Intermediate Accounting - Chap003 ppt

The purpose of the balance sheet is to report a company’s financial position on a particular date... Learning ObjectivesDistinguish between current and noncurrent assets and liabilitie

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The Balance Sheet and

Financial Disclosures

3

Learning Objectives

Describe the purpose of the balance sheet and understand its usefulness and limitations.

The Balance Sheet

Limitations:

 The balance sheet does not

portray the market value of

the entity as a going concern

nor its liquidation value.

 Resources such as

employee skills and

reputation are not recorded

in the balance sheet.

Limitations:

 The balance sheet does not

portray the market value of

the entity as a going concern

nor its liquidation value.

 Resources such as

employee skills and

reputation are not recorded

in the balance sheet.

 It provides long-term solvency information relating

to the riskiness of a company with regard to the amount of liabilities in its capital structure.

 It provides long-term solvency information relating

to the riskiness of a company with regard to the amount of liabilities in its capital structure.

The purpose of the balance sheet is to report a

company’s financial position on a particular date.

Claims against resources (Liabilities)

Remaining claims accruing to owners (Owners’ Equity)

Remaining claims accruing to owners (Owners’ Equity)

Balance Sheet

Learning Objectives

Distinguish between current and noncurrent

assets and liabilities.

Identify and describe the various balance

sheet asset classifications.

(In millions) 2004 2003 Assets:

Current assets:

Cash and cash equivalents $ 1,046 $ 538 Receivables, less allowances 3,027 2,627 Spare parts, supplies, and fuel 249 228 Deferred income taxes 489 416 Prepaid expenses and other 159 132 Total current assets $ 4,970 $ 3,941 Property and equipment, at cost:

Aircraft and related equipment $ 7,001 $ 6,624 Package handling & ground support

equipment and vehicles 5,296 5,013 Computer & electronic equipment 3,537 3,180 Other 4,477 4,200

20,311

19,017 Less accumulated depreciation 11,274 10,317 Net property and equipment 9,037 8,700 Other long-term assets:

Goodwill 2,802 1,063 Prepaid pension cost 1,127 1,269 Intangible and other assets 1,198 412 Total other long-term assets 5,127 2,744 Total Assets $ 19,134 $ 15,385

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepayments

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepayments

as commercial paper, money market funds, and U.S treasury bills.

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepayments

Cash Cash Equivalents Short-term Investments

Receivables Inventories Prepayments

Current

Assets

Current

Assets

Operating Cycle of a Typical Manufacturing

Company

Use cash to acquire raw materials

Convert raw materials to finished

product

Deliver product to customer

Collect cash from customer

Noncurrent Assets

Investments and

Funds Property, Plant, &

Equipment Intangibles Other

Investments and

Funds Property, Plant, &

Equipment Intangibles Other

Noncurrent Assets

Other Assets

1 Includes long-term prepaid

expenses and any noncurrent assets not falling in one of the other classifications

Investments and Funds

1 Not used in the operations of the

business

2 Includes both debt and equity securities

of other corporations, land held for

speculation, noncurrent receivables, and

cash set aside for special purposes

Property, Plant and Equipment

1 Are tangible, long-lived, and used in the

operations of the business

2 Includes land, buildings, equipment,

machinery, and furniture as well as

natural resources such as mineral mines,

timber tracts, and oil wells

3 Reported at original cost less

accumulated depreciation (or depletion

for natural resources)

Intangible Assets

1 Used in the operations of the

business but have no physical substance

2 Includes patents, copyrights, and

franchises

3 Reported net of accumulated

amortization

©

Learning Objectives

Identify and describe the two balance sheet

liability classifications.

(In milions) 2004 2003

Liabilities:

Current liabilities:

Current portion of long-term debt $ 750 $ 308

Accrued salaries & employee benefits 1,062 724

Accounts payable 1,615 1,168

Accrued expenses 1,305 1,135

Total current liabilities 4,732 3,335

Long-term debt, less current portion 2,837 1,709

Other long-term liabilities

Deferred income taxes 1,181 882

768

657 Self-insurance accruals 591 536

Deferred lease obligations 503 466

426

455 Other liabilities 60 57

Total other long-term liabilities 3,529 3,053

Total liabilities 11,098 8,097

Deferred gains, principally related to

aircraft transactions

Balance Sheet 31-May

Pension, postretirement healthcare

and other benefit obligations

Liabilities are probable future sacrifices of economic benefits arising from present obligations of

a particular entity to transfer assets or provide services to other entities

as a result of

past transactions

or events

Liabilities are

probable future sacrifices of economic benefits arising from present obligations of

a particular entity to transfer assets or provide services to other entities

as a result of

past transactions

or events

Current Liabilities

Accounts Payable Notes Payable Accrued Liabilities Current Maturities

of Long-Term Debt

Accounts Payable Notes Payable Accrued Liabilities Current Maturities

of Long-Term Debt

Obligations expected to be

satisfied through current

assets or creation of other

current liabilities within one

year or the operating cycle,

whichever is longer

Obligations expected to be

satisfied through current

assets or creation of other

current liabilities within one

year or the operating cycle,

whichever is longer

Current Liabilities

Current Liabilities

Long-term Liabilities

Notes Payable Mortgages Bonds Payable Pension Obligations Lease Obligations

Notes Payable Mortgages Bonds Payable Pension Obligations Lease Obligations

(In millions, except shares) 2004 2003

Common Stockholders' Investment:

Common stock, $.10 par value, 800 million

shares authorized, 300 million shares

issued for 2004 and 299 million shares $ 30 $ 30

stock at cost 28 50

Total common stockholders' investment $ 8,036 $ 7,288

Balance Sheet 31-May

Shareholders’ Equity is the residual interest in the

assets of an entity that remains after deducting

liabilities.

Shareholders’ Equity is the residual interest in the

assets of an entity that remains after deducting

liabilities.

Shareholders’ Equity

Capital Stock

Capital Stock

Retained Earnings

Retained

Treasury Stock

Deferred Compensation

Deferred Compensation

Accumulated Other Comprehensive Income

Learning Objectives

Explain the purpose of financial statement

disclosures.

Disclosure Notes

Summary of Significant Accounting Policies

Conveys valuable information about the company’s choices from

among various alternative accounting methods.

Subsequent Events

A significant development that takes place after the company’s fiscal year-end but before the financial statements are issued.

Learning Objectives

Explain the purpose of management’s

discussion and analysis.

Management Discussion and Analysis

Provides a biased but informed perspective of

Management’s Responsibilities

 Preparing the financial

statements and other

Learning Objectives

Explain the purpose of an audit and describe

the content of the audit report.

Auditors’ Report

Expresses the auditors’ opinion

as to the fairness of presentation of the financial

statements in conformity with

generally accepted accounting

principles

Must comply with specifications

of the AICPA and the PCAOB

Auditors’ Opinions

Unqualified

Issued when the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP

Proxy Statement Information

A proxy statement is sent each year

to all shareholders, usually in the

same mailing with the annual

report

Using Financial Statement Information

Comparative Financial

Statements

Allow financial statement users to compare year-to-year financial position, results of operations, and

cash flows

Horizontal Analysis

Expresses each item in the financial statements as a percentage of that same item in the financial statements of another

year (base amount)

Vertical Analysis

Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year.

Ratio Analysis Allows analysts to control for size differences over time and among

firms

Learning Objectives

Identify and calculate the common liquidity and

financing ratios used to assess risk.

Liquidity Ratios—Federal Express

Indicates the extent of reliance on creditors, rather than owners, in providing resources

=

Times interest earned ratio

Net income + Interest expense + Taxes Interest expense

Indicates the margin of safety provided to

creditors

Financing Ratios—Federal Express

= 1.38

$11,098

$8,036

Debt to equity ratio

Times interest earned ratio

= 10.70

$1,455

$136

Appendix 3

Reporting Segment Information

Reporting by Operating Segment

Reportable Operating Segment Characteristics

Engages in business activities

from which it may earn revenues

and incur expenses

Many companies operate in several business

segments as a strategy to achieve growth and to reduce operating risk through diversification

Segment reporting facilitates the financial

statement analysis of diversified companies.

Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance Discrete financial information is

available

Operating Segment

General information about

the operating segment

Segment profit or loss, segment assets, and the basis of measurement

Reconciliations of the

totals of segment

revenues, reported profit or

loss, assets, and other

significant items

Interim period information

Segment Reporting

Reporting by

Geographic Area

SFAS 131 requires an enterprise to

report certain geographic information unless it is impracticable to do so.

Information About

Major Customers

Revenues from customers generating 10% or more of the revenue of an enterprise must be

disclosed.

End of Chapter 3