FORMAL FINANCIAL STATEMENTS

1. FORMAL FINANCIAL STATEMENTS • Income statement • Statement of stockholders’ equity • Retained earnings • Balance sheet • Statement of cash flows

2. INCOME STATEMENTStatement of Earnings • Report on the operations of the entity • Listing of Revenues, Gains, Expenses, & Losses • Covers a period of time

3. STATEMENT OF STOCKHOLDERS’ EQUITY“Retained earnings” • Report on the changes in Retained Earnings • Covers a period of time • Link between the Balance Sheet & Income Statement

4. STATEMENT OF FINANCIAL POSITIONBalance Sheet • Report on the financial position of the entity • Listing of Assets, Liabilities, & Owners’ Equity items • A specific point in time

5. STATEMENT OF CASH FLOWS • Report on financial activities of the entity • Shows the changes in cash (and cash equivalents) • Covers a period of time

6. “FINANCIAL STATEMENT PACKAGE” • Formal financial statements • Footnotes • Supplementary information • Attestation reports

7. OTHER INFORMATION • Footnotes • Refers to a specific item or section • Supplementary information • All additional disclosures

8. ATTESTATION REPORTS • Management report • Report of the audit committee • Report of the independent auditor (CPA)

9. Contributed (Paid-in) Capital Retained Earnings BASIC ACCOUNTING EQUATION[Corporation] Assets = Liabilities + Stockholders’ Equity Net Income (+) Dividends (-) Expenses & Losses (-) Revenues & Gains (+)

10. RELATIONSHIP OF FINANCIAL STATEMENTS Balance Sheet 12-31-x1 Balance Sheet 12-31-x2 Income Statement For Year 2 Revenues - Expenses = Net Income (or Loss) Assets Liabilities Owners’ equity Assets Liabilities Owners’ equity Statement of Retained Earnings For Year 2 Balance 1-1-x2 (+/-) Net income or loss - Dividends = Balance 12-31-x2

11. IMPLEMENTATION PRINCIPLES • Cost/Exchange Transactions • Revenue Realization • Matching • Full Disclosure

12. ARTICULATION The Quick Corporation The Quick Corporation Balance Sheet Statement of Cash Flows January 1, 2003 For the Year Ended December31, 2003 Cash flows from operating activities Liabilities Assets Cash $15,000 Cash revenues $ 535,000 Accounts payable $84,000 Less: Cash expenses 485,000 Accounts receivable 4,000 Notes payable The Quick Corporation Net cash provided by operating activities $ 50,000 Inventories 86,000 Total liabilities Income Statement Cash flows from investing activities Purchase of land (30,000) For the Year Ended 12/ 31/03 Land 2,000 Stockholders' equity Sale of equipment 10,000 Plant and Equipment 100,000 Capital stock $85,000 $18,000 Revenues Retained earnings Net cash used by investing activities (20,000) Fees earned $541,000 Cash flows from financing activities Total stockholders' equity 103,000 Issuance of capital stock 10,000 Expenses Less: Issuance of dividends (15,000) Cost of goods sold $215,000 Salary expense 85,000 Total liabilities and Net cash used by financing activities (5,000) Rent expense 45,000 $15,000 Supplies expense 15,200 Cash balance January 1, 2003 Total assets $207,000 stockholders' equity Utilities expense 75,000 Insurance expense 1,200 Cash balance December 31, $40,000 Interest expense 3,000 Total expenses 439,400 The Quick Corporation Balance Sheet Income before taxes 101,600 December 31, 2003 Income taxes 40,640 Net Income $ 60,960 Assets Liabilities $40,000 Cash The Quick Corporation Accounts payable $80,000 Retained Earnings Statement Accounts receivable 5,000 Notes payable 20,000 Inventories 90,000 Total liabilities $100,000 For the Year Ended December 31, 2003 Land 10,000 Stockholders' equity $18,000 Retained Earnings, January 1, Plant and Equipment 125,000 Capital stock $145,000 Retained earnings $25,000 $60,960 Add: Net Income for the year Total stockholders' equity 170,000 Subtotal $78,960 Less: Dividends paid (53,960) Total liabilities and $25,000 Retained earnings, December 31, 2003 Total assets $270,000 stockholders' equity $270,000

13. Assets Liabilities Equity (Owners’) Investments by Owners Distributions to Owners Revenues Expenses Gains Losses Comprehensive Income ELEMENTS OF FINANCIAL STATEMENTS

14. Claims against resources (Liabilities) Remaining claims accruing to owners (Owner’s Equity) BALANCE SHEET Resources (Assets)

15. BALANCE SHEET ELEMENTS • Assets • Economic resources with probable future value • Controlled by management • Resulting from past transactions • Liabilities • Probable future sacrifices of economic benefits (debts/obligations) • Require transfer of assets • Terms of obligations are specified • Result from past transactions • Equity • Residual interest in the assets of the entity • “Net assets” • Represents the “investment” by owners

16. Assets Current Assets Long-term Investments Property, Plant, and Equipment Intangible Assets Other Assets Liabilities Current Liabilities Long-term Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Other Items BALANCE SHEET CLASSIFICATIONS

17. BALANCE SHEET • Liquidity - length of time until assets are converted to cash or until a liability must be paid • Solvency – the ability of a firm to meet its debts as they come due • Financial flexibility - ability of company to manage its cash flows (deal with emergencies or take advantage of unexpected opportunities)

18. THE INCOME STATEMENT • Describes a company’s operating performance for a specified period of time

19. INCOME STATEMENTELEMENTS • Revenues • Inflows of assets (settlement of liabilities) • From delivery or production of goods or rendering of services • Gains • Increases to equity • From peripheral or incidental transactions • Expenses • Outflows of assets (incurrance of liabilities) • Consumption or expiration of assets in an attempt to generate revenue • Losses • Decreases in equity • From peripheral or incidental transactions • Earnings per share • Basic • Fully diluted

20. INCOME STATEMENT“Multiple-Step” • Operations section • Gross margin (Sales - Cost of goods sold) • Operating expenses • Other items (“nonoperating”) • “Special items” • Net income - “the bottom line” • Earnings per share

21. INCOME STATEMENT“Multiple-Step” • Items within “Income from continuing operations” • Unusual OR infrequent gains and losses • Below “Income from continuing operations” • Discontinued Operations • Extraordinary items (unusual AND infrequent) • Cumulative effect of “Changes in Accounting Principles”

22. Income Statement (Multiple-Step) Operations Other Special items

23. Revenue Principle Revenue should be recognized in the financial statements when . . • It is earned, and … • It is realized or realizable.

24. REVENUE RECOGNITION POINTS Recognition before delivery Recognition at delivery Recognition after delivery Design and production, construction in progress, minerals discovered Goods completed and ready for sale, contract complete Delivery of product or service Cash collected for goods or services Right of return expires Percentage-of completion method Production method Point of sale method Installment method Right of return expiration method Completed contract method Cost recovery method RELEVANCE RELIABILITY

25. Matching • Once revenues are determined, the expenses incurred in attempting to generate the revenue should be recognized. • As revenues are earned, certain assets are consumed and services are used.

26. Expense Classification • Direct • Period • Allocated

27. EXPENDITURES vs. EXPENSES Assets as of Jan. 1, 2003 Expenditures during 2003 Direct association with revenue Expenses of 2003 Yes Example: Cost of goods sold No Association with activities Yes Example: Office expenses No Association with future Yes No Assets as of 12-31-03 Example: Obsolete merchandise

28. BUSINESS CYCLE Collect cash from customer Customer receives item Purchase materials Convert materials into finished product Ship product & invoice customer Receive order from customer Inspect product Store product in warehouse