The Balance Sheet and Financial Disclosures

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Describe the purpose of the balance sheet and understand its usefulness and limitations. The Balance Sheet The purpose of the balance sheet is to report a company’s financial position on a particular date. Limitations: The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. p Resources such as employee skills and reputation are not recorded in the balance sheet. p Usefulness: p The balance sheet describes many of the resources a company has available for generating future cash flows. p It provides liquidity information useful in assessing a company’s ability to pay its current obligations....

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Nội dung Text: The Balance Sheet and Financial Disclosures

The Balance Sheet and Financial Disclosures 3 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 3-2 Learning Objectives Describe the purpose of the balance sheet and understand its usefulness and limitations. 3-3 The Balance Sheet The purpose of the balance sheet is to report a company’s financial position on a particular date. Usefulness: Limitations: p The balance sheet describes The balance sheet does not p many of the resources a portray the market value of company has available for the entity as a going concern generating future cash flows. nor its liquidation value. p It provides liquidity p Resources such as information useful in employee skills and assessing a company’s reputation are not recorded ability to pay its current in the balance sheet. 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. 1
3-4 Balance Sheet Claims against resources (Liabilities) Remaining claims Resources accruing to owners (Assets) (Owners’ Equity) 3-5 Learning Objectives Distinguish between current and noncurrent assets and liabilities. Identify and describe the various balance sheet asset classifications. 3-6 FedEx Corporation Balance Sheet 31-May (In millions) 2004 2003 Assets: Current assets: Assets are Cash and cash equivalents $ 1,046 $ 538 Receivables, less allowances 3,027 2,627 probable Spare parts, supplies, and fuel 249 228 future Deferred income taxes 489 416 Prepaid expenses and other 159 132 economic Total current a ssets $ 4,970 $ 3,941 benefits Property and equipment, at cost: Aircraft and rela ted equipment $ 7,001 $ 6,624 obtained or Package handling & ground support controlled by equipment and vehicles 5,296 5,013 Computer & ele ctronic equipment 3,537 3,180 a particular Other 4,477 4,200 entity as a 20,311 19,017 Less accumulated depreciation 11,274 10,317 result of past Net property and equipment 9,037 8,700 transactions Other long-term assets: Goodwill 2,802 1,063 or events. Prepaid pension cost 1,127 1,269 Intangible and other assets 1,198 412 Total other long-term assets 5,127 2,744 Total Assets $ 19,134 $ 15,385 2
3-7 Current Assets Cash Cash Equivalents Current Short-term Investments Short- Receivables Assets Inventories Prepayments Will be converted Cash equivalents to cash or include certain consumed within negotiable items such one year or the as commercial paper, operating cycle, money market funds, and U.S. treasury bills. whichever is longer. 3-8 Current Assets Cash Cash Equivalents Current Short-term Investments Short- Receivables Assets Inventories Prepayments Will be converted Cash that is restricted to cash or for a special purpose consumed within and not available for one year or the current operations operating cycle, should not be classified as a current whichever is asset. longer. Operating Cycle of a Typical Manufacturing 3-9 Company Use cash to acquire raw materials Convert raw materials to finished product Deliver product to customer Collect cash from customer 3
3-10 Noncurrent Assets Investments and Funds Noncurrent Property, Plant, & Equipment Assets Intangibles Other Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer 3-11 Noncurrent Assets ©Used Intangible Assetsof the Investments and Funds 1. Not used in the operations of the 1. in the operations business business but have no physical substance 2. Includes both debt and equity securities of other corporations, land held for 2. Includes patents, copyrights, and speculation, noncurrent receivables, and franchises 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. Includes long-term prepaid 2. Includes land, buildings, equipment, expenses and any noncurrent machinery, and furniture as well as assets not falling in one of the natural resources such as mineral mines, other classifications timber tracts, and oil wells 3. Reported at original cost less accumulated depreciation (or depletion for natural resources) 3-12 Learning Objectives Identify and describe the two balance sheet liability classifications. 4
FedEx Corporation 3-13 Balance Sheet Liabilities are 31-May probable (In milions) 2004 2003 future Liabilities: sacrifices of Current liabilities: economic Current portion of long-term debt $ 750 $ 308 benefits Accrued salaries & employee benefits 1,062 724 arising from Accounts payable 1,615 1,168 present Accrued expenses 1,305 1,135 obligations of Total current liabilities 4,732 3,335 a particular Long-term debt, less current portion 2,837 1,709 entity to Other long-term liabilities transfer Deferred income taxes 1,181 882 assets or P ension, postretirement healthcare provide a nd other benefit obligations 768 657 Self-insurance accruals 591 536 services to Deferred lease obligations 503 466 other entities Deferred gains, principally related to as a result of aircraft transactions 426 455 past Other liabilities 60 57 transactions Total other long-term liabilities 3,529 3,053 or events. Total liabilities 11,098 8,097 3-14 Current Liabilities Accounts Payable Notes Payable Current Accrued Liabilities Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer 3-15 Long-term Liabilities Notes Payable Mortgages Long-Term Bonds Payable Liabilities Pension Obligations Lease Obligations Obligations that will not be satisfied within one year or operating cycle, whichever is longer 5
3-16 FedEx Corporation Balance Sheet 31-May (In millions, except shares) 2004 2003 Common Stockholders' Investment: Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares $ 30 $ 30 issued for 2003 Additional paid-in capital 1,079 1,088 Retained earnings 7,001 6,250 Accumulated other comprehensive loss (46) (30) 8,064 7,338 Less deferred compensation and treasury stock at cost 28 50 Total common stockholders' investment $ 8,036 $ 7,288 Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting liabilities. 3-17 Shareholders’ Equity Deferred Capital Compensation Stock Retained Treasury Earnings Stock Accumulated Other Comprehensive Income 3-18 Learning Objectives Explain the purpose of financial statement disclosures. 6
3-19 Disclosure Notes Summary of Conveys valuable information about the company’s choices from Significant among various alternative Accounting Policies accounting methods. A significant development that takes place after the company’s Subsequent Events fiscal year-end but before the financial statements are issued. Transactions or events that are potentially important to evaluating Noteworthy Events a company’s financial statements, and Transactions e.g., related parties, errors and irregularities, and illegal acts. 3-20 Learning Objectives Explain the purpose of management’s discussion and analysis. 3-21 Management Discussion and Analysis Provides a biased but informed perspective of a company’s operations, liquidity, and capital resources. 7
3-22 Management’s Responsibilities Preparing the financial p statements and other information in the annual report. Maintaining and p assessing the company’s internal control procedures. 3-23 Learning Objectives Explain the purpose of an audit and describe the content of the audit report. 3-24 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 8
3-25 Auditors’ Opinions Issued when the financial statements present fairly the Unqualified financial position, results of operations, and cash flows in conformity with GAAP Issued when there is an exception that is not of sufficient seriousness Qualified to invalidate the financial statements as a whole Issued when the exceptions are so Adverse serious that a qualified opinion is not justified Issued when insufficient Disclaimer information has been gathered to express an opinion Compensation of Directors & Top 3-26 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. 3-27 Learning Objectives Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. 9
3-28 Using Financial Statement Information Allow financial statement users to Comparative Financial compare year-to-year financial position, results of operations, and Statements cash flows Expresses each item in the financial statements as a Horizontal Analysis percentage of that same item in the financial statements of another year (base amount) Involves expressing each item in the financial statements as a Vertical Analysis percentage of an appropriate corresponding total, or base amount, within the same year. Allows analysts to control for size Ratio Analysis differences over time and among firms 3-29 Learning Objectives Identify and calculate the common liquidity and financing ratios used to assess risk. 3-30 Liquidity Ratios 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 10
3-31 Liquidity Ratios—Federal Express $4,970 = 1.05 $4,732 Current ratio $4,073 = .86 $4,732 Acid-test ratio 3-32 Financing Ratios 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 Indicates the margin of safety provided to creditors 3-33 Financing Ratios—Federal Express $11,098 = 1.38 $8,036 Debt to equity ratio $1,455 = 10.70 $136 Times interest earned ratio 11
3-34 Reporting Segment Information Appendix 3 3-35 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 Operating results are regularly from which it may earn revenues reviewed by the enterprise’s chief and incur expenses operating decision maker to make decisions about resources to be Discrete financial information is allocated to the segment and available assess its performance What Amounts Are Reported By An 3-36 Operating Segment Segment profit or loss, General information about segment assets, and the the operating segment basis of measurement Reconciliations of the totals of segment Interim period information revenues, reported profit or loss, assets, and other significant items 12
3-37 Segment Reporting SFAS 131 requires an enterprise to Reporting by report certain geographic information unless it is Geographic Area impracticable to do so. Revenues from customers Information About generating 10% or more of the revenue of an enterprise must be Major Customers disclosed. 3-38 End of Chapter 3 13