ChapterOutline 2 1TheBalanceSheet2 2TheIncomeStatement2 3NetWorkingCapital2 4FinancialCashFlow2 5SummaryandConclusions SourcesofInformation AnnualreportsWallStreetJournalInternetNYSE Nasdaq Text 2 1TheBalanceSheet Anaccountant ssnapshotofthefirm saccountingvalueasofaparticulardate TheBalanceSheetIdentityis Whenanalyzingabalancesheet thefinancialmanagershouldbeawareofthreeconcerns accountingliquidity debtversusequity andvalueversuscost TheBalanceSheetoftheU S CompositeCorporation Liabilities Debt Assets 20X2 20X1 andStockholder sEquity 20X2 20X1 Currentassets CurrentLiabilities Cashandequivalents 140 107 Accountspayable 213 197 Accountsreceivable 294 270 Notespayable 50 53 Inventories 269 280 Accruedexpenses 223 205 Other 58 50 Totalcurrentliabilities 486 455 Totalcurrentassets 761 707 Long termliabilities Fixedassets Deferredtaxes 117 104 Property plant andequipment 1 423 1 274 Long termdebt 471 458 Lessaccumulateddepreciation 550 460 Totallong termliabilities 588 562 Netproperty plant andequipment 873 814 Intangibleassetsandother 245 221 Stockholder sequity Totalfixedassets 1 118 1 035 Preferredstock 39 39 Commonstock 1pervalue 55 32 Capitalsurplus 347 327 Accumulatedretainedearnings 390 347 Lesstreasurystock 26 20 Totalequity 805 725 Totalassets 1 879 1 742 Totalliabilitiesandstockholder sequity 1 879 1 742 Theassetsarelistedinorderbythelengthoftimeitnormallywouldtakeafirmwithongoingoperationstoconvertthemintocash Clearly cashismuchmoreliquidthanproperty plantandequipment BalanceSheetAnalysis Whenanalyzingabalancesheet thefinancialmanagershouldbeawareofthreeconcerns AccountingliquidityDebtversusequityValueversuscost AccountingLiquidity Referstotheeaseandquicknesswithwhichassetscanbeconvertedtocash Currentassetsarethemostliquid Somefixedassetsareintangible Themoreliquidafirm sassets thelesslikelythefirmistoexperienceproblemsmeetingshort termobligations Liquidassetsfrequentlyhavelowerratesofreturnthanfixedassets DebtversusEquity Generally whenafirmborrowsitgivesthebondholdersfirstclaimonthefirm scashflow Thusshareholder sequityistheresidualdifferencebetweenassetsandliabilities ValueversusCost UnderGAAPauditedfinancialstatementsoffirmsintheU S carryassetsatcost Marketvalueisacompletelydifferentconcept 2 2TheIncomeStatement Theincomestatementmeasuresperformanceoveraspecificperiodoftime Theaccountingdefinitionofincomeis U S C C IncomeStatement in millions 20X2 IncomeStatement U S COMPOSITECORPORATION Totaloperatingrevenues Costofgoodssold Selling general andadministrativeexpenses Depreciation Operatingincome Otherincome Earningsbeforeinterestandtaxes Interestexpense Pretaxincome Taxes Current 71 Deferred 13 Netincome Retainedearnings 43 Dividends 43 Theoperationssectionoftheincomestatementreportsthefirm srevenuesandexpensesfromprincipaloperations 2 262 1 655 327 90 190 29 219 49 170 84 86 in millions 20X2 IncomeStatement U S COMPOSITECORPORATION Totaloperatingrevenues 2 262 Costofgoodssold 1 655 Selling general andadministrativeexpenses 327 Depreciation 90 Operatingincome 190 Otherincome 29 Earningsbeforeinterestandtaxes 219 Interestexpense 49 Pretaxincome 170 Taxes 84 Current 71 Deferred 13 Netincome 86 Retainedearnings 43 Dividends 43 Thenon operatingsectionoftheincomestatementincludesallfinancingcosts suchasinterestexpense U S C C IncomeStatement in millions 20X2 IncomeStatement U S COMPOSITECORPORATION Totaloperatingrevenues Costofgoodssold Selling general andadministrativeexpenses Depreciation Operatingincome Otherincome Earningsbeforeinterestandtaxes Interestexpense Pretaxincome Taxes Current 71 Deferred 13 Netincome Retainedearnings 43 Dividends 43 Usuallyaseparatesectionreportsasaseparateitemtheamountoftaxesleviedonincome 2 262 1 655 327 90 190 29 219 49 170 84 86 U S C C IncomeStatement in millions 20 x2 IncomeStatement U S COMPOSITECORPORATION Totaloperatingrevenues Costofgoodssold Selling general andadministrativeexpenses Depreciation Operatingincome Otherincome Earningsbeforeinterestandtaxes Interestexpense Pretaxincome Taxes Current 71 Deferred 13 Netincome Retainedearnings 43 Dividends 43 Netincomeisthe bottomline 2 262 1 655 327 90 190 29 219 49 170 84 86 U S C C IncomeStatement IncomeStatementAnalysis Therearethreethingstokeepinmindwhenanalyzinganincomestatement GAAPNonCashItemsTimeandCosts GenerallyAcceptedAccountingPrinciples GAAPThematchingprincipalofGAAPdictatesthatrevenuesbematchedwithexpenses Thus incomeisreportedwhenitisearned eventhoughnocashflowmayhaveoccurred IncomeStatementAnalysis NonCashItemsDepreciationisthemostapparent Nofirmeverwritesacheckfor depreciation Anothernoncashitemisdeferredtaxes whichdoesnotrepresentacashflow IncomeStatementAnalysis TimeandCostsIntheshortrun certainequipment resources andcommitmentsofthefirmarefixed butthefirmcanvarysuchinputsaslaborandrawmaterials Inthelongrun allinputsofproduction andhencecosts arevariable Financialaccountantsdonotdistinguishbetweenvariablecostsandfixedcosts Instead accountingcostsusuallyfitintoaclassificationthatdistinguishesproduc