Overview of Corporate Financial Statements

1. Overview of Corporate Financial Statements Or . . . What are all those numbers anyway?

3. Required Financial Statements • Financial Position at the end of the period; • Earnings for the period; • Cash flows during the period; and • Investments by and distributions to owners during the period.

4. Assets = Resources owned by the firm with the potential to provide future economic benefits, as a result of past transactions or events. The Accounting Equation

5. Assets Liabilities = Creditors’ fixed claims on the assets resulting from past transactions and representing probable future sacrifices of economic benefits (resources). The Accounting Equation

6. Assets Liabilities Owners’ Equity = + Owners’ residual interest after all liabilities have been settled. The Accounting Equation

7. Assets Liabilities Owners’ Equity = + Capital Stock Retained Earnings Invested Capital Earned Capital The Accounting Equation

8. Assets Liabilities Owners’ Equity = + Capital Stock Retained Earnings Revenue = The Value of goods and/or services provided to customers. Revenue The Accounting Equation

9. Assets Liabilities Owners’ Equity = + Capital Stock Retained Earnings Expense = The Cost of goods and/or services provided to customers. Revenue Expenses - The Accounting Equation

10. Assets Liabilities Owners’ Equity = + Capital Stock Retained Earnings Net Income = Net Value added to the firm Revenue Expenses - Net Income = The Accounting Equation

11. The Financial Statements

12. Financial Statements • We will illustrate the “set” of financial statements by examining Sourdough Alaska, Inc. 2001 and 2002 financial statements. • Sourdough Alaska is a fictitious company but it will provide us with an opportunity to examine the individual statements.

13. The Balance Sheet AKA: Statement of Financial Position . . .

14. The Balance Sheet . . . A Balance sheet lists a firm’s assets, liabilities, and owners’ equity at a given point in time. That is, it is a snapshot of the financial position of a firm at a specific point in time.

15. Sourdough Alaska, Inc. Balance Sheet Increase/Decrease 2002 2001 Amount Percent ASSETS Current Assets Cash $1,200 $2,600 ($1,400) (53.8%) Accounts Rec. Net 7,000 4,000 3,000 75.0% Inventory 8,000 9,750 ($1,750) (17.9%) Prepaid Expenses 450 150 300 200.0% Total Current Assets $16,650 $16,500 $150 0.9% Property and Equipment Land 6,500 6,500 00 0.0% Buildings, Net 6,000 6,000 0 0.0% Equipment, Net 3,000 1,500 1,500 100.0% Total Prop. & Equip. 15,500 14,000 1,500 10.7% TOTAL ASSETS $32,150 $30,500 $1,650 5.4%

16. Increase/Decrease LIABILITIES 2002 2001 Amount Percent Current Liabilities Accounts Payable $6,250 $5,000 $1,250 25.0% Accrued Payables 1,000 600 400 66.7% Notes Payable 500 450 50 11.1% Total Curr Liabilities $7,750 $6,050 $1,700 28.1% Long Term Liabilities Bonds Payable, 6% 7,000 8,000 (1,000) (12.5%) TOTAL LIABILITIES 14,750 14,050 700 5.0% STKHOLDERS EQUITY Pref. Stock, $100 Par, 6% 1,800 1,800 0 0.0% Common Stock, $10 Par 6,000 6,000 0 0.0% Additional Paid in Cap. 3,100 3,100 00 0.0% Total Paid In Capital 10,900 10,900 0 0.0% Retained Earnings 6,500 5,550 950 17.1% TOTAL SE 17,400 16,450 950 5.8% TOTAL LIAB & EQUITY $32,150 $30,500 $1,650 5.4%

17. Current Assets . . . • Consist of cash and other assets the firm expects to convert into cash within one year or the operating cycle, whichever is longer. • A firm’s operating cycle is the average time from when materials are purchased to when sales of finished goods or services yield cash.

18. Current Assets . . . • Are listed in order of liquidity; that is, how easily they can be converted into cash. • A typical order would be: • Cash and cash equivalents • Marketable securities • Receivables • Inventory

19. Sourdough Alaska, Inc. Balance Sheet Increase/Decrease 2002 2001 Amount Percent ASSETS Current Assets Cash $1,200 $2,600 ($1,400) (53.8%) Accounts Rec. Net 7,000 4,000 3,000 75.0% Inventory 8,000 9,750 ($1,750) (17.9%) Prepaid Expenses 450 150 300 200.0% Total Current Assets $16,650 $16,500 $150 0.9% Property and Equipment Land 6,500 6,500 00 0.0% Buildings, Net 6,000 6,000 0 0.0% Equipment, Net 3,000 1,500 1,500 100.0% Total Prop. & Equip. 15,500 14,000 1,500 10.7% TOTAL ASSETS $32,150 $30,500 $1,650 5.4%

20. Noncurrent Assets . . . • Consist of those assets that do not meet the definition of a current asset. • Noncurrent assets include . . . • Long-term receivables; • Investments; • Property, plant and equipment; and • Purchased intangible assets

21. Sourdough Alaska, Inc. Balance Sheet Increase/Decrease 2002 2001 Amount Percent ASSETS Current Assets Cash $1,200 $2,600 ($1,400) (53.8%) Accounts Rec. Net 7,000 4,000 3,000 75.0% Inventory 8,000 9,750 ($1,750) (17.9%) Prepaid Expenses 450 150 300 200.0% Total Current Assets $16,650 $16,500 $150 0.9% Property and Equipment Land 6,500 6,500 00 0.0% Buildings, Net 6,000 6,000 0 0.0% Equipment, Net 3,000 1,500 1,500 100.0% Total Prop. & Equip. 15,500 14,000 1,500 10.7% TOTAL ASSETS $32,150 $30,500 $1,650 5.4%

22. Current Liabilities . . . • . . . are obligations the firm expects to discharge over the next year, either through using current assets or by creating new current liabilities. • Typical current liabilities . .. • Accounts Payable • Short-term debt • Accrued expenses of various kinds

23. Increase/Decrease LIABILITIES 2002 2001 Amount Percent Current Liabilities Accounts Payable $6,250 $5,000 $1,250 25.0% Accrued Payables 1,000 600 400 66.7% Notes Payable 500 450 50 11.1% Total Curr Liabilities $7,750 $6,050 $1,700 28.1% Long Term Liabilities Bonds Payable, 6% 7,000 8,000 (1,000) (12.5%) TOTAL LIABILITIES 14,750 14,050 700 5.0% STKHOLDERS EQUITY Pref. Stock, $100 Par, 6% 1,800 1,800 0 0.0% Common Stock, $10 Par 6,000 6,000 0 0.0% Additional Paid in Cap. 3,100 3,100 00 0.0% Total Paid In Capital 10,900 10,900 0 0.0% Retained Earnings 6,500 5,550 950 17.1% TOTAL SE 17,400 16,450 950 5.8% TOTAL LIAB & EQUITY $32,150 $30,500 $1,650 5.4%

24. Noncurrent Liabilities . . . • . . . are long-term liabilities that do not meet the definition of current liabilities. • Noncurrent Liabilities include . . . • Long-term debt; • Capital Leases; • Deferred Tax Liabilities

25. Increase/Decrease LIABILITIES 2002 2001 Amount Percent Current Liabilities Accounts Payable $6,250 $5,000 $1,250 25.0% Accrued Payables 1,000 600 400 66.7% Notes Payable 500 450 50 11.1% Total Curr Liabilities $7,750 $6,050 $1,700 28.1% Long Term Liabilities Bonds Payable, 6% 7,000 8,000 (1,000) (12.5%) TOTAL LIABILITIES 14,750 14,050 700 5.0% STKHOLDERS EQUITY Pref. Stock, $100 Par, 6% 1,800 1,800 0 0.0% Common Stock, $10 Par 6,000 6,000 0 0.0% Additional Paid in Cap. 3,100 3,100 00 0.0% Total Paid In Capital 10,900 10,900 0 0.0% Retained Earnings 6,500 5,550 950 17.1% TOTAL SE 17,400 16,450 950 5.8% TOTAL LIAB & EQUITY $32,150 $30,500 $1,650 5.4%

26. Owners’ Equity . . . • Typically has three major components: • Contributed Capital • Common and preferred stock at par value • Additional paid-in capital • Retained Earnings • Treasury Common or Preferred Stock

27. Increase/Decrease LIABILITIES 2002 2001 Amount Percent Current Liabilities Accounts Payable $6,250 $5,000 $1,250 25.0% Accrued Payables 1,000 600 400 66.7% Notes Payable 500 450 50 11.1% Total Curr Liabilities $7,750 $6,050 $1,700 28.1% Long Term Liabilities Bonds Payable, 6% 7,000 8,000 (1,000) (12.5%) TOTAL LIABILITIES 14,750 14,050 700 5.0% STKHOLDERS EQUITY Pref. Stock, $100 Par, 6% 1,800 1,800 0 0.0% Common Stock, $10 Par 6,000 6,000 0 0.0% Additional Paid in Cap. 3,100 3,100 00 0.0% Total Paid In Capital 10,900 10,900 0 0.0% Retained Earnings 6,500 5,550 950 17.1% TOTAL SE 17,400 16,450 950 5.8% TOTAL LIAB & EQUITY $32,150 $30,500 $1,650 5.4%

28. The Income Statement AKA: Statement of Operations . . .

29. Income Statement . . . • Summarizes the firm’s operating activities over a given period of time. • An income statement always begins by reporting revenue • Key expenses are then subtracted from revenues to yield operating income

30. Sourdough Alaska, Inc. Income Statement Increase/Decrease 2002 2001 Amount Percent Sales $55,000 $52,000 $3,000 5.8% Cost of Goods Sold 38,000 36,000 2,000 5.6% Gross Margin $17,000 $16,000 $1,000 6.3% Operating Expenses: Selling Expenses $7,500 $7,000 $500 7.1% Administrative Exp. 6,300 6,000 300 5.0% Total Operating Expense $13,800 $13,000 $800 6.2% Net Operating Income $3,200 $3,000 $200 6.7% Interest Expense 436 435 1 0.2% Net Income Before Taxes $2,764 $2,565 $199 7.8% Income Taxes 1,106 1,026 80 7.8% Net Income $1,658 $1,539 $119 7.8%

31. Income Statement . . . • Immediately following operating income: • Nonoperating income, • Income tax expense, • Effects of discontinued operations, • Extraordinary items,

32. Income Statement . . . • Immediately following operating income: • Cumulative effects of changes in accounting principles • Net Income

33. For Example Let’s briefly examine the Bridgeport Corporation Income Statement for the year ended December 31, 2002.

34. Sales $2,000,000 Cost of Goods Sold 1,200,000 Gross Profit $800,000 Operating Expenses Selling $280,000 Administrative 170,000 450,000 Income from operations $350,000 Bridgeport Corporation Income Statement For the Year Ended December 31, 2002

35. Income From Operations $350,000 Other Revenue (Expense) 1 Loss on sale of machinery (50,000) Inc. From Continuing Opns. BT $300,000 2 Income Tax on Continuing Operations 120,000 Income From Continuing Operations $180,000 Bridgeport Corporation Income Statement For the Year Ended December 31, 2002

36. Income From Continuing Operations $180,000 Earnings From Sunrise Division operations, less applicable taxes ($110,000 - $44,000) 66,000 3 Loss on disposal of Sunrise facilities, less tax savings ($250,000 - $100,000) (150,000) Income Before Extraordinary Item $96,000 Bridgeport Corporation Income Statement For the Year Ended December 31, 2002

37. Income Before Extraordinary Item $96,000 Extraordinary Item Flood loss, less tax savings ($60,000 - $24,000) (36,000) 4 Cumulative effect on prior years of a change in accounting principle, less applicable taxes ($25,000 - $10,000) 15,000 5 Net Income $75,000 Bridgeport Corporation Income Statement For the Year Ended December 31, 2002

38. The Statement of Cash Flows Where the cash came from . . . and Where the cash went . . .

39. Statement of Cash Flows • A statement of cash flows subdivides the change in a firm’s cash balance over the period into three categories . . . • operating activities • investing activities, or • financing activities

40. Statement of Cash Flows • Is used extensively by creditors who are interested in . . • The extent to which the firm will be able to meet interest payments on its current and potential future debt; and • The firm’s liquidity, solvency, and financial flexibility.

41. Statement of Cash Flows • Is used extensively by investors, who are interested in . . . • The firm’s ability to pay future dividends from future operating cash flows; and • The firm’s liquidity, solvency, and financial flexibility.

42. “Retailing With A Difference” W. T. Grant Co. A Classic Example . . .

43. The W. T. Grant Co. • The W. T. Grant Company was the nation’s largest retailer when it filed for protection under Chapter XI of the bankruptcy act on October 2, 1975. • Four months later the company was liquidated.

44. What Happened?

45. Chain of Events . . . • 1906: First store opened • 1928: Public stock offering • 1950: Had 500 stores • 1963: W. T. Grant retired • 1969: Opened 410 new stores • 1973: Stock sold at 20 times earnings

46. Chain of Events . . . • 1974: Borrowed $600 million • 1974: Stock price was at $2 from a high of $71 • 1974: Hired new president • 1975: Opened 6 new stores • 1975: Closed 107 stores and laid off 7,000 employees

47. Chain of Events . . . • Oct. 1975: Chairman, Senior VP and all outside directors resigned - FILED FOR CHPT 11 BANKRUPTCY. • Feb. 1976: Judge ordered liquidation in 60 days • Apr. 1976: Company adjudicated as a bankrupt.

48. Working Capital Provided By Operations Net Income Cash Flow Provided by Operations W. T. Grant Company Millions of Dollars 40 20 0 1966 1968 1970 1972 1974 -20 -40 -100

49. The Statement of Cash Flows

50. Where Does It Fit In?