Exam 1 - Financial Statements Flashcards
Financial Statements (Purpose)
- Helps potential creditors and investors make rational decisions about investments, credit, etc
- Helps estimate timing of cash flows from dividends, interest payments, etc
- Provides information on economic resources and claims
- Assets, liabilities and equity
Financial Statements (Limitations)
- Limited nonfinancial information
- customer service, sales pipelines, quality measures
- Limited info on soft assets
- knowledge base, quality of personnel
- Limited real-time information
- Information not forward-looking
Balance Sheet
- A listing of distributor’s assets, liabilities and capital as of a particular date
- “Snapshot” of what the distributor owns and what it owes
- Assets = Liabilities + Shareholder’s Equity
- Distributor’s Assets
- Current Assets
- Management expects to use these assets within the next accounting period
- Ex: cash, accounts receivable, inventory
- Management expects to use these assets within the next accounting period
- Current Assets
Current Assets (Cash & Cash Equivalents)
- Is money in the bank, cash on hand, Treasury bills
- Cash is required to pay employees, suppliers, tax, interest etc
- Cash represents approx. 2% of a distributor’s asset
- Controller or financial manager is responsible for forecasting the distributor’s cash inflows and outflows
Current Assets (Accounts Receivable)
- Largest or 2nd largest asset on distributor’s balance sheet
- Accounts receivable and inventory make up 80% or more of total assets for many distributors
- estimate the % of receivables that might turn bad
Net Accounts Receivables = Accounts receivables - Estimate of Doubtful Accounts
Current Assets (Inventory)
Largest or 2nd largest asset for distributors
Valuation of distributor inventory is an accounting challenge
Current Assets (Other)
Unexpired insurance premium is a current asset
Unused advertising expenses
Prepaid expenses would have been otherwise cash in bank (asset)
Deffered Charges
Expenditures whose benefits are reaped for periods after one year from the balance-sheet date
Not current asset
Fixed Assets
Non current assets are not expected to be completely used during the next business period
-Land and buildings
-Office furniture and fixtures
-Warehouse racks and equipment
-Trucks and other vehicles
The figure is the book value (not mkt. value), since the assets are not sold or replaced in the near term
Fixed assets are depreciated; Land is NOT
Depreciation is an EXPENSE
Other Assets
Goodwill is an asset that is typically found on the balance sheet that has aquired other businesses
Price of the acquired business - Fair value of the assets
Company’s name and reputation, customer base, intellectual capital, workforce, relationships
Writing off goodwill is called amortization
Distributor Liabilities (Current Liabilities)
Liabilities that are due for payment in the next accounting period
Accounts payable
Short-term notes payable
Current portion of long-term debt
Accrued Expenses
-Accrued salaries, accrued bonuses
Deferred Income Taxes
Accelerated depreciation for Tax purpose - reduces the tax
Normal Depreciation - Financial Statements
Tax gained now is paid back in years to come
Considered as Long-term Liability
Distributor Liabilites (L-T Liability & Equity)
Long Term Liabilities
- Are amounts due after a year from the date on the B.S.
- Dist. L-T debt is usally owed to a bank or other commercial lender
- Some distributors borrow L-T funds from individuals or other investors
Equity
- Capital invested and/or left in the business
- Shares (common & preferred stock)
- Preferred stock holders are given priority to the common stock holders for dividends and the proceeds from liquidation
Income Statement
Shows results of a company’s operations for a given period of time
Sales Revenue
Proceeds from sales of products and services to customers
