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17 - 1©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Chapter 17
Understanding Corporate
Annual Reports:
Basic Financial Statements
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 1
Identify and explain the main
types of assets in the balance
sheet of a corporation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
The Balance Sheet
AssetsAssets LiabilitiesLiabilities
EquityEquity
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Assets ExampleDecember 31
2003 2002
Current assets Cash and cash equivalents $ 3,445 $ 1,553 Short-term investments 699 171 Accounts receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred income taxes 3,162 2,362 Other current assets 750 743Total current assets $16,603 $13,631 Property, plant, and equipment, net 9,246 10,049 Other assets 11,578 5,148Total assets $37,427 $28,828
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Assets Example
December 312003 2002
Property, plant, and equipmentLand 251 284Buildings 5,989 6,288Machinery 15,608 16,316
$21,848 $22,888Less: Accumulated depreciation 12,602 12,839Property, plant, and equipment, net $ 9,246 $10,049
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Equivalents
Cash equivalents are short-term investments that can easily be converted into cash with little delay.
What are some examples?– money market funds– Treasury bills
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Cycle
Cash$100,000
Cash$100,000
MerchandiseInventory$100,000
MerchandiseInventory$100,000
AccountsReceivable$160,000
AccountsReceivable$160,000
Buy Sell
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Depreciation
Cost
Expense
Acquisition cost – Estimated residual value= Amount to be allocated
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Depreciation
Straight line
Accelerated
Units of production
Cost – Accumulated depreciation = Net book value
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Natural Resources
Natural resources such as mineral deposits are typically grouped with plant assets.
Their original cost is written off in the form of depletion as the natural resource is used.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Intangible Assets
Intangible assets are a class of long-lived assets that are not physical in nature.
What are some examples?
Trademarks
Patents
Goodwill
Franchises
Copyrights
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 2
Identify and explain the main
types of liabilities in the
balance sheet of a corporation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Liabilities Example
December 312003 2002
Current liabilities Notes payable and current portion of long-term debt $ 2,604 $ 2,909 Accounts payable 3,015 2,405 Accrued liabilities 6,897 6,226Total current liabilities 12,516 11,540 Long-term debt 3,089 2,633 Deferred income taxes 3,481 1,188 Other liabilities 1,513 1,245Total liabilities $20,599 $16,606
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 3
Identify and explain the main
elements of the stockholders’
equity section of the balance
sheet of a corporation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Stockholders’ Equity ExampleDecember 31
2003 2002
Preferred stock, $100 par value issuable in series, Authorized shares: 0.5 (none issued) – –Common stock, $3 par value Authorized shares: 1,400 Issued and outstanding: 2003, 612.8; 2002, 601.1 1,838 1,804Additional paid-in capital 2,772 1,894Retained earnings 9,064 8,254Non-owner changes to equity 3,154 270Total stockholders’ equity 16,828 12,222Total liabilities and stockholders’ equity $37,427 $28,828
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Stockholders’ Equity
Contributed or paid-in capital
Retained income
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Common Stock
Common stock has no predetermined rate of dividends and is the last to obtain a share in the assets when the corporation is dissolved.
Common shares usually have voting power to elect the board of directors of the corporation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Preferred Stock
Preferred stock has some priority overother shares regarding dividends or thedistribution of assets upon liquidation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Treasury Stock
It is a corporation’s own stock that wasissued and subsequently repurchased by thecompany and is being held for a specific purpose.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 4
Identify and explain the
principal elements in the
income statement of a
corporation.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Income Statement
Single step Multiple step
An income statement can takeone of two major forms:
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Operating Management
Operating managementfocuses on the majorday-to-day activitiesthat generate salesrevenue.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Financial Management
In contrast, financialmanagement focuseson where to get cashand how to use cashfor the benefit of theorganization.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Net Income
Net income is the popular “bottom line”– the residual after deducting allexpenses including income taxes.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Earnings Per Share
Income statements conclude withdisclosure of earnings per share,which is net income divided by theaverage number of common sharesoutstanding during the year.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 5
Identify and explain the
elements in the statement
of retained earnings.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Statement of Retained Earnings
An analysis of the changes in retained earnings is frequently placed in a separate financial statement, the statement of retained earnings (also called statement of retained income).
The major reasons for changes in retained earnings are dividends and net income.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 6
Identify activities that affect
cash, and classify them as
operating, investing, or
financing activities.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Statement of Cash Flows
It shows the relationship of net incometo changes in cash balances.
It reports past cash flows.
It reveals commitments to assets that mayrestrict or expand future courses of action.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Typical Activities Affecting Cash
1 List the activities that increased or decreased cash.
2 Place each cash inflow and outflow into one of three categories.
– operating activities– investing activities– financing activities
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 7
Interpret a statement of
cash flows that uses the
direct method.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Receipts: Collections from customers $180Payments: To suppliers $72 To employees 15 For interest 4 For taxes 20Total payments 111Net cash provided by operating activities $ 69
Cash Flows from Operating Activities
The Direct Method
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Collections from Customers
Sales $200,000Decrease (increase) in accounts receivable (20,000)Cash collections from customers $180,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Collections from Customers
Cost of goods sold $100,000Increase (decrease) in inventory 40,000Decrease (increase) in trade accounts payable (68,000)Payments to suppliers $ 72,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Payments to Suppliers
Cost of goods sold $100,000Increase (decrease) in inventory 40,000Decrease (increase) in trade accounts payable
(68,000)Payments to suppliers $
72,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Payments to Employees
Wages and salaries expense $36,000Decrease (increase) in wages and salaries payable
(21,000)Cash payments to employees $15,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash flows from investing activities:Purchases of fixed assets $(287)Proceeds from sale of fixed assets 10Net cash used in investing activities $(277)
Investing Activities
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash flows from financing activities:Proceeds from issue of long-term debt $120Proceeds from issue of common stock 98Dividends paid (19)Net cash provided by financing activities $199
Financing Activities
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Net cash provided by operating activities $ 69Net cash used in investing activities (277)Net cash provided by financing activities 199Net (decrease in cash) $ (9)Cash, December 31, 2002 $25Cash, December 31, 2003 $16
Statement of Cash Flows
Statement of Cash Flows (Direct Method)Year Ended December 31, 2003 (Thousands)
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Fixed Assets
Three items usually explain changes in net fixed assets.
1 Asset acquisitions2 Asset dispositions3 Depreciation expense for the period
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Stockholders’ Equity
Changes in stockholders’ equity can be explained by three factors:
1 Issuance (or repurchase) of capital stock2 Net income (or loss)3 Dividends
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Noncash Investing and Financing Activities
Must be reported in a schedulethat accompanies the statementof cash flows.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cash Flow
A focal point of the statement of cash flows is the net cash flow from operating activities, which is frequently referred to as simply cash flow.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 8
Understand the reconciliation
of net income to net cash
provided by operations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Reconciliation of Net Income to Net Cash
Net income $23Adjustments to reconcile net income Depreciation $ 17 Net increase in accounts receivable (20) Net increase in inventory (40) Net increase in accounts payable 68 Net increase in wages and salaries payable 21Total additions and deductions 46Net cash provided by operating activities $69
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Adjustment for Increases in Noncash Current Assets
Suppose the $20,000 increase in receivables resulted from credit sales made near the end of the year.
The $20,000 sales figure would be included in the computation of net income, but the $20,000 would not have increased cash flow from operations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Adjustment for Increases in Current Liabilities
Suppose the $21,000 increase in wages payable was attributable to wages earned near the end of the year, but not yet paid in cash.
The $21,000 wages expense would be deducted in computing net income, but the $21,000 would not have decreased cash flow from operations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 9
Explain the role of depreciation
in the statement of cash flows.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Role of Depreciation
Depreciation is an allocation of historicalcost to expense.
Therefore, depreciation expense does notentail a current outflow of cash.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 10
Understand how investors and
managers use balance sheets,
income statements, and cash
flow statements to aid their
decision making.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Financial Statements Aid Managers’ Decision Making
Managers and investors use balance sheets toassess a company’s financial position ata point in time.
Managers and investors use income statementsand statements of cash flows to assessperformance over a period of time.
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