©2012 McGraw-Hill Ryerson Limited Learning Objectives 1.Prepare and analyze the four basic financial statements. (LO1) 2.Examine the limitations of the Income Statement as a measure of a firm’s profitability. (LO2) 3.Examine the limitations of the Balance Sheet as a measure of the firm’s financial position. (LO3) 4.Explain the importance of cash flows as identified in the statement of cash flows. (LO4) 1 of 45

©2012 McGraw-Hill Ryerson Limited Balance Sheet A Balance Sheet (B/S) shows what a firm owns and how it is financed at a point in time (ex. December 31) Assets = Liabilities + Owners’ Equity LO1 and LO3 2 of 45

©2012 McGraw-Hill Ryerson Limited Classifications on the Balance Sheet Assets: what a business owns Current Assets e.g. Accounts receivable, Inventory Will be sold or used up within 1 year Capital Assets e.g. Building, Equipment Liabilities: what a business owes Current Liabilities e.g. Accounts payable Due within 1 year Long-term Liabilities Due some time after 1 year Equity: what the owner(s) have invested in the business Shareholders’ Equity Capital stock Retained Earnings LO1 and LO3 3 of 45

©2012 McGraw-Hill Ryerson Limited KRAMER CORPORATION Balance Sheet (Statement of Financial Position) December 31, 2012 Assets Current assets: Cash $40,000 Marketable securities ,000 Accounts receivable $ 220,000 Less: Allowance for bad debts. 20, ,000 Inventory ,000 Prepaid expenses ,000 Total current assets ,000 Other assets: Investments ,000 Capital assets: Plant and equipment, original cost.. $1,100,000 Less: Accumulated amortization 600,000 Net plant and equipment ,000 Total assets $1,000,000 Table 2-4a (private company without IFRS) LO1 and LO3 4 of 45

©2012 McGraw-Hill Ryerson Limited Liabilities and Shareholders ’ Equity Current liabilities: Accounts payable $ 80,000 Notes payable (bank indebtedness) ,000 Accrued expenses ,000 Total current liabilities ,000 Long-term liabilities: Bonds payable, ,000 Total liabilities ,000 Shareholders’ equity: Preferred stock, 500 shares ,000 Common stock, 100,000 shares ,000 Retained earnings ,000 Total shareholders’ equity ,000 Total liabilities and shareholders’ equity.... $1,000,000 Table 2-4a (private company without IFRS) LO1 and LO3 5 of 45

©2012 McGraw-Hill Ryerson Limited Valuation Based on Balance Sheet One number related to a firm’s value on the balance sheet is net worth or book value, which is defined as: Shareholders’ Equity minus Preferred Stock It represents common shareholders’ original investment plus all earnings reinvested in the firm so far. The relationship between this number and the firm’s market value is an interesting ratio Market-to-Book Value Ratio = Market Value/Book Value LO1 and LO3 6 of 45

©2012 McGraw-Hill Ryerson Limited AbitibiBowater (ABH) $0.53$ BCE (BCE) Bank of Montreal (BMO) Loblaw (L) MolsonCoors (TAP.A) Open Text (OTC) EnCana (ECA) Ratio of Market ValueBook ValueMarket Value Corporationper Share ($) per Share ($)to Book Value Table 2-5 Comparison of market value to book value per share, November 2010 LO3 Source: Company financial reports, TSX website, 7 of 45

©2012 McGraw-Hill Ryerson Limited Limitations of the Balance Sheet Based on past transactions rather than future forecasts May not recognize important economic changes as they occur  increase in property values  new competition Variety of accounting policies and methods are used  amortization  inventory valuation LO3 8 of 45