Chapter 2 Financial Statements & Cash Flows PDF

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CHAPTER 2FINANCIAL STATEMENTSAND CASH FLOWCh2: FINANCIAL STATEMENTS ANDCASH FLOWAfter discussing this chapter, you should be able to:➢ Read and interpret the basic financial statements: thebalance sheet, income statement, and statement of cashflows.➢ Explain how the balance sheet portrays a company'...

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CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW

Ch 2: FINANCIAL STATEMENTS AND CASH FLOW After discussing this chapter, you should be able to: ➢

Read and interpret the basic financial statements: the balance sheet, income statement, and statement of cash flows.

➢

Explain how the balance sheet portrays a company's financial position.

➢

Describe how the income statement reveals the entity's operating performance.

➢

Determine and assess a company's cash inflows and cash outflows.

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Ch 2: FINANCIAL STATEMENTS AND CASH FLOW After discussing this chapter, you should be able to: (Con’t.) ➢

Outline the many types of accounts that may exist in the accounting system.

➢

Explain what the annual report is and read and list its components, including the financial statements, footnotes, review of operations, auditor's report, and supplementary schedules.

➢

Describe what management‘s discussion and analysis (MD&A) involves.

Ch 1: Intro to Financial Management After discussing this chapter, you should be able to: (Con’t.) ➢

Explain the role of financial managers.

➢

Describe the relationship between accounting and finance.

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Explain the financial and operating environment in which financial managers operate.

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Compare the various legal forms of business organization.

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WHAT AND WHY OF FINANCIAL STATEMENTS?

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FIGURE 2-2 HOW THE FINANCIAL STATEMENTS TIE TOGETHER

X Company Income Statement For the Year Ended December 31, 20XX

Fig. 2-3 Classified Income Statement

Revenue Gross Sales Less: Sales Ret. & Allow. Sal es Discounts Net Sales Cost of Goods Sold Inventory, Jan. 1 Add: Purchases Cost of Goods Available for Sale Less: Inventory, Dec. 31 Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Advertising Salesman Salaries Travel & Entertainment Depreciation-Delivery Truc Gen. & Administrative Expenses Officer's Salaries Depreciation Rent Insurance Total Operating Expenses Operating Income Other Expenses (net) Interest Expense Less: Interest Income Dividend Income Other Expenses (net) Net Income

40,000 1,000 500

1,500 38,500 1,000 15,000 16,000 5,000 11,000 27,500

3,000 2,000 1,000 500

6,500

4,000 1,000 2,000 1,000

8,000 14,500 13,000 2,000

500 1,000

1,500 500 12,500

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Fig. 2-4 Classified Balance Sheet

Fig. 2-5 Statement of Cash Flows (Indirect)

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PREPARING AND ANALYZING THE STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS AND CORPORATE PLANNING OTHER SECTIONS OF THE ANNUAL REPORT ➢ Report of Independent Public Accountants ➢ Unqualified

Opinion ➢ Qualified Opinion ➢ Disclaimer of opinion ➢ Adverse Opinion ➢

Footnotes (Notes to the Financial Statements) ➢ Supplementary

Schedules and Tables

➢ Two-Year Quarterly Data ➢ Segmental Disclosure

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FIGURE 2-6 SEGMENTED INCOME STATEMENT OFFICE EQUIPMENT AND AUTO PARTS COMPANY Income Statement Data (in Millions)

Net Sales Manufacturing costs Inventories, beg. Materials and services Wages Inventories, end Totals Selling and administrative expenses Total operating expenses Income before taxes Income taxes (35%) Net Income

Consolidated 78.8

Office Equipment 18.0

Auto Parts 60.8

12.3 38.9 12.9 (13.3) 50.8 12.1 62.9 15.9 (5.6) 10.3

4.0 10.8 3.8 (3.9) 14.7 1.6 16.3 1.7 (0.6) 1.1

8.3 28.1 9.1 (9.4) 36.1 10.5 46.6 14.2 (5.0) 9.2

HOW TO READ A QUARTERLY REPORT

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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) ➢ Liquidity ➢ Capital resources

➢ Results of operations ➢ Positive and negative

trends ➢ Significant uncertainties ➢ Events of an unusual or infrequent nature ➢ Underlying causes of material changes in financial statement items ➢ A narrative discussion of the material effects of inflation

END OF CHAPTER 2

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