1. Financial Statements and the Annual Report
Chapter 2
Financial Statements and the Annual Report
Financial Accounting, Alternate 4e by Porter and Norton 1 1

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

3. Secondary Objectives of Financial Reporting
Assess investor/
creditor cash
receipts A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Assess cash
flows to
company A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Assets = Liabilities + OE
Reflect
resources and
claims to
them 2 2

4. To those willing to take the time to understand it
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 3 3 3

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

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

7. Typical Operating Cycle
CASH A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Time it takes to go from cash back to cash A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
ACCTS. RECEIVABLE
INVENTORY A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
L F 12
ONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293 4 6 6

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. Monaco Coach Corporation Consolidated Balance Sheets
A = L + SE
Monaco Coach Corporation Consolidated Balance Sheets
Realized, sold or consumed in
one year or operating cycle
(in thousands) A
Assets Dec. 29, Dec. 28,
Current assets:
Trade receivables, net $ 82, $ 116,647
Inventories , ,609
Resort lot inventory ,883
Prepaid expenses , ,612
Deferred income taxes , ,379
Total current assets , ,130
Notes receivable ,
Property, plant and equipment, net , ,350
Debt issuance costs, net
Goodwill, net , ,254
$ 427, $ 547,417

10. Monarch Coach Corporation Consolidated Balance Sheets
A = L + SE
Monarch Coach Corporation Consolidated Balance Sheets
Satisfied within one
year or operating cycle
Liabilities and Stockholders' Equity
Current liabilities:
Book overdraft $ 5, $ 3,518
Line of credit , ,413
Current portion of long-term note payable , ,667
Accounts payable , ,055
Product liability reserve , ,322 Product warranty reserve , ,745
Income taxes payable ,536
Accrued expenses and other liabilities , ,633 Total current liabilities , ,889
Long-term note payable , ,333
Deferred income taxes , ,568
Total liabilities , ,790
= L
Stockholders' equity:
Common stock
Additional paid-in capital , ,501
Retained earnings , ,837
Total stockholders' equity , ,627
+ SE
$ 427, $ 547,417 10

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

12. Monaco Coach's Liquidity
(in 000’s)
Current assets $239, $356,130
Current liabilities , ,889
What's the
trend??
Working
Capital = C.A. less C.L $ 63, $ 114,241
Current = Current Assets : :1
Ratio Current Liabilities 8 9 9

13. Comparison of Liquidity
Some 2002 current ratios:
Gap, Inc :1
Sprint :1
McDonald's 0.71:1
Can you compare
the ratios?
Consider composition
of current assets and
frequency of turnover

14. Income Statement Single Step Revenues $$$ Less: expenses ($$)
Net income $$ 16 16

15. Multiple-Step Income Statement
Sales
– Cost of goods sold
= Gross profit
Operating expenses:
– Selling expenses
– General and
administrative expenses
= Income from operations
+/– Other revenues and expenses
= Income before income taxes
– Income tax expense
= Net income
Four
important
subtotals 6 13 13

16. Monaco Coach Corporation Consolidated Statements of Operations
For the Years Ended
Net Sales $ 937, $1,222,689
Cost of sales , ,059,560 Gross profit , ,129
Selling, general and administrative
expenses , ,202
Amortization of goodwill
Operating income , ,927
Other income, net
Interest expense (2,357) (2,752)
Income before income taxes , ,280
Provision for income taxes , ,765
Net income $ 24, $ 44,515

17. Analysis of Profitability
particular
interest
to current and
potential
investors
Gross
Profit %
Profit
Margin % 14 14

18. Monaco Coach Corporation's Profitability
(in 000’s)
Net sales $901,890 $937,073 $1,222,689
Cost of sales 772, , ,059,560
Gross profit $129,650 $113,990 $ 163,129
Gross profit % = % % %
Gross Profit (Margin) % = Gross Profit
Sales
(How many cents on every $ of sales are left over
after covering the cost of the product) 15 15

19. Monaco Coach Corporation's Profitability
(in 000’s)
Net sales $ 901,890 $937,073 $1,222,689
Net income $ 42,521 $ 24,919 $ ,515
Profit margin % = 4.7% % %
Profit Margin % = Net Income
Sales
(How many cents on every $ of sales are left
over after covering all expenses) 16 16

20. Statement of Stockholders’ Equity
Shows changes in all equity accounts including:
Sales and purchases of capital stock
Statement of Retained Earnings
Beginning retained earnings
Add: net income
Deduct: dividends
= Ending retained earnings
Includes: 19 19

21. Statement of Cash Flows
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 20 20

22. 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 assets
Involve the issuance and repayment
of long-term liabilities and stock 20 20

23. Elements of an Annual Report
Report of independent accountants
Management discussion & analysis
Summary of financial data
Letter to stockholders
Financial statements
Notes to financial
statements 21 21

24. End of Chapter 2