1. Chapter 5: Financial Reporting and Analysis Learning Objective 1 Explain the needs of financial statement users. 5-1

2. The Needs of Financial Statement Users Managers DirectorsCreditorsInvestors Government 5-2

3. Learning Objective 3 Prepare a comparative balance sheet, multistep income statement, and statement of stockholders’ equity. 5-3

4. Comparative Financial Statements A comparative format reveals changes over time, such as Activision’s huge increase in Cash and decline in Short-term Investments. 5-4

5. Multistep Income Statements 5-5

6. Statement of Stockholders’ Equity 5-6

7. Learning Objective 7 Calculate and interpret the debt-to-assets, asset turnover, and net profit margin ratios. 5-7

8. A Basic Business Model Most businesses can be broken down into 4 elements: (1)Obtain financing from lenders and investors, which is used to invest in assets, (2)Invest in assets, which are used to generate revenues, (3)Generate revenues, which produce net income, (4)Produce net income, which is needed to satisfy lenders and investors. (2) Assets(3) Revenues Operating Investing Financing Invested in generate produce (1) Debt & Equity Financing (4) Net Income 5-8

9. Financial Statement Ratios In addition to making it possible to compare companies of different sizes, a benefit of ratio analysis is that it enables comparisons between companies reporting in different currencies (dollars vs. euros). 5-9

10. Financial Statement Ratios The debt-to-assets ratio provides the percentage of assets financed by debt. A higher ratio means greater financial risk. 5-10 The asset turnover ratio measures how well assets are used to generate sales. A higher ratio means greater efficiency. The net profit margin ratio measures the ability to generate sales while controlling expenses. A higher ratio means better performance.

11. How Transactions Affect Ratios Three-step process: 1.Analyze the transaction to determine its effects on the accounting equation. 2.Relate the effects in step 1 to the ratio’s components, to determine whether each component increases, decreases, or stays the same. 3.Evaluate the combined impact of the effects in step 2 on the overall ratio. 5-11