MGT 497 Financial Statements

1. MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA

2. Balance Sheet Assets: Liabilities & Equity: Statement of Cash Flows Cash Receivables Inventory Fixed Assets Other Assets Liabilities Equity Income Statement Revenues Expenses Net Income

3. Balance Sheet Assets: Liabilities & Equity: Cash Receivables Inventory Fixed Assets Other Assets Liabilities Equity Statement of Stock-holders’ Equity

4. The Income Statement Rockyfellow, Inc. Income Statement For the Year Ended December 31, 2001 The heading.

5. The Income Statement Sales revenue $186,230 Cost of goods sold 73,350 Gross profit 112,880 Operating expenses: Wages $42,700 Utilities 6,430 Depreciation 9,650 Insurance 3,420 Supplies 8,390 Advertising 7,120 Patent 3,000 Total operating expenses 80,710

6. The Income Statement Sales revenue $186,230 Cost of goods sold 73,350 Gross profit 112,880 Total operating expenses 80,710 Operating income 32,170 Interest expense 10,300 Pretax income 21,870 Income tax expense 5,600 Net income $ 16,270

7. The Income Statement Sales revenue $186,230 Cost of goods sold 73,350 Gross profit 112,880 Total operating expenses 80,710 Operating income 32,170 Interest expense 10,300 Pretax income 21,870 Income tax expense 5,600 Net income $ 16,270 Earnings per share of common stock $1.30 ($16,270  12,500 shares)

8.  = Net Income Earnings per Share (Net Income  Shares of Stock) =  The Income Statement

9. The Balance Sheet Rockyfellow, Inc. Balance Sheet December 31, 2001 The heading.

10. The Balance Sheet Rockyfellow, Inc. Balance Sheet December 31, 2001 20012000 Assets Current assets: Cash $ 15,600 $ 11,700 Accounts receivable 22,430 13,850 Merchandise inventory 43,500 44,450 Supplies 12,670 9,920 Prepaid insurance 8,290 5,950 Total current assets $102,490 $ 85,870

11. 20012000 Property, plant, and equipment: Equipment $ 93,070 $ 79,570 Building 275,000235,000 368,070 314,570 Less: Accumulated depreciation 105,860 96,210 262,210 218,360 Land 36,810 45,000 Total property, plant, and equipment 299,020 263,360 Other assets: Patents 32,000 35,000 Total assets $433,510 $384,230

12. 20012000 Liabilities Current liabilities: Accounts payable $ 24,790 $ 22,630 Wages payable 4,100 5,510 Interest payable 11,250 9,920 Income taxes payable 2,400 3,000 Notes payable, current portion 14,400 9,320 Total current liabilities 56,940 50,380 Long-term liabilities: Notes payable, long-term 177,600171,150 Total liabilities 234,540 221,530

13. 20012000 Stockholders’ Equity Contributed capital $125,000 $100,000 Retained earnings 73,970 62,700 Total stockholders’ equity 198,970162,700 Total liabilities and stockholders’ equity $433,510 $384,230

14. Dividends are not reported on the income statement because they are not expenses. Retained earnings is the cumulative amount of net income earned that has been reinvested in the corporation. Contributed capital is the amount of direct investment by owners in a corporation. The Statement of Stockholders’ Equity Rockyfellow, Inc. Statement of Stockholders’ Equity For the Year Ended December 31, 2001 Contributed Retained CapitalEarningsTotal Balance, December 31, 2000 $100,000 $62,700 $162,700 Common stock issued 25,000 25,000 Net income 16,270 16,270 Dividends declared (5,000) (5,000) Balance, December 31, 2001 $125,000 $73,970 $198,970

15. Statement of Stockholders’ Equity Beginning stockholders’ Equity + Net income - Dividends + Stock issued - Stock repurchased Ending stockholders’ equity Balance Sheet Stockholders’ equity The “link” The Statement of Stockholders’ Equity Income Statement Net income

16. The Statement of Cash Flows This statement reports events that resulted in cash inflows and outflows for a fiscal period.

17. The Statement of Cash Flows In other words, this statement explains the changes in a company’s cash balance during the fiscal period.

18. Operating Activities Operating activities involve the use of resources to design, produce, distribute, and market goods and services.

19. - Cash Paid for Operating Activities = Net Cash from (for) Operating Activities Direct Format Cash Flow from Operating Activities Cash Received from Operating Activities 

20. Rockyfellow, Inc. Statement of Cash Flows For the Year Ended December 31, 2001 (Direct Method) Cash flow from operating activities: Receipts: Collections from customers $177,550 Payments: To suppliers of inventory $(70,240) To employees (44,110) For utilities (6,430) For insurance (5,760) For supplies (11,140) For interest (8,970) For advertising (7,120) For income taxes (6,200) Total cash payments (159,170) Net cash flow from operating activities 17,680

21. Investing Activities Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services.

22. Financing Decisions • How much financing does an organization need? • Where should an organization obtain its financing? • When should an organization obtain funding? • What effect will financing have on profitability and survival?

23. Cash flow from investing activities: Purchase of plant assets $(53,500) Sale of plant assets 8,190 Net cash flow from investing activities $(45,310) Cash flow for financing activities: Proceeds from issuing common stock $25,000 Proceeds from issuing long-term debt 32,000 Payment of long-term debt (20,470) Payment of dividends (5,000) Net cash flow from financing activities 31,530 Net increase in cash 3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001 $ 15,600

24. Indirect Format The indirect format reconciles net income on an accrual basis with cash flow from operating activities on a cash basis.

25. Rockyfellow, Inc. Statement of Cash Flows For the Year Ended December 31, 2001 (Indirect Method) From Income Statement 2001 2000 Change $22,430 $13,850 $8,580 From Balance Sheet Cash flow from operating activities: Net income $ 16,270 Adjusted for: Depreciation and amortization 12,650 Increase in receivables (8,580) Decrease in merchandise 950 Increase in supplies (2,750) Increase in prepaid insurance (2,340) Increase in accounts payable 2,160 Decrease in wages payable (1,410) Increase in interest payable 1,330 Decrease in income tax payable (600) Net cash from operating activities 17,680

26. The following adjustments are made to net income using the indirect format in computing cash flow from operating activities. Summary of Adjustments for the Indirect Format • Noncash expenses, such as depreciation and amortization, are added to net income in computing cash flow from operating activities. • Increases in current asset balances are subtracted from net income. Decreases in current asset balances are added to net income. • Increases in current liability balances are added to net income. Decreases in current liability balances are subtracted from net income.

27. Indirect Format Net income + Depreciation and Amortization Expense - Increases in Current Asset Accounts + Decreases in Current Asset Accounts + Increases in Current Liability Accounts - Decreases in Current Liability Accounts = Cash Flow from Operating Activities

28. The investing and financing sections are identical for the direct and indirect formats. Cash flow from investing activities: Purchase of plant assets $(53,500) Sale of plant assets 8,190 Net cash flow from investing activities $(45,310) Cash flow for financing activities: Proceeds from issuing common stock $25,000 Proceeds from issuing long-term debt 32,000 Payment of long-term debt (20,470) Payment of dividends (5,000) Net cash flow from financing activities 31,530 Net increase in cash 3,900 Cash balance, December 31, 2000 11,700 Cash balance, December 31, 2001 $ 15,600

29. Changes Reported on the Income Statement and Statement of Cash Flows Amount on the Balance Sheet End of Fiscal Period + - = Interrelationships Among Financial Statements Amounts on the Balance Sheet Beginning of Fiscal Period