Chapter 2

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

2. Classified Balance Sheet

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

4. Current Assets Cash Receivables Inventories Prepayments Current Assets Will be converted to cash or consumed within one year or the operating cycle, whichever is longer.

5. Non-Current Assets Investments and Funds Property, Plant, & Equipment Intangibles Other Noncurrent Assets Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer

6. Current Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Current Liabilities Obligations expected to be satisfied through current assets or creation of other current liabilities

7. Non-Current Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Long-Term Liabilities Obligations that will not be satisfied within one year or operating cycle, whichever is longer

8. Realized, sold or consumed in one year or operating cycle A = L + SE Hewlett-Packard Co.Consolidated Balance SheetsAt October 31st (in millions) A Assets 20112010 Current assets: Cash and cash equivalents $ 8,043 $ 10,929 Marketable Securities 3,162 2,986 Accounts receivable, net 18,224 18,481 Inventory 7,490 6,466 Other 14,102 15,322 Total current assets 51,021 54,184 Property, plant and equipment, net 12,292 11,763 Goodwill 44,551 38,483 Other Intangibles, net 10,898 7,848 Other assets 10,75512,225 $ 129,517 $ 124,503

9. Satisfied within one year or operating cycle A = L + SE Hewlett Packard Co.Consolidated Balance SheetsAt October 31st Liabilities and Stockholders' Equity (in millions) = L Current liabilities: Accounts payable $ 14,750 $ 14,365 Accrued liabilities 19,506 20,354 Other current liabilities 16,186 14,684 Total current liabilities 50,442 49,403 Long-term liabilities 40,071 34,319 Total liabilities 90,513 83,722 Stockholders' equity: Common stock 20 22 Additional Paid-In-Capital 6,837 11,569 Retained earnings 35,645 33,027 Treasury stock -- -- Accumulated other comprehensive loss ( 3,498) (3,837) Total stockholders' equity 39,004 40,781 + SE $ 129,517 $ 124,503 9

10. Classified Balance Sheet Ratios to Know

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

12. Current assets $ 51,021 $ 54,184 Current liabilities 50,44249,403 Working Capital = C.A. less C.L. $ 579 $ 4,781 Hewlett Packard’s Liquidity (in millions) 20112010 What's the trend?? Current = Current Assets 1.01 1.10 Ratio Current Liabilities

13. Can you compare the ratios? Comparison of Liquidity Some 2011 current ratios: • Apple 1.61 • Campbell Soup .99 • Fed Ex 1.69 Consider composition of current assets and frequency of turnover

14. Multi-Step Income Statement

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

16. Multi-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 taxes – Income tax expense =Net income Four important subtotals

17. Hewlett Packard Co.Consolidated Statements of OperationsFor the Years Ended October 31st (in millions) 20112010 Net Sales $ 126,796 $ 125,615 Cost of goods sold 97,223 95,654 Gross profit 29,573 29,961 Selling, general and administrative expenses 18,32717,161 Operating income (loss) 11,246 12,800 Other income (loss), net (2,264) (1,826) Income (loss) before income taxes 8,982 10,974 Provision (benefit) for income taxes 1,9082,213 Net income (loss) $ 7,074 $ 8,761

18. Multi-Step Income Statement Ratios to Know

19. Analysis of Profitability Of particular interest to current and potential investors Gross Profit % Profit Margin %

20. Gross Profit (Margin) % = Gross Profit Sales (How many cents on every $ of sales are left over after covering the cost of the product) Hewlett Packard’s Profitability (in millions) 2011 2010 2009 Net sales $ 126,796 $ 125,615 $ 114,175 Cost of sales 97,223 95,654 87,163 Gross profit $ 29,573 $ 29,961 $ 27,012 Gross profit % = 23.3%23.9% 23.7%

21. Profit Margin % = Net Income Sales (How many cents on every $ of sales are left over after covering all expenses) Hewlett Packard’s Profitability (in millions) 2011 2010 2009 Net sales $ 126,796 $ 125,615 $ 114,175 Net income $ 7,074 $ 8,761 $ 7,660 Profit margin % = 5.6% 7% 6.7%

22. Statement of Retained Earnings

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

24. Statement of Cash Flows

25. 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

26. 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 payment of long-term liabilities and stock

27. End of Chapter 2