Transcript Slide 1

Financial
Statements
and
Business
Decisions
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
Understanding the Business - Stakeholders
Founders of the business who also
function as managers are called OwnerManagers.
Owner-Managers
Creditors lend money for a specific period
of time and gain by charging interest on
the money they lend.
Creditors
Investors buy ownership in the company
in the form of stock.
Investors
1-3
Understanding the Business
Investors purchase stock (or ownership) in
businesses hoping to gain in two ways:
Sell
ownership
interest in the
future for more
than they
paid.
Receive a
portion of the
company’s
earnings in cash
(dividends).
1-4
The Accounting System
Collects and processes
financial information
Reports
information
to decision
makers
Managers
(internal
decision
makers)
Investors
and
Creditors
(external
decision
makers)
1-5
The Accounting System
Accounting System
Financial Accounting System
Managerial Accounting System
Periodic financial statements and
related disclosures
Detailed plans and continuous
performance reports
External Decision Makers
Internal Decision Makers
Investors, creditors,
suppliers, customers, etc.
Managers throughout the
organization
1-6
The Four Basic Financial Statements
Statement of Cash Flows
Balance Sheet
Statement of Retained Earnings
Income Statement
Financial statements summarize the financial
activities of the business.
1-7
The Four Basic Financial Statements
Companies can prepare financial statements
at the end of the year, quarter or month.
Financial statements prepared at the end
of the year are called annual reports.
1-8
Let’s look at
MAXIDRIVE
CORP.’s
financial
statements.
1. Name of entity
2. Title of statement
3. Specific date
4. Unit of measure
The Balance
Sheet reports
the financial
position of an
entity at a
particular point
in time.
1-9
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable
$
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 16,156
$ 2,000
9,105
11,105
$ 27,261
1-10
The Balance Sheet
Basic Accounting Equation
Assets = Liabilities + Stockholders’ Equity
Economic
Resources
Sources of Financing for
Economic Resources
Assets are
economic
resources
owned by the
business as a
result of past
transactions.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
1-11
Cash
$ 4,895
Accounts receivable
5,714
Inventories
8,517
Plant and equipment
7,154
Land
981
Total assets
$ 27,261
Liabilities andAmount
Stockholders'
Equity
of cash
in the company’s bank
Cash
Liabilities
accounts.
Accounts
payable
$ 7,156from prior
Accounts
Amounts owed by customers
Notes
payable
receivable
9,000
sales.
Total liabilities
Parts and completed but unsold$ 16,156
Assets are listed
Inventories
Stockholders'
Equity
products.
by their ease of
Contributed capital
$ 2,000
Plant
and
conversion into Retained earnings
Factories and production 9,105
machinery.
equipment
cash.
Total stockholders' equity
11,105
Land
on which factories
Total Land
liabilities and
stockholders'
equity are built.
$ 27,261
1-12
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
Liabilities are
debts or
obligations of
the business
that result from
past
transactions.
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable
$
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
Total liabilities
Accounts Amounts owed to Stockholders'
suppliers forEquity
prior
Contributed capital
payable purchases.
Retained earnings
Notes
Amounts owed on written debt
Total stockholders' equity
payable contracts.
Total liabilities and stockholders' equity
$ 16,156
$ 2,000
9,105
11,105
$ 27,261
Equity is the
amount of
financing
provided by
owners of the
business and
earnings.
Contributed
capital
Retained
earnings
1-13
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Amounts invested in the business by
Accounts payable
stockholders.
Notesnot
payable
Past earnings
distributed to
Total liabilities
stockholders.
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
$ 16,156
$ 2,000
9,105
11,105
$ 27,261
1-14
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
Use $ on the
first item in a
group
and on the
group total.
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable
$
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
Assets = LiabilitiesTotal
+ Stockholders’
Equity
liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 16,156
$ 2,000
9,105
11,105
$ 27,261
1-15
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2006
(in thousands of dollars)
Revenues
1. Name
of entity
Sales
revenue
$ 37,436
2. Title of statement
Expenses
3. Specific
balance
Cost
of goodsperiod
sold of time (Unlike the
$ 26,980
sheet,
this statement
covers a specified
Selling,
general
and administrative
3,624
periodand
of time.)
Research
development
1,982
4. Unit expense
of measure
Interest
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
1-16
MAXIDRIVE CORP.
The Income Statement reports the
Income Statement
revenues
minus expenses of the
For the Year Ended December 31, 2006
accounting
period.
(in
thousands of
dollars)
Revenues
Sales revenue
$ 37,436
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
1-17
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2006
(in thousands of dollars)
Revenues
Sales revenue
$ 37,436
Expenses
Revenues are earnings from the sale of goods or
Cost of goods sold
$ 26,980
services
to customers. Revenue is recognized
in the
Selling, general and administrative
3,624
period
in which
goods and services1,982
are sold, not
Research
and development
necessarily
the period in which cash450
is received.
Interest expense
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
1-18
Revenues
Earnings from the sale of goods or services.
When will the revenue from this
transaction be recognized?
$1,000 sale made
on May 25th.
May 2006
X
Cash from sale
collected on June 10th.
X
June 2006
1-19
Revenues
Earnings from the sale of goods or services.
When will the revenue from this
transaction be recognized?
$1,000 sale made
on May 25th.
May 2006
X
1-20
MAXIDRIVE CORP.
Income Statement
For the
Endedamount
December
31, 2003 used
Expenses
areYear
the dollar
of resources
of dollars)
up by the entity(intothousands
earn revenues
during a period. An
expense is recognized in the period in which
goods and services are used, not necessarily
Revenues
the period in which cash is paid. $ 37,436
Sales revenue
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
1-21
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2006
(in thousands of dollars)
Revenues
Cost of
The cost to produce products sold this
Sales
revenue
$ 37,436
goods
sold period.
Expenses
Selling,
Operating expenses not
directly related
Cost
of
goods
sold
$
26,980
general and
production.
Selling,
generaltoand
administrative
3,624
administrative
Research and development
1,982
Research and Expenses incurred to develop new
Interest expense
450
development products.
Total expenses
33,036
Interest
Pretax income The cost of using borrowed funds.
$ 4,400
expense
Incometax
tax expense
1,100
Income
Income taxes on current period’s pretax
Netexpense
income
$ 3,300
income.
1-22
Expenses
The dollar amount of resources used
up by the entity to earn revenues
during a period.
When will the expense for this
transaction be recognized?
May 11 paid $75 cash
for newspaper ad.
X
May 2006
Ad appears
on June 8th.
X
June 2006
1-23
Expenses
The dollar amount of resources used
up by the entity to earn revenues
during a period.
When will the expense for this
transaction be recognized?
Advertising expense
recorded in June.
X
June 2006
1-24
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2006
(in thousands of dollars)
Revenues
Sales revenue
$ 37,436
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
If expenses exceed revenues,
Pretax income
$ 4,400
we report net loss.
Income tax expense
Net income
1,100
$ 3,300
1-25
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2006
(in thousands of dollars)
Retained earnings, January 1, 2006
$ 6,805
1. Name
of entity
Net
income
for 2006
3,300
2. Title of statement
Dividends
for 2006
(1,000)
3. Specific
period ofDecember
time (Like31,
the2006
income$ 9,105
Retained
earnings,
statement, this statement covers a specified
period of time.)
4. Unit of measure
1-26
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2006
(in thousands of dollars)
Retained earnings, January 1, 2006
Net income for 2006
Dividends for 2006
Retained earnings, December 31, 2006
$ 6,805
3,300
(1,000)
$ 9,105
The Statement of Retained Earnings reports the way that
net income and the distribution of dividends affect the
financial position of the company during a period.
1-27
Statement of Cash Flows
Because
revenues reported
do not always equal
cash collected. . .
. . . and expenses
reported do not
always equal
cash paid . . .
net income is
usually not equal
to the change
in cash for
the period.
1-28
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
$
33,563
paid of
to suppliers
(30,854)
1.Cash
Name
entity and employees
paid for interest
(450)
2.Cash
Title
of
statement
Cash paid for taxes
(1,190)
3.Net
Specific
of time
(Like the income $ 1,069
cash flowperiod
from operating
activities
Cashstatement,
flow from investing
this activities:
statement covers a specified
Cash paid to purchase equipment
$
(1,625)
period of time.)
Net cash flow from investing activities
(1,625)
4. Unit
of measure
Cash
flow from
financing activities:
Cash received from bank loan
Cash paid for dividends
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
(156)
5,051
$
4,895
1-29
MAXIDRIVE CORP.
of Cash Flows
The Statement ofStatement
Cash Flows
reports the inflows and
For the Year Ended December 31, 2006
outflows of cash during
the period in the categories of
(in thousands of dollars)
operating, investing, and financing.
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
(1,625)
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
1-30
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
$
33,563
(30,854)
(450)
(1,190)
$
1,069
$
(1,625) to
Cash flows directly related
(1,625)
earning income are shown in the
Cash received from bank loan
$
1,400
operating section.(1,000)
Cash paid for dividends
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
(156)
5,051
$
4,895
1-31
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
$
33,563
(30,854)
(450)
(1,190)
$
$
1,069
(1,625)
(1,625)
Cash
flows
related
to the$ acquisition
Cash received
from bank
loan
1,400
Cash paid for dividends
(1,000)
or
sale
of
productive
assets
are 400
Net cash flow from financing activities
Net decrease
in cashin
during
year
$
(156)
shown
thetheinvesting
section.
Cash at beginning of the year
Cash at end of the year
5,051
$
4,895
1-32
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
$
33,563
(30,854)
(450)
(1,190)
Cash flows from or to investors or
$
1,069
creditors are shown in the financing
$
(1,625)
section.
(1,625)
Cash received from bank loan
Cash paid for dividends
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
(156)
5,051
$
4,895
1-33
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
$
33,563
(30,854)
(450)
(1,190)
$
$
1,069
(1,625)
(1,625)
The statement ends$with
a
1,400
Cash paid for
dividends
(1,000)
reconciliation
of Cash.
Cash received from bank loan
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
(156)
5,051
$
4,895
1-34
Relationship Among the Financial Statements
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2006
(in thousands of dollars)
Revenues
Sales revenue
Expenses
Cost of goods sold
Selling, general and administrative
Research and development
Interest expense
Total expenses
Pretax income
Income tax expense
Net income
$ 37,436
$ 26,980
3,624
1,982
450
Net income from the
income statement
increases ending retained
earnings on the statement
of retained earnings.
33,036
$ 4,400
1,100
$ 3,300
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2006
(in thousands of dollars)
Retained earnings, January 1, 2006
$ 6,805
Net income for 2006
3,300
Dividends for 2006
(1,000)
Retained earnings, December 31, 2006 $ 9,105
1-35
Relationship Among the Financial Statements
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable
$
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
Ending retained earnings
from the statement of
retained earnings is one of
the components of
stockholders’ equity on the
balance sheet.
$ 16,156
$ 2,000
9,105
11,105
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2006
(in thousands of dollars)
$ 27,261
Retained earnings, January 1, 2006
$ 6,805
Net income for 2006
3,300
Dividends for 2006
(1,000)
Retained earnings, December 31, 2006 $ 9,105
1-36
Relationship Among the Financial Statements
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2006
(in thousands of dollars)
Assets
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2006
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Notes payable
4,895
5,714
8,517
7,154
981
$ 27,261
$ 7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
(in thousands of dollars)
$
$ 16,156
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
(1,625)
$
1,400
(1,000)
Net cash flow from financing activities
$ 2,000
9,105
Net decrease in cash during the year
11,105
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
$ 27,261
The change in cash on the statement of cash flows added to the
beginning of the year balance in cash equals the ending balance
in cash on the balance sheet.
1-37
Notes
Notes provide supplemental
information about the financial
condition of a company.
Three basic types of notes:
 Description of accounting rules applied.
 Presentation of additional detail about an
item on the financial statements.
 Provide additional information about an
item not on the financial statements.
Operating
Decisions
and the
Income Statement
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
1-39
Elements on the Income Statement
Revenues
Increases in assets or settlement of
liabilities from ongoing operations.
Expenses
Decreases in assets or increases in
liabilities from ongoing operations.
Gains
Increases in assets or settlement of
liabilities from peripheral transactions.
Losses
Decreases in assets or increases in
liabilities from peripheral transactions.
1-40
Papa John’s Primary
Operating Activity is
selling pizza and selling
franchises.
Operating Activities
Peripheral Activities
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
For the Month Ended January 31, 2004
(In thousands)
Revenues
Restaurant and commissary sales
Franchise royalties and development fees
Total revenues
Costs and expenses
Cost of sales
Salaries and benefits expense
General and administrative expenses
Total costs and expenses
Operating income
Other revenues and gains (expense and losses)
Investment income
Interest expense
Gain on sale of land
Income before income taxes
Income tax expense
Net income
Earnings per share
$
66,000
2,800
68,800
30,000
14,000
7,000
51,000
17,800
$
1,000
3,000
21,800
21,800
$
1.21
1-41
Papa John’s Primary
Operating Expenses
Cost of sales
(used inventory)
Salaries and benefits
to employees
Other costs (like
advertising,
insurance, and
depreciation)
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
For the Month Ended January 31, 2004
(In thousands)
Revenues
Restaurant and commissary sales
Franchise royalties and development fees
Total revenues
Costs and expenses
Cost of sales
Salaries and benefits expense
General and administrative expenses
Total costs and expenses
Operating income
Other revenues and gains (expense and losses)
Investment income
Interest expense
Gain on sale of land
Income before income taxes
Income tax expense
Net income
Earnings per share
$ 66,000
2,800
68,800
30,000
14,000
7,000
51,000
17,800
1,000
3,000
21,800
$ 21,800
$
1.21
1-42
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
For the Month Ended January 31, 2004
(In thousands)
Earnings Per Share
Net Income
Weighted Average
Number of Common
Shares Outstanding
Revenues
Restaurant sales
Franchise royalties and development fees
Total revenues
Costs and expenses
Cost of sales
Salaries and benefits expense
General and administrative expenses
Total costs and expenses
Operating income
Other revenues and gains (expense and losses)
Investment income
Interest expense
Gain on sale of land
Income before income taxes
Income tax expense
Net income
Earnings per share
$ 66,000
2,800
68,800
30,000
14,000
7,000
51,000
17,800
1,000
3,000
21,800
$ 21,800
$
1.21
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
For the Year Ended December 28, 2003
(In thousands)
Corporations are taxable
entities. Income tax
expense is Income Before
Income Taxes × Tax Rate
(Federal, State, Local and
Foreign).
1-43
Revenues
Restaurant and commissary sales
$ 811,000
Franchise royalties and development fees
106,000
Total revenues
917,000
Costs and expenses
Cost of sales
385,000
Salaries and benefits
164,000
Rent expense
26,000
Advertising expense
38,000
General and administrative expenses
67,000
Depreciation expense
31,000
Restaurant closure costs
3,000
Other operating costs
141,000
Total costs and expenses
855,000
Operating income
62,000
Other revenues and gains (expense and losses)
Investment income
1,000
Interest expense
(7,000)
Restaurant disposition and impairment losses
(2,000)
Income before income taxes
54,000
Income tax expense
20,000
Net income
$ 34,000
1-44
How are Financial Statements Prepared?
Income
Statement
Revenues – Expenses = Net Income
Statement of
Retained
Earnings
Beginning Retained Earnings
+ Net Income
- Dividends Declared
Ending Retained Earnings
Balance
Sheet
Statement
of Cash Flows
Assets = Liabilities + Stockholders’ Equity
Contributed Capital
Retained Earnings
Change =
Cash from Operating Activities
in
+ Cash from Investing Activities
Cash
+ Cash from Financing Activities
1-45
Income Statement
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
For the Month Ended January 31, 2004
(In thousands)
Revenues
Restaurant and commissary sales
Franchise royalties and development fees
Total revenues
Costs and expenses
Cost of sales
Salaries and benefits expense
General and administrative expenses
Total costs and expenses
Operating income
Other revenues and gains (expense and losses)
Investment income
Interest expense
Gain on sale of land
Income before income taxes
Income tax expense
Net income
Earnings per share
$ 66,000
2,800
68,800
30,000
14,000
7,000
51,000
17,800
1,000
3,000
21,800
$ 21,800
$
1.21
1-46
Statement of Retained Earnings
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Retained Earnings
For the Month Ended Janaury 31, 2004
(Dollars in thousands)
Beginning balance, December 28, 2003
Net income
Dividends
Ending balance, January 31, 2004
$
$
The net income comes from the Income
Statement just prepared.
158,000
21,800
(3,000)
176,800
1-47
 Statement of
Cash Flows
The ending cash
balance agrees
with the amount
on the Balance
Sheet.
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Month Ended Janaury 31, 2004
(Dollars in thousands)
Operating Activities
Cash from: Customers
Franchises
Interest on investments
Cash to:
Suppliers
Employees
Net cash provided by operating activities
Investing Activities
Sold land
Purchased property and equipment
Purchased investments
Lent funds to franchisees
Net cash used in investing activities
Financing Activities
Issued common stock
Borrowed from banks
Net cash provided by financing activities
Net increase in cash
Cash at beginning of month
Cash at end of month
$ 69,000
3,900
1,000
(35,000)
(14,000)
24,900
4,000
(2,000)
(1,000)
(3,000)
(2,000)
2,000
6,000
8,000
30,900
7,000
$ 37,900
 Balance Sheet
The ending RE balance
from the Statement of
Retained Earnings and the
ending Cash balance from
the Statement of Cash
Flows feed into the asset
and equity sections of the
Balance Sheet.
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES1-48
Consolidated Balance Sheets
(Dollars in thousands)
Assets
Jan. 31, 2004
Current assets:
Cash
$
37,900
Accounts receivable
16,200
Supplies
16,000
Prepaid expenses
20,000
Other current assets
7,000
Total current assets
97,100
Long-term investments
9,000
Property and equipment, net of depreciation
213,000
Long-term notes receivable
14,000
Intangibles
49,000
Other assets
13,000
Total assets
$ 395,100
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Dividends payable
Accrued expenses payable
Total current liabilities
Unearned franchise fees
Long-term notes payable
Other long-term liabilities
Total liabilities
Stockholders' equity:
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
38,000
3,000
53,000
94,000
6,300
75,000
40,000
215,300
3,000
176,800
179,800
395,100
1-49
Judging Earnings Quality
Companies that make relatively pessimistic estimates
that reduce current income are judged to follow
conservative financial reporting strategies, and
experienced analysts give these reports more
credence. These companies are viewed as having
“higher quality” earnings.
1-50
Financial Statement Formats
Let’s take a
closer look
at the asset
section of the
balance
sheet!
1-51
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
$
Property, plant and equipment, net
Intangible assets, net
Other assets
$
47,340 $
100,664
185,389
50,069
383,462
108,452
63,867
151,760
44,948
369,027
164,763
169,851
30,490
748,566 $
167,340
121,317
22,161
679,845
1-52
Callaway Golf Company
Consolidated Balance Sheet
(in thousands, except share data and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
December 31,
2003
2002
Current assets
assets
that
$ are
47,340
$ 108,452
63,867
will100,664
be
turned
into
185,389
151,760
cash50,069
or expire
(be
44,948
383,462
369,027
used
up) within
167,340
the164,763
longer of
one
169,851
121,317
year
30,490 or the
22,161
$operating
748,566 $ cycle.
679,845
1-53
Callaway Golf Company
Consolidated Balance Sheet
Property,
plant and
December 31,
equipment
includes
(in thousands, except share data and per share data)
2003
2002
ASSETS
assets with useful
Current assets:
lives
of more
than
Cash and cash equivalents
$
47,340
$ 108,452
Accounts receivable, net
63,867
one 100,664
year acquired
Inventories, net
185,389
151,760
for
use
in
the
Other current assets
50,069
44,948
Total current assets
383,462
369,027
business
rather
than 164,763
for resale.
The
Property, plant and equipment, net
167,340
Intangible assets, net
169,851
121,317
amount
is reported
Other assets
30,490
22,161
net
accumulated
$ of
748,566
$ 679,845
depreciation.
1-54
Callaway Golf Company
Consolidated Balance Sheet
(in thousands, except share data and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
December 31,
2003
2002
Intangible
$
47,340 $ assets
108,452
100,664
63,867
have
no physical
185,389
151,760
existence
and
a
50,069
44,948
383,462
369,027
long
life. They
include
164,763 patents,
167,340
169,851
121,317
copyrights,
30,490
22,161
trademarks,
etc.
$ 748,566 $ 679,845
1-55
Let’s now look
at the liability
section of a
classified
balance sheet.
1-56
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
LIABILITIES & STOCKHOLDERS" EQUITY
Current Liabilities:
Accounts payable and accrued
expenses
Notes payable, current portion
Income taxes payable
Total current liabilities
Long-term liabilities:
Other liabilities
Commitment and contingencies (Note 13)
$
117,958 $
98,352
240
11,962
130,160
3,160
7,649
109,161
29,023
27,297
1-57
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
expenses
Notes payable, current portion
Income taxes payable
Total current liabilities
Long-term liabilities:
Other liabilities
Commitment and contingencies (Note 13)
Current liabilities
obligations
$ are
117,958
$
98,352
that will be paid
240 current
3,160
with
11,962
7,649
assets,
normally
130,160
109,161
within one year.
29,023
27,297
1-58
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
LIABILITIES & STOCKHOLDERS" EQUITY
Current Liabilities:
Accounts payable and accrued
expenses
$
117,958 $
98,352
Long-term liabilities are debts that have
Notes payable, current portion
240
3,160
maturity
dates extending beyond
one
Income taxes payable
11,962
7,649
year Total
from
the
balance sheet
current
liabilities
130,160 date.
109,161
Long-term liabilities:
Other liabilities
Commitment and contingencies (Note 13)
29,023
27,297
1-59
Finally, we get to
the
stockholders’
equity section of
a classified
balance sheet.
1-60
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
LIABILITIES & STOCKHOLDERS' EQUITY
Shareholders' equity:
Common stock, $.01 par value, 83,710,094
and 83,577,427 issued and outstanding at
December 31, 2003 and 2002, respectively
Additional paid-in capital
Retained Earnings
Total stockholders equity
Total Liabilities and stockholders' equity
$
837
122,105
466,441
589,383
748,566
$
Contributed capital is often shown in
$
$
two separate accounts
1. Common stock.
2. Additional paid-in capital.
836
103,097
439,454
543,387
679,845
1-61
Callaway Golf Company
Consolidated Balance Sheet
December 31,
2003
2002
(in thousands, except share data and per share data)
LIABILITIES & STOCKHOLDERS' EQUITY
Shareholders' equity:
Common stock, $.01 par value, 83,710,094
and 83,577,427 issued and outstanding at
December 31, 2003 and 2002, respectively
Additional paid-in capital
Retained Earnings
Total stockholders equity
Total Liabilities and stockholders' equity
$
837
122,105
466,441
589,383
748,566
$
836
103,097
439,454
543,387
679,845
$
Retained earnings is$ the total
earnings of the company less the
total dividends declared since
inception of operations.
1-62
Classified Income Statement
Income statements may contain five sections:
1.
2.
3.
4.
Continuing operations
Discontinued operations
Extraordinary items
Cumulative effect of changes in accounting
methods
5. Earnings per share
1-63
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Gross sales minus any
discounts, returns, and
allowances during the period.
1-64
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Cost of inventory sold.
1-65
Classified Income Statement
General Format for the Classified Income Statement
−
−
±
−
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Nonoperating revenues/expenses and gains/losses
Income before income taxes
Income tax expense
Net income
Not related to the company’s primary
operations. Usually includes interest income or
expense and any gains or losses from the
retirement of equipment.
1-66
Common-Size Income Statement
Papa John's International, Inc. and Subsidiaries
Consolidated Statement of Income
Month Ended January 31, 2004
(in thousands of dollars)
Revenues:
Restaurant sales
$
Franchise fees
Total revenues
Costs and expenses:
Cost of sales
Salaries & benefits expense
General & administrative expenses
Depreciation expense
Total costs and expenses
Operating income
Other revenues and gains (expenses and losses)
Investment income
Interest expense
Gain on sale of land
Income before income taxes
Income tax expense
Net income
$
Earnings per share
$
66,000
3,800
69,800
94.56%
5.44%
100.00%
36,000
16,000
8,100
2,500
62,600
7,200
51.58%
22.92%
11.60%
3.58%
89.68%
10.32%
1,000
(60)
3,000
11,140
3,899
7,241
1.43%
-0.09%
4.30%
15.96%
5.59%
10.37%
0.40
Total revenue is
equal to 100%.
1-67
Earnings Per Share
EPS =
Net Income Available to Common Shareholders
Weighted Average Number of Shares
Outstanding During the Reporting Period
Basic EPS
1-68
Earnings Per Share
EPS =
Net Income Available to Common Shareholders
Weighted Average Number of Shares
Outstanding During the Reporting Period
Diluted EPS
Stock options, debt securities,
equity securities are assumed to
be converted into common stock
at the beginning of the period.
1-69
Statement of Cash Flows
Recall that the Statement of Cash Flows is
divided into three major sections.
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities.
We will examine the indirect method of
preparing the statement. This format begins
with a reconciliation of accrual income to
cash flows from operations.
1-70
Consolidated Statement of Cash Flows
(in thousands)
2003
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization
Other non-cash items
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net
Inventories, net
Other assets
Accounts payable and accrued expenses
Income taxes payable
Other liabilities
Net cash provided by operating activities
$
45,523
44,496
17,593
12,698
4,897
(4,743)
(7,297)
4,004
1,572
$ 118,743
This is the operating activities section of Callaway using the indirect
method. Begin with accounting net income and arrive at cash
provided by operating activities.
1-71
Consolidated Statement of Cash Flows
(in thousands)
2003
While these
items are on
the income
statement, they
have no
current cash
effect.
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization
Other non-cash items
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net
Inventories, net
Other assets
Accounts payable and accrued expenses
Income taxes payable
Other liabilities
Net cash provided by operating activities
$ 45,523
44,496
17,593
12,698
4,897
(4,743)
(7,297)
4,004
1,572
$ 118,743
1-72
Consolidated Statement of Cash Flows
(in thousands)
Change in Account Balance During Year
2003
Increase
Decrease
Cash flows from
operating activities:
Current
Subtract from net
Add to net income.
Net income
$ 45,523
AssetsAdjustments income.
to reconcile net income to net cash
provided
by to
operating
activities:
Current
Add
net income.
Subtract from net
44,496
Liabilities Depreciation & amortization
income.
This table
provides
guidance for
adjustments
related to
changes in
current assets
and current
liabilities.
Other non-cash items
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net
Inventories, net
Other assets
Accounts payable and accrued expenses
Income taxes payable
Other liabilities
Net cash provided by operating activities
17,593
12,698
4,897
(4,743)
(7,297)
4,004
1,572
$ 118,743
1-73
Consolidated Statement of Cash Flows
(in thousands)
2003
Here is the rest
of Callaway’s
Statement of
Cash Flows
showing the
cash balance
on the
company’s
balance sheet.
Cash flows from investing activities
Capital expenditures
Acquisition, net of cash acquired
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Payments on financing arrangements
Issuance of common stock
Acquisitiion of Common Stock
Dividends paid, net
Net cash used in financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash
equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
$
$
(7,810)
(160,321)
202
(167,929)
(8,117)
17,994
(4,755)
(18,536)
(13,414)
1,488
(61,112)
108,452
47,340
1-74
Other Items Reported on the
Income Statement
1-75
Classified Income Statement
General Format for the Classified Income Statement
In addition, companies may have nonrecurring items.
Net sales
These
nonrecurring items may include:
−
Cost of goods sold
1. Discontinued
operations,
Gross profit
2. Extraordinary
items,
− Operating
expenses
Income
from operations
3. Cumulative
effect
of changes in accounting methods.
± Nonoperating revenues/expenses and gains/losses
These items
are reported separately because they are
Income before income taxes
not useful
in predicting
future income of the company.
− Income
tax expense
Net income
1-76
Discontinued Operations
Sale or abandonment of a segment of a
business.
Income or loss on
segment’s operation for
the period.
Gain or loss on
disposal of the
segment.
Show net of applicable taxes.
1-77
Extraordinary Items
Unusual
Infrequent
Show net of applicable taxes.
1-78
Cumulative Effect of Changes in Accounting
Methods
GAAP
Method
Change to
Alternative
GAAP
Method
The change must be to a preferable
method and must be disclosed in notes
to financial statements.
Show net of applicable taxes.