Principles of ACCT I
Principles of ACCT I ACCT 2121
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CHAPTER 5 FINANCIAL REPORTING The Needs of Financial Statement Users 0 Managers quot39 i ermuummi 7 Government Creditors Investors Financial Reporting in the US Final Preliminary Release of Fiscal Release of Annual Year End Key Results Report I Independent External Audit Financial Statement Preparation March 31 May 8 May 30 2008 2008 2008 39 C r quot How many days does a company have to file its annual report after its fiscal yearend Independent External Audit Auditors are Certified Public Accountants who are independent of the company Unqualified Qualified Audit Opinion Audit Opinion l Financial Financial statements are statements fail to presented in follow GAAP or not accordance with able to complete GAAP needed tests Preliminary Releases Most public companies announce quarterly and annual earnings through a press release that is sent to news agencies Financial Statement Release Name of Financial Section Information Presented 1 Summarized financial data key figures covering a period of 5 or 10 years 2 Management39s discussion and analysis MDampA an honest and detailed analysis of the company39s financial condition and operating results quotmust readquot for any serious financial statement user 3 Management39s report on internal control statements that describe management39s responsibility for ensuring adequate internal control over financial reporting and that report on the effectiveness of these controls during the yea r 4 Auditor39s report ill the auditor39s conclusion about whether GAAP was followed and for public companies whether internal contrcdsmee ecthtel 5 Comparative financial statements I 6 FinanCIaI statement notes TRecent sfoclffirifda39ta a multiyear presentation of the four basic statements further Informaton about the finanCIaI statements crUCIal to understanding the financial statement data At W W ltT ri TWf hig hs and l HWs during the year 8 Unaudited quarterly data condensed summary of each quarter39s results 9 Directors and officers a list of who39s overseeing and running the company Where would you go to find out what method of depreciation calculation a company uses A Management discussion and analysis Notes to financial statements C Auditor s opinion D Manager s report on internal control Securities and Exchange Commission SEC Filings Public companies are required to electronically file certain reports with the SEC including Form 10K Form 10Q and Form 8K S EC Fi ling Description Form 10K Annual filing of financial information Form 10Q Quarterly filing of financial information Form 8K Reports s39ignifi ca nt business eve nts Which of the following is a company required to file annually with the SEC AVV Form 10 Q I Form 8K D Articles of Incorporation Comparative Financial Statements Assets Term Investments Receiwbles and Equipment net Noncurrent Assets Liabilities Payable Capital Balance Sheet March 31 March 31 A comparative format reveals changes over time such as Activision s huge increase in Cash and decline in Shortterm Investments Who is ultimately responsible for insuring that the information included in a company s financial statements is correct N39jManagement quot External auditor C Internal auditor SingleStep Income Statement I Subtract total expenses from total revenues I Two reasons for using the singlestep format 1 Company does not realize any type of profit until total revenues exceed total expenses 2 Format is simpler and easier to read WALMART ALWAYS Low PRICES Single Step in millions Revenues Net sales Other revenues net Expenses Cost of goods sold Selling general and administrative expenses Interest expense Other expense Income taxes Net income WALMART STORES INC Income Statements 2007 344992 3658 348650 264152 64001 1529 1319 6365 337366 8 11284 For the years ended January 31 2006 308945 3156 312101 237649 55739 1178 501 5803 300870 11231 MultipleStep Income Statement I Considered more useful because it highlights the components of net income I Three important line items gross profit income from operations and net income SINGLEstep Revenues income statement Expenses Net Income Net Loss Multistep income statement THE MERCHANDISING PROFIT OF A COMPANY Multiple Step Key Line Items ALWAYS LOW PRICES 1 VMAL l IR1 w Net sales Cost of goods sold Gross profit OperaLing expenses Selling general and administrative expenses Income from operations Other revenues and gains Other revenues net Other expenses and losses Interest expense Other expense Income before income taxes Income tax expense Net income WALMART STORES INC Income Statements in millions For the years ended January 31 2007 344992 264152 80840 64001 16839 3658 L529 1319 17649 6365 11284 2006 308945 237649 71296 55739 15557 3J56 1178 501 11034 5803 11231 M54 Preparing and Interpreting a Multistep Income Statement Nutboy Theater Company reported the following singlestep income statement Prepare a multistep income statement forthe local theater company Also calculate the net pro t margin and compare it to the 8 earned in 2009 In which year did the company generate more profit from each dollar of sales NUTBOY THEATER COMPANY lnmme Statement is a For the year ended December 31 20W service Rtvmues Com pany SO Ltx salt you won t SW 33 have cost of 133 1 goods sold or Imimmm 5175 gross profit Expenses Salaries and W4 gu Eztfuuu N5 Income M54 Preparing and Interpreting a Multistep Income Statement NUTBOY THEATER COMPANY Income Statement For the Year Ended December 31 2010 Revenues Ticket Sales 50000 Concession Sales 2500 Total Sales Revenues 52500 Which would normally NOT be included in operating expenses A Rent Expense Interest Expense EC Depreciation Expense D Supplies Expense Which of the following would normally be included in Other Revenues and Expenses A Notes Payable B Depreciation Expense quotGain on Sale of Plant Asset D Patent Statement of Stockholders Equity ACTIVISION INC Statement of Stockholders39 Equity For the Year Ended March 31 2008 in millions of US dollars Contributed Retained Capital Earnings Balances at March 31 2007 984 428 Net Income 345 Dividends Declared Issued Shares of Stock 191 Repurchased Shares of Stock Balances at March 31 2008 1175 773 Shows ALL changes in SE notjust Retained Earnings M55 Preparing a Statement of Stockholders Equity On December 31 2008 WER Productions reported 100000 of contributed capital and 20000 of retained earnings During 2009 the company had the following transactions Prepare a statement of stockholders equity for the year ended December 31 2009 a Issued stock for 50000 b Declared and paid a cash dividend of 5000 0 Reported total revenue of 120000 and total expenses of 87000 M55 Preparing a Statement of Stockholders Equity WER PRODUCTIONS Statement of Stockholders Equity For the Year Ended December 31 2009 Contributed Caeital Balances at December 31 2008 100000 Net Income Dividends Declared Issued Shares of Stock 50000 Balances at December 31 2009 150000 Which of the following would be shown on the Statement of Stockholders Equity but not on the Statement of Retained Earnings A Dividends Declared 1lssuance of Common Stock Net Income Globalization and IFRS International Financial Reporting Standards IFRS are accounting rules established by the International Accounting Standards Board for use in over 100 countries around the world In 2008 the SEC announced a plan to allow some US companies to use IFRS in 2009 and could require mandatory use of IFRS starting in 2014 IFRS Formatting of Financial Statements Financial Statement Titles The financial statements repert similar Items but under different titles Balance sheet Income statement Statement of etc knelders39 enuity Statement of ash flaws Statement of financial positian Statement at comprehensive incnme Statement of shareholders39 enuite Statement at cash flaws Presentation at Expenses Similar expenses are reported but may be grouped in diriferent ways Public cempanies categnrize expenses lav business twnctilan teq predestien research Companies can cateqarize expenses by either function or natwre Keg salaries rent Supplies marketing general operations electricity Bellanca Sheet Order Assets Assets Similar acceunts are Current NUI39ICUI39I39E39nt shown but difier in order of Dncurmnt Curr liquidity for assets arm Lhmm mes 5Mquot des39 miillill39 ut order of maturity tier Current Liabitities liabilities NanCurrent NonCurrent Stnknetnets Eternity Current 15T VISION ix Eillnmshll M aulnru n LLS am Ann lumza Am Illa 1 Lnwrlz Kuwaiti55 um LQLnbk 1m mm ifqlxrvIan hxu Tum Curran Ann m a ELpwmm z 1 E4155 1 Foul IIL J Max 1L 1 Li i tiu ad Su hu rn Earlily lilac Lillqu Again Parnth Clcnzrifuuzl Ltlull 5 4qu Ezzmp Tmal Sunkluln39 EH 39i Tau gelling Amquot Euz mum Eaux Max Jr u luv thk p 6 Hi p Kunming v1 lmcumil u39 HEVCI snnmm If Fill IIIC39EI Willa In millmn a Mix Omaha51 mantra 31126 511 CariHE limit Gib r Nun mun Ala1 iclzw 1mquot 34mm m 61 I 7 nd Roman 71 Emu1 41 h l inl a Mina mam Amt nun1 Russnsz 11 mwn Cub 72ml InnIx Kitmm Tnu Ann Emily ud ilbiiih um I Jan T53 11m Lubialm mel LatHing Tum m at n L Lam A sidebyside comparison of a balance sheet prepared using GAAP and a statement of financial position prepared using IFRS Comparison to Common Benchmarks To help interpret amounts on the financial statements it s useful to have points of comparison or benchmarks Prior Periods Competitors Time series analysis compares a company s results for one period to its own results over a series of time periods Crosssectional analysis compares the results of one company with those of others in the same section of the industry Time Series Analysis Chart Millions of US Dollars 3500 3000 2500 2000 1500 1000 500 0 D 2007 2008 Activision Financial Statement Categories CrossSectional Analysis m 7000 is 6000 7 T 5000 7 3 4000 if D 3000 7 7 5 2000 if g 1000 if g 0 7 v 7V i7 IATVI E 391000 a 69 J6 Q9 0 IERTS 9 00 006 V 5 g0 Q9 0 0 2 b 5 e0 o 00 0 6 g 90 Activision and ElectronicArts Financial Statement Categories A Basic Business Model Most businesses can be broken down into 4 elements 10btain financing from lenders and investors which is used to invest in assets 2 Invest in assets which are used to generate revenues 3Generate revenues which produce net income 4 Produce net income which is needed to satisfy lenders and investors generate 2 Assets 3 Revenues 2 q A I t39 c nves Ing inancin O eratin 1 Debt amp Equity 9 p g Financin 4 Net Income Financial Statement Ratios Financial Analysis Tools 1 Debttnassets ratio Total Liabilities Total Assets l r The percentage of assets financed by oi ebt A higher ratio means greater financing risk 2 Asset turnover ratio Sales Reven ue Average Total Assets How well assets are used to generate revenues A higher ratio means greater efficiencyr 3 Net pro t margin ratio Net Income Sales Rwen Lie How well expenses arecontrolled A higher ratio means better performance In addition to making it possible to compare companies of different sizes a benefit of ratio analysis is that it enables comparisons between companies reporting in different currencies dollars vs euros Using the Financial Statements 23 l Debt to total assets ratio measures the percentage of total financing provided by creditors rather than stockholders Total Liabilities Debt to Total Assets Ratio Total Assets Beg 35 In millions 13570 Circuit City 55 Industry average 21 The 2007 Best Buy Best Buy Improving was nanced by 54 cents of debt Circuit City Getting Worse I Financial Statement Ratios The debtto assets ratio is calculated for Activision and 2 of its competitors With respect to this ratio alone which company is in the best position Uhiszufl Activistm Inc Electronic Arts 111 DEMrtEkAESQIS Taiiil Liabilities 416 532 31330 I 1 Ram TotalAssels L Bq39 AUbisoft ctivision CEectronic Arts The debttoassets ratio provides the percentage of assets financed by debt A higher ratio means greater financial risk Analyzing Plant Assets Asset Turnover Ratio indicates how efficiently a company uses its assets to generate sales Net Sales Average Total Assets AirTran Southwest Airlines in millions in millions 2049 16042 Asset Turnover Ratio 9861 65 t39 16772 134602 quotquot93 For each dollar of assets AirTran generated 126 in revenue For each dollar of assets Southwest generated 065 in revenue Net Profit Margin Ratio Net Income Net Sales WalMart 11284 33 11231 2 36 In millions 344992 308945 47 Profit Margin Ratio Target V industry average For every dollar of sales how much net income results Target generated 0048 net income for every dollar of sales Wal Mart generated 0038 net income for every dollar of sales Keep in mind that an increasing percentage of Wal Mart s sales is from low margin groceries Financial Statement Ratios Uhtsacht Activision Inc Electronic Arts Inc Debutsmam TatalLiahtltties 416 533 11730 1 Baths Total gets sum 311530 w 35059 54 Asset Tum31ml Sales Revenue 933 0 09 3565 Ratio fewmeg Tom A5595 1050 23 2112 21530 1D4l2 t6059 MilWI The asset turnover ratio measures how well assets are used to generate sales A higher ratio means greater efficiency Financial Statement Ratios Uh iezuft Activls mn Inc Electronic Arts Inst Dn htrtL uAsrets Tara Liabilities 416 583 31730 1 Ratio Total ssel 1050 27530 w 35059 34 Asset Turnover Sales Mamie 5733 0 09 Ratio figmeg Tom mm 1050 322lquotf39 quot 21530 1l94ii392 i6059 iii161R Napierii Nethimme 110 315 M454 MEIER Ratkquot EnbsRevenuz 933 w 537393 w 53855 w The net profit margin ratio measures the ability to generate sales while controlling expenses A higher ratio means better performance Using Financial Ratios Go to the Home Depot and Lowe s financial statements in the back of your textbook Calculate Debt to Assets Ratio Asset Turnover Ratio and Profit Margin ratio for each company for the latest year available With respect to each ratio separately which company is in a better position Debt to Assets Home Depot Lowe39s Debtto Assets 0 Asset TUrnover Profit Margin A Ratio 46 Finding Financial Statement Information Indicate whether each of the following would be reported on the balance sheet BS income statement US or statement of stockholders equity SSE Insurance costs this to costs costs 4 Cost of used this 7 Cost of unused at the end of the at Cividends declared and this 46 Finding Financial Statement Information Indicate whether each of the following would be reported on the balance sheet BS income statement US or statement of stockholders equity SSE Insurance costs this to costs costs 4 Cost of used this 7 Cost of unused at the end of the at Cividends declared and this End of Chapter 5 M59 Determining the Effects of Transactions on Debtto Assets Asset Turnover and Net Profit Margin Using the transactions in M58 complete the following table by indicating the sign of the effect for increase for decrease NE for no effect and CD for cannot determine of each transaction Consider each item independently Dc labiaAssets Ratio Total Liabililia Total smm Sales Revenue AVExe Total Assets Net Income Sales ngnue Asset Turnover Ratio Net Profit Margin Ratio M510 Preparing Comparative Financial Statements Complete the blanks in the following comparative income statements statement of stockholders equity and balance sheets SI RBDUKS CORPOR ATION Income Statements For the fears Ended December 31 5211 and Sum1 Rc39rmuua 543quot 5303 L m ml Dyerarmy Expc nsua 133 03 mll 7 3 u39I l Uter Hurtnu l3 2quot ml l mum2 Tax Expiry f Hm hutmm 5 33 a Income from Operations blncome before Income Tax Expense c 100 M510 Preparing Comparative Financial Statements 039 e f STARBOOKS CORPORATION Statement of Stockholders Equity For the Year Endsu December an acne Cnnrribured Retained Capital Earninga Ba letters at Januaryquot 1 3010 403 eh Net Inaumr II D ivid cncls cclaro 39 303 Issu til Shares of 5m k 103 Re purcha cd Shara citStock I330 Balances at Dccc mbcr 31 3010 d 480 80 from December 31 2009 Balance Sheet 120 M510 Preparing Comparative Financial Statements STII RHODES CORPORATl 0N Balance Sheets Deco m her St 1010 1039 Assets Total Assets in 00 603 LiEil1l lities 5 Stockhold Ers39 Equ ivy Tctal Liabilities 140 130 Stockholder rs Eq u in Can tributh Capital 51 I 403 Rt rained Earnings ih lj 50 TEtal Sm khc39ldcrs39 Equity Total Liabilities S4 SE 800 600 9 480 h 180 41 Analyzing and Interpreting Asset Turnover and Net Profs Margin RadioShack Corporation has populated the world with stores from Greece to Canada and in the United States an estimated 94 percent ofall Americans live or work within five minutes of the electronics retailer not bad for a company that originally started business as American Hide amp Leather Company The following amounts in millions were reported in RadioShack s income statement and balance sheet 20C 8 2007 2006 Sales Revenue 4225 4252 4773 Net lnco me 192 237 73 Total Assets 2284 1990 2070 Total Liabilities 1466 1220 141 6 kequirements are listed on the next slide E511 Analyzing and Interpreting Asset Turnover and Net Profit Margin Required 1 Compute the asset turnover and net profit margin ratios for 2008 and 2007 Asset turnover Sales Revenue 4225 98 Average Total Assets 2284 1 9902 2007 Asset turnover Sales Revenue 4 252 209 Average Total Assets 1990 20702 E511 Analyzing and Interpreting Asset Turnover and Net Profit Margin Required 2 Would analysts be more likely to increase or decrease their estimates of stock value on the basis ofthese changes Explain what the changes in these two ratios mean The asset turnover ratio determines how well assets are used to generate sales This analysis indicates that the company has decreased its efficiency in using assets to generate sales from 209 in 2007 to 198 in 2008 Net profit margin measures a company s ability to control expenses while generating sales This analysis indicates that the company s performance is this regard has declined from 56 in 2007 to 45 in 2008 E511 Analyzing and Interpreting Asset Turnover and Net Profit Margin Required 3 Compute the debttoassets ratio for 2008 and 2007 2008 Debttoassets 2007 Debttoassets Total Liabilities Total Assets Total Liabilities 1466 2284 1220 Total Assets 1990 642 613 642 613 E511 Analyzing and Interpreting Asset Turnover and Net Profit Margin Required 4 Would analysts be more likely to increase or decrease their estimates of RadioShack s ability to repay lenders on the basis of this change Explain by interpreting what the change in this ratio means The debttoassets ratio indicates the percentage of assets financed by debt as a sign of the company s financing risk This analysis indicates that the company has increased its debt financing from 613 in 2007 to 642 in 2008 Analysts would likely decrease their estimates of RadioShack s ability to repay lenders because the company increased its relative reliance on debt financing making the company more risky