Business 299E: Introduction To Financial Statements

BUSINESS 2299E
Introduction to financial statements
Introduction to Financial
Statements
Text References
 Pages 5-23 Introduction to Financial Accounts
 Business 2299E Casebook
Business for Engineering Students

The Statement of Earnings
 Reports the financial performance of a business for
one accounting period.
 An accounting period is generally one year in

length.
 This is the statement containing the often referenced

“bottom line”

Microsoft Corporation
Statement of Earnings
For the year ending June 30, 20XX
(000s)
Net Sales/Revenue $73,723,000

Cost of Goods Sold $17,530,000
Gross Profit $56,193,000
Operating Expenses $34,430,000

Operating Profit $21,763,000
Other Income $ 504,000

Other Expenses $ -
Net Profit Before Tax $22,267,000
Tax $ 5,289,000
Net Profit (Loss) $16,978,000
(000s)



Other Expenses $ -
Tax $ 5,289,000

Revenue (Sales)
 Revenue can be thought of as a measure of accomplishment for the

accounting period
 Includes product shipped and invoiced during the accounting period

 The actual payment may not yet have been received from the customer
 Gross Sales
 Total sales
 Net Sales
 Value after deducting returns, special discounts

(000s)



Other Expenses $ -
Net Profit BeforeTax $22,267,000
Tax $ 5,289,000

Cost of goods sold
 These are the costs directly related to
manufacturing the product
 Cost of raw material plus the costs to convert them

to finished goods
 Only the costs of the goods actually sold is included

– it is not the total cost of goods manufactured or
purchased
COGS
 For a retail firm this is the purchase price of the
goods plus the transportation costs to your facility.

COGS Formula
 COGS = Beginning Inventory
+ Purchases
- Ending Inventory

COGS Break down
for retail situation
Beginning Inventory $ 100
plus Purchases $1000
=COG available for sale $1100
less Ending Inventory $ 50
=Cost of goods sold $1050

(000s)


Other Expenses $ -
Net Profit B4 Tax $22,267,000
Tax $ 5,289,000

Operating Expenses
 Normally costs that are not directly related to sales
 Rent
 Salaries
 Sales and Marketing
 Amortization/depreciation
 Research and Development

Depreciation/Amortization
 The process of spreading the cost of a fixed asset over its

useful life
 This is done because of the matching convention.
 May appear in either COGS or Operating expenses

section
 All fixed assets are depreciated except for land
 Intangible assets are depreciated as well

Depreciation
 Several different methods used to calculate
 Straight line
 Sum of years’ digits
 Declining allowance
 Double declining balance

For B2299 – Always Linear
 Assume a constant amortization value per year
 Original cost/years of useful life
 I buy a $40,000 car for the business
 It is expected to have a useful life of 5 years
 Depreciation expense on the Statement of earnings =

$40,000/5 = $8,000
Matching Convention
 Using this convention, the accomplishment is matched
with the effort to achieve it during a given time
period
 COGS are only those costs incurred to manufacture

the product actually sold
 This is the rational behind

depreciation/amortization as well

(000s)



Other Expenses $ -
Tax $ 5,289,000

Other expenses/income
 Costs and income that are not normally part of a firm’s
operations
 Extraordinary losses on equipment or inventory
 Settlement of lawsuits
 Restructuring costs (fire lots of people – severances)
 Financing costs (interest on debt)
 Income other than from sales (interest on investments)

(000s)



Other Expenses $ -
Tax $ 5,289,000

Taxes
 Taxes are paid on profit before tax
 In B2299 – it will be a percentage of earnings
 In reality are based on a very complex set of rules

created by government

Profit
 Profit = Accomplishment minus effort
 Profit is an accounting term and does not mean “net cash”
 Gross Profit = Sales less COGS
 Operating Profit = Gross Profit less Operating expenses
 Net Profit = Operating profit less other expenses, plus other

income

The Balance Sheet
 The balance sheet shows the financial condition of a
business at a particular point in time
Assets=Liabilities + Equity

Balance Sheet
As at June 30, 20XX
(000s)
Assets
Current Assets $ 85,084,000
Long Term Assets $ 19,565,000
Intangible Assets $ 16,622,000
Total Assets $121,271,000
Liabilities
Current Liabilities $ 32,688,000
Long term Liabilities $ 22,220,000
Total Liabilities $ 54,908,000
Equity
Common Stock $ 65,797,000
Retained Earnings $ 566,000
Total Equity $ 66,363,000
Total Liabilities + Equity $121,271,000
Balance Sheet
As at June 30, 20XX
(000s)
Assets
Liabilities
Equity
Current Assets
 Assets the business expects to soon convert into cash

Current Assets
 Cash
 This is cash on premises or deposited in a bank
 Marketable Securities
 Short term investments
 Can be cashed quickly
 Usually recorded at the lower of cost or market value
 Accounts receivable (A/R)

 The money our customers owe us
 Customers usually given 30 to 60 days to pay after invoice date
 A/R is included as part of the “Sales” on the income statement

Current Assets
 Inventory
 Valued at cost (to buy or manufacture)
 Must match the value on the income statement
 Prepayments
 Short term items paid for up-front
 There is still an “unused” portion that has value
 Examples: Insurance, photocopier service

Balance Sheet
As at June 30, 20XX
(000s)
Assets
Liabilities
Equity
Long Term or Fixed Assets
 Long term assets that are not normally converted into
cash
 Buildings
 Equipment
 Vehicles
 These assets are depreciated over their lifetime

Balance Sheet
As at June 30, 2012
(000s)
Assets
Liabilities
Equity
Intangible Assets
 Non-physical items owned by a company
 Rarely converted to cash during normal operations
 Examples:
 Goodwill
 Intellectual Property

Other Assets
 Not directly related to the day to day operations
of the company
 Examples:
 Investment in subsidiary company
 controllinginterest (>50%)
 not intended for resale
 Other investments
 non-controllinginterest
 not intended for resale

Balance Sheet
As at June 30, 20XX
(000s)
Assets
Liabilities
Equity
Liabilities
 Debts or obligations the company is expected to pay
 Payment includes principal plus interest
 Current liabilities
 Debt due this year
 Long term liabilities

 Debt due after this year

Current liabilities
 Accounts payable
 Money we owe suppliers
 Accruals
 Salaries and wages earned but not yet paid
 Notes Payable
 Borrowed money – short term
 Working capital loan or line of credit
 Money borrowed to ensure that there is cash for day to day
activities
 Current portion of Long term debt
Long term Liabilities
 Money borrowed to finance long term items

 New plants
 Equipment additions/replacements
 Bonds
 Debentures
 Bank loans

Balance Sheet
As at June 30, 20XX
(000s)
Assets
Liabilities
Equity
Equity
 The difference between total assets and total
liabilities
 Called shareholders’ equity or net worth
 Think of as the value of the business’ assets that was

financed by the “owners” rather than by “the bank”

Equity
 Categories include:
 Share capital
 Common shares or Preferred shared issued
 Retained earnings

Equity vs Debt
 Debt holders
 People who lend money to your business
 Contract with interest rate
 Time period to pay back
 Shareholders
 People who buy a piece of your business (a share)
 Hoping for dividend or an increase in the value of the share (capital
gain)

To do for Next Week
 Buckner
 Crawford
 Webster
 Thomas
 Bargain Store
 in the Case Book

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BUSINESS 2299E

Introduction to financial statements

 Pages 5-23 Introduction to Financial Accounts

 Business 2299E Casebook

Business for Engineering Students

 An accounting period is generally one year in

 This is the statement containing the often referenced

Business for Engineering Students

Net Sales/Revenue $73,723,000

Operating Expenses $34,430,000

Other Income $ 504,000

Net Sales/Revenue $73,723,000

Operating Expenses $34,430,000

Other Income $ 504,000

Business for Engineering Students

 Revenue can be thought of as a measure of accomplishment for the

 Includes product shipped and invoiced during the accounting period

Business for Engineering Students

Net Sales/Revenue $73,723,000

Operating Expenses $34,430,000

Other Income $ 504,000

Business for Engineering Students

 Cost of raw material plus the costs to convert them

 Only the costs of the goods actually sold is included

Business for Engineering Students

Business for Engineering Students

plus Purchases $1000

=COG available for sale $1100

less Ending Inventory $ 50

=Cost of goods sold $1050

Net Sales/Revenue $73,723,000

Other Income $ 504,000

Business for Engineering Students

Business for Engineering Students

 The process of spreading the cost of a fixed asset over its

 This is done because of the matching convention.

 May appear in either COGS or Operating expenses

 All fixed assets are depreciated except for land

 Intangible assets are depreciated as well

Business for Engineering Students

 Sum of years’ digits

 Double declining balance

 Assume a constant amortization value per year

 Original cost/years of useful life

 I buy a $40,000 car for the business

 It is expected to have a useful life of 5 years

 Depreciation expense on the Statement of earnings =

 COGS are only those costs incurred to manufacture

 This is the rational behind

Business for Engineering Students

Net Sales/Revenue $73,723,000

Operating Expenses $34,430,000

Other Income $ 504,000

Business for Engineering Students

 Extraordinary losses on equipment or inventory

 Restructuring costs (fire lots of people – severances)

 Financing costs (interest on debt)

 Income other than from sales (interest on investments)

Net Sales/Revenue $73,723,000

Operating Expenses $34,430,000

Other Income $ 504,000

Business for Engineering Students

 In B2299 – it will be a percentage of earnings