a biased but informed perspective of informed perspective of a company’s a company’s operations, liquidity, operations, liquidity, and capital resources. and capital resources.
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Management’s Responsibilities
p Preparing the financial statements and other information in the annual report.
p Maintaining and assessing the company’s internal control procedures.
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Learning Objectives
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Auditors’ Report
Expresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principles
Must comply with specifications of the AICPA and the PCAOB
Explain the purpose of an audit and describe the content of the audit report.
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Auditors’ Opinions
Unqualified
Issued when the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP
Qualified
Issued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a whole
Adverse
Issued when the exceptions are so serious that a qualified opinion is not justified
Disclaimer
Issued when insufficient information has been gathered to express an opinion
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Compensation of Directors & Top Executives
Proxy Statement Information p Summary compensation table p Table of options granted p Table of options holdings
A proxy statement is sent each year to all shareholders, usually in the same mailing with the annual report.
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Learning Objectives
Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.
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Using Financial Statement Information
Comparative Financial Statements
Allow financial statement users to compare year-to-year financial position, results of operations, and cash flows
Horizontal Analysis
Vertical Analysis
Expresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount) Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year.
Ratio Analysis
Allows analysts to control for size differences over time and among firms
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Learning Objectives
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Liquidity Ratios
Identify and calculate the common liquidity and financing ratios used to assess risk.
Current assets Current ratio = Current liabilities
Measures a company’s ability to satisfy its short-term liabilities
Quick assets Acid-test ratio = Current liabilities
Provides a more stringent indication of a company’s ability to pay its current liabilities
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Liquidity Ratios—Federal Express
$4,970 = 1.05 $4,732
Current ratio
$4,073 = .86 $4,732
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Financing Ratios
Acid-test ratio
Total liabilities = Debt to equity ratio Shareholders’ equity
Indicates the extent of reliance on creditors, rather than owners, in providing resources
Net income + Interest expense + Taxes = Times interest earned ratio Interest expense
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Financing Ratios—Federal Express
Indicates the margin of safety provided to creditors
$11,098 = 1.38 $8,036
Debt to equity ratio
$1,455 = 10.70 $136
Times interest earned ratio
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Reporting Segment Information
Appendix 3
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Reporting by Operating Segment
Many companies operate in several business segments as a strategy to achieve growth and to reduce operating risk through diversification.
Segment reporting facilitates the financial statement analysis of diversified companies.
Reportable Operating Segment Characteristics
Engages in business activities from which it may earn revenues and incur expenses
Discrete financial information is available
Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance
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What Amounts Are Reported By An Operating Segment
General information about the operating segment Segment profit or loss, segment assets, and the basis of measurement
Interim period information
Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items
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Segment Reporting
Reporting by Geographic Area
SFAS 131 requires an enterprise to report certain geographic information unless it is impracticable to do so.
Information About Major Customers
Revenues from customers generating 10% or more of the revenue of an enterprise must be disclosed.
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End of Chapter 3
