1. Foundations of Business
Introduction to Financial Reporting
The Balance Sheet
Financial Application Assignment

2. Basic Elements of Financial Statements
Assets =
Liabilities =
Equity =
What a business owns
What a business owes
Owners’ economic position in the business

3. Balance Sheet Equation
Assets =
(What a company owns)
A =
Liabilities +
Stockholders’ Equity
L OE
(Funds to purchase what a company owns)

4. Balance Sheet Funds to purchase what a company owns
L OE
What a Company = owns
A =

5. Champ Creemee Company Balance Sheet (as of 12/31/10)
Shows the company’s position on a fixed date; “snapshot” in time
Accounts Payable $2,000
Wages Payable Current Liabilities ,500
Notes Payable (L.T.) 5,000
Total Liabilities ,500
Common Stock 10,000
Retained Earnings Total Shareholders’ Equity ,690
Total Liab. & SH Equity $18,190
Cash $8,690
Accounts Receivable 3,000
Inventory 3,500
Current Assets ,190
Equipment ,000
Total Assets $18,190

6. How Transactions Impact Financial Statements
Increase in something owned
Increase in something owed
Sale of Common stock
Increase in Sales
Increased Expenses associated with sales
Increase in Net Income
Pay dividend
+ Asset
+ Liability
+ Common Stock
+ Sales
+ Net Income
+ Expenses
- Net Income
+ Retained Earnings
- Retained Earnings

7. Owners’ Equity Example: Owning a house with a mortgage
Value of the house (= asset): $300,000
- Mortgage (= liability): $200,000
Owners’ Equity: $100,000
Assets - Liabilities = Equity
(House) - (Mortgage) = Equity
$300, $200,000 = $100,000

8. The 30 Companies in the Dow Jones Industrial Average (DJIA)
3M Company (MMM)
Alcoa Inc. (AA)
Amer. Express (AXP)
AT&T (T)
Bank of America (BAC)
Boeing (BA)
Caterpillar Inc. (CAT)
Chevron
Corporation
(CVX)
Cisco Systems (CSCO)
Coca-Cola (KO)
DuPont (DD)
Exxon Mobil Corp. (XOM)
Gen'l Electric (GE)
Hewlett
- Packard (HPQ)
Home Depot (HD)
Intel (INTC)
Int'l Business Mach. (IBM)
Johnson & Johnson (JNJ)
JPMorgan Chase (JPM)
Kraft Foods (KFT)
McDonald's Corp. (MCD)
Merck & Co. (MRK)
Microsoft Corp. (MSFT)
Pfizer, Inc. (PFE)
Procter & Gamble (PG)
Travelers (TRV)
United Technologies (UTX)
Verizon Communic. (VZ)
Wal-Mart Stores (WMT)
Walt Disney (DIS)
Spring 2011

9. The Dow Jones Industrial Average (The DJIA or the “Dow”)
Source: Google Finance

10. The Dow vs. the S&P 500 (Standard & Poor’s 500)
= Dow Jones
= S&P 500
Source: Google Finance

11. 3 major market indexes the DJIA, S&P 500, NASDAQ
Source: Google Finance

12. BP vs. Exxon Mobil vs. the S&P 500
Source: Google Finance
Link to Financial Application Assignment

13. A major company event—Jan. 13, 2011 Effect on company stock price?
headline
Merck clot drug seen unfit for stroke
Top experimental drug found unfit for stroke patients
* Vorapaxar acquired in Merck's buy of Schering-Plough
* Dashed drug hopes pose challenge to new CEO
* Merck shares drop 6.6 pct (Adds Merck drag on Dow, drug sales potential, stroke statistics)
By Ransdell Pierson
NEW YORK, Jan 13 (Reuters) - One of Merck & Co's (MRK) most important experimental drugs, blood clot preventer Vorapaxar, has been deemed inappropriate for patients who have suffered a stroke, dashing investor hopes and erasing nearly $8 billion from its market value.
Vorapaxar, meant to prevent heart attacks and strokes or their recurrence, was considered a crown jewel in Merck's $41 billion acquisition in late 2009 of Schering-Plough Corp and deemed capable of generating annual sales of more than $3 billion.
Jan. 13, 2011
Date, source
Company announcement

14. Comparison chart: The impact of a company event on the company’s stock price
Event: Announcement by Merck of Vorapaxar’s ineffectiveness

15. Effect of a company announcement on the company’s stock price
MRK’s stock price underperforms the S&P500 slightly before the event but then experiences a sharp decline on the day of the event and continues to underperform the S&P 500 for the next 5 days.
Date of Announcement

16. Creating an Index Index = new value / base value * 100 Base value 2
DATE
S&P 500 ACTUAL VALUE (Close)
S& P 500 INDEX VALUE
(calculated)
MERCK ACTUAL STOCK PRICE (Close)
MERCK INDEX VALUE (calculated)
1/10/11
100
$37.20
1/11/11
/ x 100 =
$36.95
36.95 / x 100 = 99.33
1/12/11
/ x 100 =
$37.15
37.15 / x 100 = 99.87
1/13/11
/ x 100 =
$34.69
34.69 / x 100 = 93.25
1/14/11
/ x 100 =
$34.23
34.23 / x 100 = 92.02
1/18/11
/ x 100 =101.99
$33.87
33.87 / x 100 = 91.05
1/19/11
/ x 100 =100.96
$33.91
33.91 / x 100 = 91.16
1/20/11
/ x 100 =100.83
$34.05
34.05 / x 100 = 91.53
1/21/11
/ x 100 =
$33.90
33.90 / x 100 = 91.13

17. Champ Creemee Company Inventory
2 gallons of ice cream
cones
napkins