2-0,CHAPTER,2,Accounting Statements and Cash Flow,2-1,Chapter Outline,2.1 The Balance Sheet 2.2 The Income Statement 2.3 Net Working Capital 2.4 Financial Cash Flow 2.5 The Statement of Cash Flows 2.6 Financial Statement Analysis 2.7 Summary and Conclusions,2-2,Sources of Information,Annual reports Wall Street Journal Internet NYSE () Nasdaq () Text () SEC EDGAR 10K & 10Q reports,2-3,2.1 The Balance Sheet,An accountants snapshot of the firms accounting value as of a particular date. The Balance Sheet Identity is: Assets Liabilities + Stockholders Equity When analyzing a balance sheet, the financial manager should be aware of three concerns: accounting liquidity, debt versus equity, and value versus cost.,2-4,The Balance Sheet of the U.S. Composite Corporation,Liabilities (Debt),Assets,20X2,20X1,and Stockholders Equity,20X2,20X1,Current assets:,Current Liabilities:,Cash and equivalents,$140,$107,Accounts payable,$213,$197,Accounts receivable,294,270,Notes payable,50,53,Inventories,269,280,Accrued expenses,223,205,Other,58,50,Total current liabilities,$486,$455,Total current assets,$761,$707,Long-term liabilities:,Fixed assets:,Deferred taxes,$117,$104,Property, plant, and equipment,$1,423,$1,274,Long-term debt,471,458,Less accumulated depreciation,-550,-460,Total long-term liabilities,$588,$562,Net property, plant, and equipment,873,814,Intangible assets and other,245,221,Stockholders equity:,Total fixed assets,$1,118,$1,035,Preferred stock,$39,$39,Common stock ($1 per value),55,32,Capital surplus,347,327,Accumulated retained earnings,390,347,Less treasury stock,-26,-20,Total equity,$805,$725,Total assets,$1,879,$1,742,Total liabilities and stockholders equity,$1,879,$1,742,The assets are listed in order by the length of time it normally would take a firm with ongoing operations to convert them into cash. Clearly, cash is much more liquid than property, plant and equipment.,2-5,Accounting Liquidity,Refers to the ease and quickness with which assets can be converted to cash. Current assets are the most liquid. The more liquid a firms assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets frequently have lower rates of return than fixed assets.,2-6,Debt versus Equity,Generally, when a firm borrows it gives the bondholders first claim on the firms cash flow. Thus shareholders equity is the residual difference between assets and liabilities.,2-7,Value versus Cost,The accounting value of a firms assets is frequently referred to as the carrying value or the book value of the assets. Under GAAP audited financial statements of firms in the U.S. carry assets at cost. Market value is a completely different concept.It is the price at which willing buyers and sellers trade the assets. Managements job is to create a value for the firm that is higher than its cost.,2-8,Problem 1,The Agua Fria Bottling Company in 2001 had notes payable of $1,500, accounts payable of $1,400, and long-term debt of $6,000. The corresponding entries for 2002 are $1,750, $1,000, and $6,000. For assets, Agua Fria had in 2001 $1,000 in cash and marketable securities and $2,000 of inventory. The corresponding entries for 2002 are $1,200 and $1,750. Accounts receivable at the end of 2001 were $800 and $950 at the end of 2002. The firms net plant and equipment was $9,800 in 2001 and $11,100 in 2002. Construct Agua Frias balance sheet for 2001 and 2002.,2-9,2-10,2.2 The Income Statement,The income statement measures performance over a specific period of time. The accounting definition of income is Revenue Expenses Income,2-11,U.S.C.C. Income Statement,(in $ millions),20X2,Income Statement,U.S. COMPOSITE CORPORATION,Total operating revenues,Cost of goods sold,Selling, general, and administrative expenses,Depreciation,Operating income,Other income,Earnings before interest and taxes,Interest expense,Pretax income,Taxes,Current: $71,Deferred: $13,Net income,Retained earnings: $43,Dividends: $43,The operations section of the income statement reports the firms revenues and expenses from principal operations,$2,262,- 1,655,- 327,- 90,$190,29,$219,- 49,$170,- 84,$86,2-12,(in $ millions),20X2,Income Statement,U.S. COMPOSITE CORPORATION,Total operating revenues,$2,262,Cost of goods sold,- 1,655,Selling, general, and administrative expenses,- 327,Depreciation,- 90,Operating income,$190,Other income,29,Earnings before interest and taxes,$219,Interest expense,- 49,Pretax income,$170,Taxes,- 84,Current: $71,Deferred: $13,Net income,$86,Retained earnings: $43,Dividends: $43,The non-operating section of the income statement includes all financing costs, such as interest expense.,U.S.C.C. Income Statement,2-13,(in $ millions),20X2,Income Statement,U.S. COMPOSITE CORPORATION,Total operating revenues,Cost of goods sold,Selling, general, and