Chapter 3
Financial Statements and
the Annual Report
BBA Honors/Emphasis
Objective of Financial Reporting
Financial reporting has one overall
objective and a set of related objectives, all
of them concerned with how the
information may be most useful to the
readers.
Primary Objective of
Financial Reporting
Provide information for decision making
Extend credit $$?? Loan $$??
Borrow $$?? Sell stocks or bonds??
Invest?? Start new business??
LO1
Secondary Objectives of
Financial Reporting
Reflect the
company’s
resources Reflect prospective
and claims to its cash receipts to
resources investors and creditors
Reflect prospective
cash flows to
the company
Assets = Liabilities + OE
Qualitative Characteristics
Understandability –
To those willing to take
the time to understand it
Relevance – Has capacity to
(Predictive value) make a difference
Reliability – Represents what
(Faithful representation) it purports
LO2
Qualitative Characteristics
Comparability
between companies
Consistency
From one period to the next
Qualitative Characteristics
Materiality
Will it make a difference
To the decision maker?
Conservatism
All else equal, choose
Least optimistic estimate
Basic Structure of a
Classified Balance Sheet
Current assets
+ Noncurrent (long-term) assets
Total assets
LO3
The Operating Cycle
Cash Inventory
Accounts
Receivable
Operating Cycle
Operating Cycle
(NAS 01)
Dixon Sporting
R ea
lize
Goods A = L + SE
on e d , s
Balance Sheety e a o ld ,
r o r or c
op on s era um
ting ed AA
Assets cyc in
le
Current assets
Cash $ 5,000
Marketable securities 11,000
Accounts receivable 23,000
Merchandise inventory 73,500
Prepaid insurance 4,800
Supplies 700
Total current assets $118,000
Investments
Land held for future office site 150,000
Property, plant, and equipment
Land $100,000
Buildings $150,000
Less: Accumulated depreciation (60,000) 90,000
Store furniture and fixtures $ 42,000
Less: Accumulated depreciation (12,600) 29,400
Total property, plant and equipment 219,400
Intangible assets
Franchise agreement 55,000
Total assets $542,400
Dixon SportingSa
Goods
ye tisfi
Balance Sheetar
o r ed w
o i
A = L + SE
pe tEquity
rati hin o
Liabilities and Stockholders’
ng ne
=L cy
Current liabilities
cle
Accounts payable $ 15,700
Salaries and wages payable 9,500
Income taxes payable 7,200
Interest payable 2,500
Bank loan payable 25,000
Total current liabilities $ 59,900
Long-term debt
Notes payable $ 120,000
Total liabilities $179,900
+ SE
Contributed capital
Capital stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Paid-in capital in excess of par value 25,000
Total contributed capital $ 75,000
Retained earnings 287,500
Total stockholders' equity $ 362,500
Total liabilities and stockholders’ equity $542,400
Analysis of Liquidity
Ability of
Of particular interest
company to
to bankers and other pay debts
creditors as they
become due
Working
Capital
LO4
Dixon Sporting Good’s Liquidity
Current assets What's the $2,000
Current liabilities
trend?? 1,600
Working = Current Assets
Capital (Current Liabilities) $58,100
Current = Current Assets
Ratio Current Liabilities 1.97:1
Single-Step
Income Statement
Revenues $$
Less: expenses ($$)
Net income $$
LO5
Multiple-Step
Income Statement
Sales
– Cost of Goods Sold
= Gross Profit
Operating expenses:
– General and
administrative expenses Four
– Selling expenses important
= Income from operations subtotals
+/– Other revenues and expenses
= Income before taxes
– Income Taxes Income tax expense
= Net income
Analysis of Profitability
Of
particular
interest
Profit
to current and
Margin %
potential
investors
LO6
Dixon Sporting Goods
Profit Margin
Profit Margin % = Net Income
Operating Revenues
Profit Margin % = $41,000 = 11%
$357,500
(The amount of every sales dollar that
results in income)
Statement of
Retained Earnings
Explains changes in the components of
owners’ equity during a period
Net income (net loss) and Dividends
Provides an important link between the
income statement and the balance sheet
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Deduct: Dividends
Equal Ending retained earnings
LO7
Dixon Sporting Goods
Statement of Retained Earnings
For the year ended December 31, 2021
Retained Earnings, Jan 1, 2021 $271,500
Add: Net Income for 2021 41,000
$312,500
Less: Dividends declared and paid
in 2021 (25,500)
Retained Earnings, Dec 31, 2021 $287,500
Basic Format of the
Statement of Cash Flows
Cash flows from operating activities:
Re $$
co
nc
Cash flows from investing activities:
in ile
th cash s ch $$
e p f an
er or ge
Cash flows from financing activities:
iod
$$
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
LO8
Basic Format for the
Statement of Cash Flows
Cash flows from operating activities:
Involves the purchase and sale $$
of products or services
Cash flows from investing activities:
Involves the acquisition and sale $$
of long-term or noncurrent assets
Cash flows from financing activities:
Involves the issuance and repayment $$
of long-term liabilities and stock
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Financial Statements
for a Real Company:
General Mills
LO9
General Mills’s Liquidity
(in millions) 2021 2020
Current assets $ 3,480.0 $ 3,534.9
Current liabilities 3,769.1 3,606.0
Working capital $ ( 289.1) $( 71.1)
Current ratio = 0.92:1 0.98:1
Current = Current Assets
Ratio Current Liabilities
(How many $ of current assets for every $ of current liabilities)
General Mills’s Profitability
(in million’s) 2021 2020 2019
Net sales $14,796.5 $14,691.3 $13,652.1
Net income $ 1,530.5 $ 1,304.4 $ 1,294.7
Profit margin % = 10.3% 8.9% 9.5%
Profit Margin % = Net Income
Net Sales
(How many cents on every dollar of sales are left
over after covering all expenses)
Other Elements of an
Annual Report
Letter to stockholders
Description of company’s products and markets
Financial statements
Notes to financial statements
Report of independent accountants
Management discussion and analysis
Summary of significant accounting policies
End of Chapter 3
