Professional Documents
Culture Documents
Step 2:
fin. performance & resultant financial position/condition.
Step 3: future predicted performance
Step 4: present value total assets (debt + equity securities) or net worth (value
of equity securities/shares) = decision of investing
Accounting Equation
Balance Sheet
Trade-offs in financing company by owner vs. non-owner financing (nonowner financing less costly)
Shareholders & long-term creditors influence strategic direction of
company
A & L reported on SOFP at acquisition price (historical cost instead of fair
value)
Income Statement
Operating activities: lists amounts of sales (revenues) less expenses (costs) over
period of time.
Sales expenses = net income
Statement of Equity
Changes in accounts that make equity: contributed & earned capital (RE +
accumulated OCI); other (accumulated OCI & minority/non-controlling interest)
Owner may prefer money reinvested, not received as dividends: reinvestment
can drive further profit & growth.
RE, contributed capital & other equity balances appear on both statement
of stockholders equity & SOFP
SOCF linked to SOCI as net income is component of operating cash flow.
SOCF also linked to SOFP as change in SOFP cash account reflects net cash
inflows & outflows for period.
Competitive Analysis
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industry competition
bargaining power buyers
bargaining power suppliers
threat substitution
threat entry
Support
Firm infrastructure
HR management
Technology/product development
Procurement
Profitability Analysis
Audit Report
F/S = managements responsibility. Auditor responsibility: express opinion on
statements
Involves sampling transactions, not investigating each trans.
Audit opinion provides reasonable assurance statements free of material
misstatements, NOT guarantee
Auditors review acctg policies used by management & estimates used in
preparing statements
F/S present fairly, in all material respects, a companys financial condition, in
conformity w/GAAP (unqualified opinion)
balance sheet
income statement
statement of SHolders equity
statement of cash flows
BALANCE SHEET
A=L+E
Uses of funds = sources of funds
-
Assets
Converted into cash or used up to generate revenues
To be reported on SOFP, asset:
1. owned (controlled) by company
2. possess expected future economic benefits
Current assets: converted into cash within a year
-
Long-term assets:
-
Cisco Systems
Liabilities
Current Liabilities
Used to operate/finance business
-
Cisco:
Non-current liabilities
-
Cisco
Equity
-
Choices for owner once profits made: reinvestment (drives growth) or dividend
distribution
Equity accounts:
-
common stock: par value received from original sale of common stock to
investors
preferred stock: value received from original sale of preferred stock (fewer
ownership rights than common)
additional paid-in capital: amounts received from original sale stock to
investors in addition to par value of common stock
treasury stock: amount firm paid to reacquire common stock from
SHolders
retained earnings: accumulated net income (profit) not distributed to
SHolders as dividends
accumulated other comprehensive income/loss: accumulated changes in
equity not reported in SOCI (module 9)
INCOME STATEMENT
Most important line item for analysts to determine valuation for corporation =
net income
net income does not correspond to net cash flow. Firm could have good
income but poor cash flow (& vice versa). Hence 2 dimensions to consider
Balance sheet = expanded acctg equation
Operating vs Non-operating
-
Accrual Accounting
Recognition revenue when earned (even if not received in cash) & matching of
expenses when incurred (even if unpaid in cash)
STATEMENT OF STOCKHOLDERS EQUITY
contributed capital
RE (including OCI)
treasury stock
Cisco:
Articulation of F/S
-
Recording Transactions
Pay $100 wages in cash
-
cash assets -100, wage expense 100 reflected in SOCI, reducing income &
RE
all transactions incurred by company during acctg period recorded
similarly
Adjusting Accounts
Prepaid rent:
Unearned revenue:
Wage accrual:
Revenue accrual:
Exercise: The Ice Cream Store, Inc. incurred the following start-up costs (1-5).
Prepare transaction analysis 1-5 using F/S effects template
Balance Sheet:
Additional transactions:
6. On October 4, purchased merchandise inventory (i.e., ice cream) at a cost
of $15,000 by paying $5,000 cash and receiving short-term credit for the
remainder from the supplier.
7. Immediately returned some of the ice cream because some of the flavors
delivered were not ordered. The cost of the inventory returned was
$3,000.
8. Sales of ice cream for the month of October, 20XX, totaled $8,000. All
sales were for cash. The ice cream cost $3,500.
9. For all of October, total employee wages and salaries earned/paid were
$3,000.
10.As of the end of October, one month's depreciation on the equipment and
building was recognized -- $383 for the building and $167 for the
equipment.
11.$450 interest expense on the note and mortgage was due and paid on
October 31. Assume that the principal amounts ($35,000 + $60,000) of
the note and mortgage remain unchanged.
Prepare transaction analysis 6-11, using balance sheet/income statement
template
Prepare updated balance sheet as of Oct 31, 20XX & income statement for
month of October 20XX. Ignore income taxes
Preparing F/S
Global Accounting
Analyst Reports
Data services:
-
Thomson Corporation
First call = summary of analysts earnings forecasts
Compustat database = individual data items for all publicly traded
companies or for any specified subset of companies.