© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 3 The Balance Sheet and Financial Disclosures

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-2 Balance Sheet Limitations: NOT Assets are recorded at historical cost, NOT at market value. Resources such as employee skills and reputation are not recorded on the balance sheet. Limitations: NOT Assets are recorded at historical cost, NOT at market value. Resources such as employee skills and reputation are not recorded on the balance sheet. Usefulness: Provides a description of available productive resources. Liquidity information. Long-term solvency information. Usefulness: Provides a description of available productive resources. Liquidity information. Long-term solvency information.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-3 Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Owners’ Equity) Balance Sheet

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-4 Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-5 Assets CashReceivablesInventoriesPrepaymentsCashReceivablesInventoriesPrepayments Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. Current Assets

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-6 Assets Investments and Funds Property, Plant, & Equipment IntangiblesOther Investments and Funds Property, Plant, & Equipment IntangiblesOther Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer Noncurrent Assets

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-7 Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-8 Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities Current Liabilities

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-9 Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Obligations that will not be satisfied within one year or operating cycle, whichever is longer Long-Term Liabilities

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-10 Equity is the residual interest in the assets of an entity that remains after its liabilities are deducted.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-11 Shareholders’ Equity Capital Stock Capital Stock Retained Earnings Treasury Stock Other Contributed Capital

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-12 Now, let’s move on to a new topic.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-13 Disclosure Notes Summary of Significant Accounting Policies Subsequent Events Noteworthy Events and Transactions

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-14 Management Discussion and Analysis (MDA) Includes management’s views on significant events, trends, and uncertainties regarding the company’s operations, liquidity, and capital resources.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-15 Management’s Responsibilities Preparing the financial statements. Preparing other information in the annual report. Maintaining the system of internal control.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-16 Auditors’ Report Expresses the auditors’ opinion as to the fairness of presentation of the financial statements. The auditor can render one of four opinions: Unqualified. Qualified. Adverse. Disclaimer.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-17 I need to have three paragraphs in my audit report: an introductory paragraph, a scope paragraph, and an opinion paragraph. Auditors’ Report

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-18 Compensation of Directors & Top Executives Proxy Statement Information Summary compensation table Table of options granted Table of options holdings

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-19 Now, let’s look at some ratios!

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-20 Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-21 Liquidity Ratios = 1.06 $3,449,061 $3,249,516 Current ratio =.81 $2,627,346 $3,249,516 Acid-test ratio

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-22 Financing Ratios = Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources = Times interest earned ratio Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-23 Financing Ratios =1.26 $7,439,592 $5,900,420 Debt to equity ratio = 7.4 $1,071,526 $143,953 Times interest earned ratio

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 3-24 End of Chapter 3