Transcript Chapter 3 THE BALANCE SHEET AND FINANCIAL DISCLOSURES © 2009 The McGraw-Hill Companies, Inc.

Chapter 3
THE BALANCE SHEET
AND FINANCIAL
DISCLOSURES
© 2009 The McGraw-Hill Companies, Inc.
Slide 2
The Balance Sheet
Reports a company’s financial position on a particular date.
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.
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Usefulness:
 The balance sheet
describes many of the
resources a company has
for generating future cash
flows.
 It provides liquidity
information useful in
assessing a company’s
ability to pay its current
obligations.
 It provides long-term
solvency information relating
to the riskiness of a
company with regard to the
amount of liabilities in its
capital structure.
Slide 3
The Balance Sheet
Claims against
resources (Liabilities)
Resources
(Assets)
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Remaining claims
accruing to owners
(Owners’ Equity)
Google Inc.
Balance Sheet
December 31
(In thousands)
Assets:
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivables, net of allowance
Deferred income taxes, net
Income taxes receivable
Prepaid revenue share, expenses and
other assets
Total current assets
Noncurrent assets:
Prepaid revenue share, expenses and
other assets, noncurrent
Deferred income taxes, net., non-current
Non-marketable equity securities
Property and equipment, net
Intangible assets, net
Goodwill
Total noncurrent assets
Total Assets
2006
$
$
3,544,671 $
7,699,243
1,322,340
29,713
-
2007
6,081,593
8,137,020
2,162,521
68,538
145,253
443,880
13,039,847
694,213
17,289,138
114,455
1,031,850
2,395,239
346,841
1,545,119
5,433,504
18,473,351 $
168,530
33,219
1,059,694
4,039,261
446,596
2,299,368
8,046,668
25,335,806
Assets are probable future economic benefits obtained or
controlled by a particular entity as a result of past
transactions or events.
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Slide 5
Current Assets
Current
Assets
Will be converted
to cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
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Cash
Cash Equivalents
Short-term Investments
Receivables
Inventories
Prepaid Expenses
Cash equivalents
include certain
negotiable items
such as commercial
paper, money market
funds, and U.S.
treasury bills.
Slide 6
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
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Slide 7
Noncurrent Assets
Noncurrent
Assets
Not expected to
be converted to
cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
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Investments
Property, Plant, &
Equipment
Intangibles
Other Assets
Slide 8
Noncurrent Assets
Investments
1.
2.
Not used in the operations of the
business.
Include both debt and equity securities of
other corporations, land held for
speculation, noncurrent receivables, and
cash set aside for special purposes.
Intangible Assets
©
1. Used in the operations of the
business but have no physical
substance.
2.
Include patents, copyrights, and
franchises.
3.
Reported net of accumulated
amortization.
Property, Plant, and Equipment
1.
Are tangible, long-lived, and used in the
operations of the business.
2.
Include 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).
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Other Assets
1.
Include long-term prepaid
expenses and any noncurrent
assets not falling in one of the
other classifications.
Google Inc.
Balance Sheet
December 31
(In milions)
Liabilities:
Current liabilities:
Accounts payable
Accrued compensation & benefits
Accrued expenses and other current
liabilities
Accrued revenue share
Deferred revenue
Total current liabilities
Long-term liabilities:
Deferred revenue, long-term
Deferred income taxes, net
Income taxes payable, long-term
Other long-term liabilities
Total long-term liabilities
Total liabilities
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2006
$
$
211,169 $
351,671
2007
282,106
588,390
266,247
370,364
105,136
1,304,587
465,032
522,001
178,073
2,035,602
20,006
40,421
68,497
128,924
1,433,511 $
30,249
478,372
101,904
610,525
2,646,127
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.
Slide 10
Current Liabilities
Current
Liabilities
Obligations expected to be
satisfied through current
assets or creation of other
current liabilities within one
year or the operating cycle,
whichever is longer.
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Accounts Payable
Notes Payable
Accrued Liabilities
Unearned Revenues
Current Maturities
of Long-Term Debt
Slide 11
Long-term Liabilities
Long-Term
Liabilities
Obligations that
will not be
satisfied within
one year or
operating cycle,
whichever is
longer.
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Long-term Notes
Mortgages
Long-term Bonds
Pension Obligations
Lease Obligations
Slide 12
Google Inc.
Balance Sheet
December 31
(In thousands, except par value per share)
Stockholders' equity
Class A and Class B common stock, $0.001
par value per share: 9,000,000 shares
authorized; 293,027 (Class A 201,268,
Class B 91,759) and par value of $293
(Class A $201, Class B $92) and 308,997
(Class A 277,670, Class B 81,327) and
par value of $309 (Class A $228, Class B
$81) shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
2006
$
$
309 $
11,882,906
23,311
5,133,314
17,039,840 $
2007
313
13,241,221
113,373
9,334,772
22,689,679
Shareholders’ Equity is the residual interest in the
assets of an entity that remains after deducting
liabilities.
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Slide 13
Shareholders’ Equity
Capital
Stock
Retained
Earnings
Accumulated Other Comprehensive Income
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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.
Noteworthy Events
and Transactions
Transactions or events that are
potentially important to evaluating
a company’s financial statements,
e.g., related parties, errors and
irregularities, and illegal acts.
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Slide 15
Management Discussion and Analysis
Provides a biased but
informed perspective of
a company’s
operations, liquidity,
and capital resources.
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Management’s Responsibilities

Preparing the financial statements
and other information in the annual
report.

Maintaining and assessing the
company’s internal control
procedures.
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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.
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Auditors’ Opinions
Unqualified
Issued when the financial
statements present fairly the
financial position, results of
operations, and cash flows are in
conformity with GAAP.
Qualified
Issued when there is an exception
that is not of sufficient seriousness
to invalidate the financial
statements as a whole.
Adverse
Issued when the exceptions are so
serious that a qualified opinion is
not justified.
Disclaimer
Issued when insufficient
information has been gathered to
express an opinion.
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Slide 19
Compensation of Directors & Top Executives
Proxy Statement Information
 Summary compensation table
 Table of options granted
 Table of options holdings
A proxy statement is sent each year
to all shareholders, usually in the
same mailing with the annual
report.
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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.
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Slide 21
Liquidity Ratios
Current assets
Current ratio =
Current liabilities
Measures a company’s ability to satisfy its
short-term liabilities
Quick assets
Acid-test ratio
=
Current liabilities
Provides a more stringent indication of a
company’s ability to pay its current
liabilities
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Slide 22
Financing Ratios
Total liabilities
Debt to equity
=
ratio
Shareholders’ equity
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
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Appendix 3: Reporting by Operating
Segment
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.
Reportable Operating Segment Characteristics
Engages in business activities
from which it may earn revenues
and incur expenses.
Discrete financial information is
available.
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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.
What Amounts Are Reported By An 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.
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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.
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End of Chapter 3
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© 2008 The McGraw-Hill Companies, Inc.