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

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

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

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

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 500 Current Liabilities 2,500 Notes Payable (L.T.) 5,000 Total Liabilities 7,500 Common Stock 10,000 Retained Earnings 690 Total Shareholders’ Equity 10,690 Total Liab. & SH Equity $18,190 Cash $8,690 Accounts Receivable 3,000 Inventory 3,500 Current Assets 15,190 Equipment 3,000 Total Assets $18,190

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

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 $300,000 - $200,000 = $100,000

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

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

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

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

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

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

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

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

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 1269.75 100 $37.20 1/11/11 1274.48 1274.48 / 1269.75 x 100 = 100.37 $36.95 36.95 / 37.20 x 100 = 99.33 1/12/11 1285.96 1285.96 / 1269.75 x 100 = 101.28 $37.15 37.15 / 37.20 x 100 = 99.87 1/13/11 1283.76 1283.76 / 1269.75 x 100 = 101.10 $34.69 34.69 / 37.20 x 100 = 93.25 1/14/11 1293.24 1293.24 / 1269.75 x 100 = 101.85 $34.23 34.23 / 37.20 x 100 = 92.02 1/18/11 1295.02 1295.02 / 1269.75 x 100 =101.99 $33.87 33.87 / 37.20 x 100 = 91.05 1/19/11 1281.92 1281.92 / 1269.75 x 100 =100.96 $33.91 33.91 / 37.20 x 100 = 91.16 1/20/11 1280.26 1280.26 / 1269.75 x 100 =100.83 $34.05 34.05 / 37.20 x 100 = 91.53 1/21/11 1283.35 1283.35 / 1269.75 x 100 = 101.07 $33.90 33.90 / 37.20 x 100 = 91.13

Champ Creemee Company Inventory 2 gallons of ice cream cones napkins