Download Comparative Financial Statements

Chapter 5
Financial Reporting and Analysis
PowerPoint Authors:
Brandy Mackintosh
Lindsay Heiser
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 5-1
Explain the needs of financial
statement users.
5-2
The Needs of Financial
Statement Users
5-3
Learning Objective 5-2
Describe the environment for
financial reporting, including
the Sarbanes-Oxley Act.
5-4
Accounting Fraud
5-5
Possible Incentives to Commit
Fraud
5-6
Opportunity to Commit Fraud
Internal controls are the methods that a
company uses to protect against theft of assets,
to enhance the reliability of accounting
information, to promote efficient and effective
operations, and to ensure compliance with laws
and regulations.
5-7
Character to Rationalize and
Conceal Fraud
Most fraudsters have a
sense of personal
entitlement, which
outweighs other moral
principles, such as
fairness, honesty, and
concern for others.
5-8
The Sarbanes-Oxley (SOX) Act
5-9
Learning Objective 5-3
Prepare a comparative
balance sheet, multistep
income statement, and
statement of stockholders’
equity.
5-10
Financial Reporting in the U.S.
Enhance
financial
statement
format
Fiscal
Year End
Obtain
independent
external
audit
Release
additional
financial
information
Preliminary
Release of
Key Results
Final
Release of
Annual
Report
Finalize External Audit
Finalize Financial Statements
December
31, 2013
5-11
Middle of
February,
2014
End of
February,
2014
Comparative Financial Statements
ACTIVISION BLIZZARD, INC.
Balance Sheet
(in millions of U.S. dollars)
December 31,
2010
Assets
Current Assets
Cash
Short-term Investments
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Property and Equipment, net
Other Noncurrent Assets
Goodwill
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts Payable
Unearned Revenue
Accrued and Other Liabilities
Total Current Liabilities
Other Noncurrent Liabilities
Total Liabilities
Stockholders’ Equity
Contributed Capital
Retained Earnings (Accumulated Deficit)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
5-12
December 31,
2009
$ 2,812
696
640
112
1,125
5,385
169
720
7,132
$13,406
$ 2,768
477
739
241
1,104
5,329
138
1,121
7,154
$13,742
$
$
363
1,726
818
2,907
296
3,203
10,146
57
10,203
$13,406
302
1,426
779
2,507
479
2,986
11,117
(361)
10,756
$13,742
A comparative
format reveals
changes over
time.
Multistep Income Statements
ACTIVISION BLIZZARD, INC.
Income Statement
(in millions of U.S. dollars)
Year Ended December 31,
2008
2010
2009
Sales and Service Revenues
Expenses:
Production
Research and Development
Marketing and Sales
General and Administrative
Total Operating Expenses
Income (Loss) from Operations
Revenue from Investments
Income (Loss) before Income Tax
Income Tax Expense (Recovery)
Net Income (Loss)
5-13
$ 4,447
$ 4,279
$ 3,026
2,126
642
520
690
3,978
469
23
492
74
$ 418
2,307
627
544
827
4,305
(26)
18
(8)
(121)
$ 113
1,839
592
464
364
3,259
(233)
46
(187)
(80)
$ (107)
Statement of Stockholders’ Equity
ACTIVISION BLIZZARD, INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2010
(in millions of U.S. dollars)
Contributed
Capital
Balances at December 31, 2009
Net Income
Dividends Declared
Issued Shares of Stock
Repurchased Shares of Stock
Balances at December 31, 2010
5-14
Retained
Earnings (Deficit)
$ 11,117
$
(361)
418
(0)
73
(1,044)
$ 10,146
$
57
Learning Objective 5-4
Describe other significant aspects
of the financial reporting process,
including external audits and the
distribution of financial
information.
5-15
Independent External Audit
Auditors are Certified Public Accountants who are
independent of the company.
5-16
Unqualified
Audit Opinion
Qualified
Audit Opinion
Financial
statements are
presented in
accordance with
GAAP
Financial
statements fail to
follow GAAP or not
able to complete
needed tests
Preliminary Releases
Most public companies
announce quarterly and
annual earnings through
a press release that is
sent to news agencies.
5-17
Financial Statement Release
5-18
Securities and Exchange
Commission (SEC) Filings
Public companies are required to electronically
file certain reports with the SEC, including Form
10-K, Form 10-Q, and Form 8-K.
SEC
Filing
Description
Form 10-K Annual filing of financial information
Form 10-Q Quarterly filing of financial information
Form 8-K Reports significant business events
5-19
Learning Objective 5-5
Explain the reasons for, and
financial statement
presentation effects of,
adopting IFRS.
5-20
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 U.S. companies to use IFRS in 2009. In
2012, the SEC is still weighing their options as
to whether or not they will require mandatory
use of IFRS and when.
5-21
IFRS Formatting of Financial
Statements
5-22
A side-by-side
comparison of a
balance sheet
prepared using
GAAP and a
statement of
financial position
prepared using
IFRS.
5-23
Learning Objective 5-6
Compare results to common
benchmarks.
5-24
Comparison to Common
Benchmarks
To help interpret amounts on the financial
statements, it’s useful to have points of
comparison or “benchmarks.”
5-25
Prior Periods
Competitors
Time series analysis
compares a company’s
results for one period to
its own results over a
series of time periods.
Cross-sectional analysis
compares the results of
one company with those
of others in the same
section of the industry.
Time Series Analysis Chart
5-26
Cross-Sectional Analysis
5-27
Learning Objective 5-7
Calculate and interpret the
debt-to-assets, asset turnover,
and net profit margin ratios.
5-28
A Basic Business Model
Most businesses can be broken down into 4 elements:
(1) Obtain financing from lenders and investors, which is used to
invest in assets,
(2) Invest in assets, which are used to generate revenues,
(3) Generate revenues, which produce net income,
(4) Produce net income, which is needed to satisfy lenders and
investors.
(2) Assets
generate
(3) Revenues
Investing
(1) Debt & Equity
Financing
5-29
Financing
Operating
(4) Net Income
Financial Statement Ratios
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).
5-30
Financial Statement Ratios
The debt-to-assets ratio provides the percentage of
assets financed by debt. A higher ratio means
greater financial risk.
5-31
Financial Statement Ratios
The asset turnover ratio measures how well assets
are used to generate sales. A higher ratio means
greater efficiency.
5-32
Financial Statement Ratios
The net profit margin ratio measures the ability to
generate sales while controlling expenses. A higher
ratio means better performance.
5-33
How Transactions Affect Ratios
Three-step process:
1. Analyze the transaction to determine its effects on the
accounting equation.
2. Relate the effects in step 1 to the ratio’s components,
to determine whether each component increases,
decreases, or stays the same.
3. Evaluate the combined impact of the effects in step 2
on the overall ratio.
5-34
Chapter 5
Solved Exercises
M5-4, M5-5, M5-9, M5-10, E5-8,
E5-11
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
M5-4 Preparing and Interpreting a Multistep Income Statement
Nutboy Theater Company reported the following single-step income
statement. Prepare a multistep income statement that distinguishes
the financial results of the local theater company’s core and
peripheral activities. Also, calculate the net profit margin using the
company’s core revenues and compare it to the 8 percent earned in
2012. In which year did the company generate more profit from each
dollar of sales?
5-36
M5-4 Preparing and Interpreting a Multistep Income Statement
NUTBOY THEATER COMPANY
Income Statement
For the year ended December 31, 2013
Revenues
Ticket Sales
Concession Sales
Total Sales Revenues
Operating Expenses:
Salaries and Wage Expense
Advertising Expense
Utilities Expense
Total Operating Expenses
Income from Operations
Other Revenue (Expense):
Interest Revenue
Other Revenue
Income before Income Tax Expense
Income Tax Expense
Net Income
$ 50,000
2,500
52,500
30,000
8,000
7,000
45,000
7,500
$
200
50
7,750
2,500
5,250
Net Profit Margin = Net Income/Total Sales Revenues
= $5,250 / $52,500
= 10%
5-37
M5-5 Preparing a Statement of Stockholders’ Equity
On December 31, 2011, WER Productions reported $100,000 of
contributed capital and $20,000 of retained earnings. During 2012, the
company had the following transactions. Prepare a statement of
stockholders’ equity for the year ended December 31, 2012.
a. Issued stock for $50,000.
b. Declared and paid a cash dividend of $5,000.
c. Reported total revenue of $120,000 and total expenses of $87,000.
5-38
M5-5 Preparing a Statement of Stockholders’ Equity
WER PRODUCTIONS
Statement of Stockholders’ Equity
For the Year Ended December 31, 2012
Balances at December 31, 2011
Net Income
Dividends Declared
Issued Shares of Stock
Balances at December 31, 2012
5-39
Contributed
Capital
Retained
Earnings
Stockholders'
Equity
$100,000
$ 20,000
33,000
(5,000)
$120,000
33,000
(5,000)
50,000
$198,000
50,000
$150,000
$ 48,000
M5-9 Determining the Effects of Transactions on Debt-toAssets, Asset Turnover, and Net Profit Margin
Using the transactions in M5-8, 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.
Transaction
Asset Turnover
Net Profit Margin
a.
Issued 10,000 shares of stock for
$90,000 cash.
-
-
NE
b.
Equipment costing $4,000 was
purchased by issuing a note
payable.
+
-
NE
Recorded depreciation of $1,000 on
the equipment.
+
+
c.
5-40
Debt-to-Assets
-
M5-10 Preparing Comparative Financial Statements
Complete the blanks in the following comparative income
statements, statement of stockholders’ equity, and balance sheets.
(a) Income from Operations
(b)Income before Income Tax Expense
(c) 100
5-41
M5-10 Preparing Comparative Financial Statements
(d) 480
(e) 80 (from December 31, 2012, Balance Sheet)
(f) 120
5-42
M5-10 Preparing Comparative Financial Statements
(g) 480
(h) 180
5-43
E5-8 Analyzing and Interpreting Asset Turnover and Net Profit
Margin
RadioShack Corporation reported the following amounts (in millions) in
its income statement and balance sheet.
Requirements are listed on the next slide.
5-44
E5-8 Analyzing and Interpreting Asset Turnover and Net Profit
Margin
Required:
1. Compute the asset turnover and net profit margin ratios for 2010 and
2009.
5-45
2010
Asset turnover
=
Total Revenue
Average Total Assets
=
$4,473
(2,175 + 2,429) / 2
=
1.94
2009
Asset turnover
=
Total Revenue
Average Total Assets
=
$4,276
(2,429 + 1,990) / 2
=
1.94
2010
Net profit margin
=
Net Income
Total Revenue
=
206
4,473
=
0.046 = 4.6%
2009
Net profit margin
=
Net Income
Total Revenue
=
205
4,276
=
0.048 = 4.8%
E5-8 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 of these 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 kept it’s level of efficiency in using assets
to generate sales constant as it’s 1.94 in both years.
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 4.8% in 2009 to 4.6% in 2010.
5-46
E5-8 Analyzing and Interpreting Asset Turnover and Net Profit Margin
Required:
3. Compute the debt-to-assets ratio for 2010 and 2009.
2010
Debt-to-assets
2009
Debt-to-assets
5-47
=
=
Total Liabilities
Total Assets
=
$640
$2,175
=
0.294 = 29.4%
Total Liabilities
Total Assets
=
$660
$2,429
=
0.272 = 27.2%
E5-8 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 debt-to-assets 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 27.2%
in 2009 to 29.4% in 2010. 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.
5-48
E5-11 Finding Financial Statement Information
Indicate whether each of the following would be reported on the
balance sheet (B/S), income statement (I/S), or statement of
stockholders’ equity (SSE).
1. Insurance costs paid this year, to expire next year
2. Insurance costs expired this year.
3. Insurance costs still owed.
4. Cost of equipment used up this accounting year.
5. Equipment book value (carrying value).
6. Amounts contributed by stockholders during the year.
7. Cost of supplies unused at the end of the year.
8. Cost of supplies used during the accounting year.
9. Amount of unpaid loans at end of year.
10. Dividends declared and paid during this year.
5-49
B/S
I/S
B/S
I/S
B/S
SSE
B/S
I/S
B/S
SSE
End of Chapter 5
5-50