1. Gary A. Porter and Curtis L. Norton
Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition
Gary A. Porter and Curtis L. Norton
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Primary Objective of Financial Reporting
Provide information
for decision making
Extend credit $$??
Loan $$??
Start new business??
Borrow $$??
Invest??
Sell stocks or bonds??
LO1 2 2

3. Secondary Objectives of Financial Reporting
Reflect
prospective
cash receipts to
investors and
creditors
Reflect the
company’s
resources and
claims to its
resources
Reflect
prospective cash
flows to the
company
Assets = Liabilities + OE 2 2

4. Qualitative Characteristics
Understandability –
Relevance –
Reliability –
To those willing to take
the time to understand it
Has capacity to
make a difference
Represents what
it purports to
LO2 3 3 3

5. Qualitative Characteristics
between companies
Comparability
from one period to the next
Consistency 3 4 4

6. Qualitative Characteristics
Materiality
Will it make a difference
to the decision maker?
Conservatism
All else equal, choose
least optimistic estimate 3 5 5

7. Operating Cycle
The period of time between the purchase (or production) of inventory and the collection of any receivable from the sale of inventory
LO3

8. Basic Structure of a Classified Balance Sheet
Current assets
+ Noncurrent (long-term) assets
Total assets
Current liabilities
+ Noncurrent (long-term) liabilities
+ Stockholders’ equity
Total liabilities and stockholders’ equity 5 7 7

9. Dixon Sporting Goods Balance Sheet
A = L + SE
Dixon Sporting Goods Balance Sheet
Realized, sold, or consumed in
one year or operating cycle A
Assets
Current assets
Cash $ 5,000
Marketable securities ,000
Accounts receivable ,000
Inventories ,500
Prepaid insurance ,800
Store Supplies
Total current assets $118,000
Investments
Land held for future office site ,000
Property, plant, and equipment
Land $100,000
Buildings $150,000
Less: Accumulated depreciation (60,000) ,000
Store furniture and fixtures ,000
Less: Accumulated depreciation (12,600) ,400
Total property, plant and equipment ,400
Intangible assets
Franchise agreement ,000
Total assets $542,400

10. Dixon Sporting Goods Balance Sheet
A = L + SE
Dixon Sporting Goods Balance Sheet
Satisfied within one
year or operating cycle
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 15,700
Salaries and wages payable ,500
Income taxes payable , Interest payable ,500
Bank loan payable ,000
Total current liabilities $ 59,900
Long-term debt
Notes payable ,000
Total liabilities $179,900
= L
+ SE
Contributed capital
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Paid-in capital in excess of par value ,000
Total contributed capital $ 75,000
Retained earnings ,500
Total stockholders' equity $362,500
Total liabilities and stockholders’ equity $542,400

11. Analysis of Liquidity Ability of company to pay debts as they
Of particular interest to
bankers and other
creditors
Ability of
company to
pay debts
as they
become due
Working
Capital
Current
Ratio
LO4 7 8 8

12. Dixon Sporting Good’s Liquidity
What's the
trend??
Current assets $118,000
Current liabilities ,900
Working = Current Assets
Capital – Current Liabilities $ 58,100
Current = Current Assets
Ratio Current Liabilities :1 8 9 9

13. Single-Step Income Statement
Revenues $$
Less: expenses ($$)
Net income $$
LO5 16 16

14. Multiple-Step Income Statement
Operating revenues
Operating expenses:
– General and
administrative expenses
– Selling expenses
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income
Three
important
subtotals 6 13 13

15. Dixon Sporting Goods Income Statement
For the Year Ended December 31, 2008
Sales $357,500
Cost of Goods Sold ,300
Gross profit $139,200
Operating expenses:
Selling Expenses
Depreciation on store furniture and fixtures $ 4,200
Advertising ,750
Salaries and wages ,000
Total Selling Expenses $ 39,950
General and Administrative Expenses:
Depreciation on buildings and amortization
of trademark $ 6,000
Salaries and wages ,000
Insurance ,600
Supplies ,050
Total General and Administrative Expenses ,650
Total operating expenses ,600
Income from operations $73,600
Other revenues and expenses:
Interest revenue $ 1,500
Interest expense ,900
Excess of other revenues over other expenses , Income before taxes $58,200
Income tax expense ,200
Net income $41,000

16. Analysis of Profitability
particular
interest
to current and
potential
investors
Profit
Margin %
LO6 14 14

17. Dixon Sporting Goods Profit Margin
Profit Margin % = Net Income
Operating Revenues
Profit Margin % = $ 41,000 = 11% $357,000
(The amount of every sales dollar that results in income)

18. Statement of Retained Earnings
Shows changes in the components of owners’ equity
Net income (net loss) and Dividends
Provides an
important link
between the
income
statement and the balance
sheet
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Deduct: Dividends
= Ending retained earnings
LO7 19 19

19. Basic Format of the Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Reconciles change
in cash for
the period
LO8 20 20

20. Basic Format for the Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Involve the purchase and sale
of products or services
Involve the acquisition and sale
of long-term or noncurrent assets
Involve the issuance and repayment
of long-term liabilities and stock 20 20

21. Looking at Financial Statements for a Real Company:
Finish Line, Inc.
LO9

22. Finish Line’s Liquidity
(in 000’s) /25/ /26/2005
Current assets $381, $371,800
Current liabilities , ,016
Working capital $239, $234,784
Current ratio = : :1
Current = Current Assets
Ratio Current Liabilities
(How many $ of current assets for every $ of current
liabilities) 15 15

23. Finish Line, Inc. Profitability
(in 000’s) /25/ /26/ /28/2004
Net sales $1,306, $1,166, $985,891
Net income $ , $ ,263 $ 47,347
Profit margin % = 4.6% % %
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses) 16 16

24. Other Elements of an Annual Report
Letter to stockholders
Description of company’s products and markets
Financial statements
Notes to financial statements
Report of independent accountants
Management discussion and analysis
Summary of significant accounting policies 21 21

25. End of Chapter 2