The Financial Statements

Chapter 1

Accounting is the information system that...Accounting is the information system that...

measures business activities,measures business activities,

processes data into reports, andprocesses data into reports, and

communicates results to decision makers.communicates results to decision makers.

Accounting –The Language of Business

The Accounting Equation

Assets are the economic resourcesof a business that are expected toproduce a benefit in the future.

Liabilities are “outsider claims,”or economic obligations

payable to outsiders.

Owners’ equity represents the“insider claims” of a business.

The Accounting Equation

The Accounting Equation

Assets

Owners’Equity

Liabilities

Assets = Liabilities + Owners’ Equity

The Accounting Equation

For a corporation, stockholders’ equityis divided into two main categories.

Paid-in capital Retained earnings

Assets = Liabilities + Stockholders’ equity

Assets = Liabilities + Paid-in capital + Retained earnings

The Accounting Equation

Paid-in capital is the amount investedin the corporation by its owners.

The basic component of paid-incapital is common stock.

Retained earnings is the amount earnedby income-producing activities and

kept for use in the business.

The Accounting Equation

Revenues are increases in retainedearnings from delivering goods

or services to customers.

Expenses are decreases in retainedearnings that result from operations.

Components of Retained Earnings

Revenues forthe period

–Expenses for

the period

=Net income(or Net loss)

for theperiod

Dividendsfor theperiod

Endingbalance ofretainedearnings

End ofthe period

Start ofthe period

Beginningbalance ofretainedearnings

+or–

– =

Information Reported on the Financial Statements

1. How well did the company perform (or operate) during the period?

Revenues– Expenses Net income (Net loss)

Incomestatement

Question AnswerFinancialStatement

2. Why did the company’s retained earnings change during the period?

Beg. retained earnings+ Net income (or – Net loss) Ending retained earnings

Statementof

retainedearnings

Information Reported on the Financial Statements

3. What is the company’s financial position at the end of the period?

Assets= Liabilities

+ Owners’ equity

Balancesheet

Question AnswerFinancialStatement

4. How much cash did the company generate and spend during the period?

Operating cash flows± Investing cash flows± Financing cash flowsIncrease or decrease in cash

Statementof

cashflows

Fossil, Inc.Consolidated Statement of Income

Net sales revenue $546 $504Cost of goods sold 274 248Gross profit 272 256Operating expenses:

Selling and distribution expense 150 126General and administrative expense 45 36 Total operating expenses 195 162

Operating income 77 94

Years Ended December 31,2001 2000Amounts in millions

Fossil, Inc.Consolidated Statement of Income

Operating income 77 94Other revenue (expense):

Write-off of investment (5) – Other income (expense) net 1 1Income before income tax 73 95Income tax expense 29 39Net income $ 44 $ 56

Years Ended December 31,2001 2000Amounts in millions

The Income Statement:Measuring Operating Performance

The income statement, statement ofoperations, or statement of earnings

reports the company’s revenues,expenses, and net incomeor net loss for the period.

Comprehensive income includes netincome from the income statement

plus additional items whichdo not affect net income.

Fossil, Inc. ConsolidatedStatement of Retained Earnings

Retained earnings:Balance, beginning of year $208 $152Net earnings for the year 44 56Less: Cash dividends declared (0) (0)Balance, end of year $252 $208

Years Ended December 31,2001 2000Amounts in millions

Fossil, Inc.Consolidated Balance Sheet

Assets:Current assets:

Cash and cash equivalents $ 68 $ 80Short-term investments 5 11Accounts receivable 74 63Inventories 104 81Prepaid expenses 19 18 Total current assets $270 $253

Investments 1 6Property, plant, and equipment, net 90 42Intangible and other assets 20 7Total assets $381 $308

December 31,2001 2000Amounts in millions

Fossil, Inc.Consolidated Balance Sheet

Liabilities:Current liabilities:

Notes payable, short-term $ 16 $ 5Accounts payable 21 19Advertising payable 15 14Compensation (salary) payable 8 6Other accrued expenses payable 28 19Income taxes payable 18 20 Total current liabilities $106 $ 83

Long-term liabilities 11 4Total liabilities $117 $ 87

December 31,2001 2000Amounts in millions

Fossil, Inc.Consolidated Balance Sheet

Stockholders’ equity:Common stock $ 16 $ 15Retained earnings 252 208Other equity (4) (2)

Total stockholders’ equity $264 $221

Total liabilities and stockholders’ equity $381 $308

December 31,2001 2000Amounts in millions

Fossil, Inc.Consolidated Balance Sheet

Total assets $381= Total liabilities

Current $106Long-term 11

Total liabilities 117+ Total stockholders’ equity 264

Total liabilities and stockholders’ equity $381

2001

Mustequal

The Statement of Cash Flows

The statement of cash flows reportsthe company’s cash inflows and

outflows from operating, investing,and financing activities.

Fossil, Inc. Statement of Cash Flows

Operating activities:Net income $44 $56Adjustments to reconcile net income to net cash from operating activities 5 (16)Net cash provided by operating activities $49 $40

Amounts in millionsDecember 31,

2001 2000

Fossil, Inc. Statement of Cash Flows

Investing activities:Business acquisitions $(16) (2)Additions to property, plant, and equipment (56) (20)Sale of investments 6 –Other investing activities (2) (2)Net cash used for investing activities $(68) $(24)

Amounts in millionsDecember 31,

2001 2000

Fossil, Inc. Statement of Cash Flows

Financing activities:Issuance of common stock $3 $ 1Purchase and retirement of common stock (4) (28)Issuance of notes payable (borrowing) 9 –Other financing activities (1) –Net cash provided by financing activities $7 $(27)

Amounts in millionsDecember 31,

2001 2000

Fossil, Inc. Statement of Cash Flows

Net increase in cash and cash equivalents $(12) $(11)Cash and cash equivalents, beginning of year 80 91Cash and cash equivalents, end of year $ 68 $ 80

Amounts in millionsDecember 31,

2001 2000