Chapter 1: Overview of Financial Reporting

Slide 1
Class objectives
 Be familiar with the four basic financial statements (the
purpose, info content, structures, key elements, and the
relation among them)
 Understand the balance sheet equation, income statement
equation, retained earnings equation and cash flow
equation
 Be able to identify the users of accounting information
 Understand the players in accounting information
communication process

Slide 2
What is accounting?
 Financial accounting:
 Provide information primarily to external decision makers
 Investors, creditors, customers, suppliers, employees etc.
 Managerial accounting
 Provide information to internal decision makers (e.g.
managers)
 To make better investment decisions
 For performance evaluation purpose
 Tax accounting
 Provide information to the tax authorities
 Legal to prepare separate books for tax and financial purpose.
 Accounting is an information system that …(page 4 of
LLS)
Slide 3
What is a financial report like?
 Where to find financial reports?
 Corporate websites: investor relation
 http://www.lenovo.com/ww/lenovo/pdf/report/E_099220100628a.pdf
 http://
i.dell.com/sites/content/corporate/financials/en/Documents/fy10-year-i
n-review/FY10_Form10K_Final.pdf
 Data service from exchanges or regulators:
 Hong Kong HKEx: http://www.hkexnews.hk/index.htm
 US SEC Edgar: http://www.sec.gov/edgar.shtml
 Finance websites
 Hong Kong: http://www.irasia.com/index.htm
 US:
 http://finance.google.com

 http://finance.yahoo.com

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Annual Reports

For
For privately
privately held
held companies,
companies, annual
annual reports
reports
are
are simple
simple documents
documents that
that include:
include:
1.
1. Four
Four basic
basic financial
financial statements.
statements.
2.
2. Related
Related notes
notes (footnotes).
(footnotes).
3.
3. Report
Report of
of independent
independent accountants
accountants (auditor’s
(auditor’s
opinion)
opinion) ifif the
the statements
statements are
are audited.
audited.

Slide 5
Annual Reports

For
For public
public companies,
companies, annual
annual reports
reports are
are
elaborate
elaborate due
due to
to SEC
SEC reporting
reporting
requirements:
requirements:
1.
1. AA Nonfinancial
Nonfinancial Section
Section
 A
Aletter
letter to
to the
the stockholders,
stockholders, aa description
description of
of
management’s
management’s philosophy,
philosophy, products,
products, successes,
successes,
etc.
etc.
2.
2. AA Financial
Financial Section
Section
 See
See next
next slide
slide for
for aa detailed
detailed listing
listing .. .. ..

Slide 6
Annual Reports
1.
1. Summarized
Summarized financial
financial data
data for
for 6.
6. Recent
Recent stock
stock price
price
5-
5- or
or 10-years.
10-years. information.
information.
2.
2. Management
Management Discussion
Discussion and
and 7.
7. Summaries
Summaries of of the
the
Analysis
Analysis (MD&A).
(MD&A). unaudited
unaudited quarterly
quarterly
3. financial
financial data.
data.
3. The
The four
four basic
basic financial
financial
statements.
statements. 8.
8. Lists
Lists of
of directors
directors and
and
4.
4. Notes
Notes (footnotes).
(footnotes). officers
officers of
of the
the company
company
and
and relevant
relevant addresses.
addresses.
5.
5. Independent
IndependentAccountant’s
Accountant’s
Report
Report and
and the
the Management
Management
Certification.
Certification.

Click

Slide 7
Quarterly/interim Reports

 Usually begin with short letter to stockholders

 Condensed unaudited income statement and balance sheet
for the quarter.
 Often, cash flow statement and statement of stockholders’
equity are omitted. Some notes to the financial statements
also may be omitted.

Click

Slide 8
The Four Basic Financial Statements

The financial position The performance (change

of an entity at a in the financial position)
given point of an entity
in time during a given period

Balance Sheet Income

(Statement of Statement
statement of Cash flow
Financial Position
Statement of
Retain Earnings

Slide 9
The Balance Sheet
 The Balance sheet reports the financial position of an entity at
a particular point in time. Also Called Statement of Financial
Position.

 Snapshot of what companies own (assets) and where did it

come from (liabilities & shareholders’ equity)

 Why balance sheet information is important?

Slide 10
Structure of Balance Sheet 1. Name of entity
MAXIDRIVE CORP.
Balance Sheet
2. Title of statement
At December 31, 2009 3. Specific date
(in thousands of dollars) 4. Unit of measure
2009
ASSETS
Cash $ 4,895
Accounts receivable 5,714
Asset: resources owned by
Inventories 8,517 the company, of probable
Plant and equipment 7,154 future economic benefits
Land 981
Total assets $ 27,261
Liabilities: debts or
LIABILITIES
Accounts payable $ 7,156 obligations that the firm
Notes payable 9,000 must pay in future
Total liabilities 16,156
STOCKHOLDERS' EQUITY Shareholders’ equity:
Contributed capital 2,000
financing provided by the
Retained earnings 9,105
Total stockholders' equity 11,105
owner, residual value of
Total liabilities and stockholders' equity $ 27,261 the company

Slide 11
The Balance Sheet
Typical Account Titles

Assets
Assets Liabilities
Liabilities
Cash Accounts Payable
Short-Term Investment Accrued Expenses
Accounts Receivable Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Unearned Revenue
Supplies Bonds Payable
Prepaid Expenses
Long-Term Investments Stockholders’ Equity
Equipment Contributed Capital
Buildings Retained Earnings
Land
Intangibles
Slide 12
 Must always
The Balance Sheet Equation balance !!!

Assets Liabilities Owners’

Equity
Economic resources Probable future
with probable future economic sacrifices
economic benefits
resulting from past = arising from past
transactions (debts + Owners’ residual
interest
transactions or obligations)

Current Long-term Current Long-term Contributed Retained

assets assets Liabilities Liabilities Capital Earnings

Tangible Account Notes Bonds Leases Common Addl

s stock Paid-in
assets Intangible Investmts Payable Capital
Payable
assets
Contingencies

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Exercise: Prepare Balance Sheet
 A UST graduate started a business of selling lunch boxes called OMG It’s Yummy!.
She started her business on January 1, 2009 by investing HK$7,500 in capital stock.
At the end of June, 2009, OMG It’s Yummy! has the following Balance Sheet
account balances:

Accounts Payable 570

Accounts Receivable 750
Capital Stock 7,500
Cash 3,480
Retained Earnings 1,800
Supplies 5,640

 Required: Prepare a balance sheet at 6/30/09. Show that it illustrates the basic
accounting equation.

Slide 14
Solution: Balance Sheet

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The Income Statement
 The income statement reports the measure of performance
of a business, revenues less expenses during a period of time.
Also called:
 Statement of income
 Statement of earnings
 Statement of operation
 Revenues come from the sale of goods or services to customers
 Expenses represent resources used up by the entity to earn
revenues during a period.
 Why income statement information is important?

Slide 16
 Structure of the Income Statement
1. Name of entity
2. Title of statement
MAXIDRIVE CORP. 3. Specific period of
Income Statement time
For the Year Ended December 31, 2009 4. Unit of measure
(in thousands of dollars)
Revenues
Sales revenue $ 37,436
Total revenues 37,436
Expenses
Cost of goods sold expense 26,980
Selling, general, and administrative expense 5,606 I/S equation:
Interest expense 450
Total expenses 33,036 Revenues
Operating income 4,400 - Expenses
Income tax expense 1,100
Net income $ 3,300
= Net Income

Slide 17
Exercise: prepare income statement
 Over the six months ending on June 30, 2009, OMG It’s Yummy! has the
following Income Statement account balances:

Rental Expense 500

Salary Expense 1,000
Sales Revenue 6,500
Supplies Expense 3,000

 Required: Prepare an income statement for the six months ending 6/30/09.
Show how it illustrates the income statement equation.

Slide 18
Solution: Income statement

Slide 19
E1-7: Prepare an Income Statement and
Inferring Missing Values

Slide 20
Statement of Retained Earnings
 Statement of Retained Earnings reports how net
income and the distribution of dividends affected the
financial position of the company during the
accounting period.

Beginning Retained Earning

Plus: Net Income
Less: Dividends
Ending Retained Earnings

Slide 21
Structure of the Statement of Retained
Earnings

1. Name of entity
MAXIDRIVE CORP.
2. Title of statement
3. Specific period of
Statement of Retained Earnings
time
For the Year Ended December 31, 2009 4. Unit of measure
(in thousands of dollars)
Retained earnings, January 1, 2009 $6,805
Net income for 2009 3,300
Dividends for 2009 (1,000)
Retained earnings, December 31, 2009 $9,105
   

Retained Earnings Equation:

Beg. RE + NI – Dividends = End. RE

Slide 22
Exercise: prepare a statement of retained
earnings
 At June 2009, OMG It’s Yummy! Paid $200 in dividends, prepare a
statement of retained earnings for the six months ending on 6/30/2009.
 Solution:

Slide 23
The Statement of Cash Flows

Because . . . and expenses

revenues reported reported do not
do not always equal always equal
cash collected. . . cash paid . . .
net income is
usually not equal
to the change
in cash for
the period.

The Statement of Cash Flows reports inflows and outflows of cash

during the accounting period in the categories of operating,
investing and financing.

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The Structure of the Statement of Cash Flows
MAXIDRIVE CORP. 1. Name of entity
Statement of Cash Flows 2. Title of statement
For the Year Ended December 31, 2009 3. Specific period of
(in thousands of dollars) time
Operating activities 4. Unit of measure
Cash collected from customers $ 33,563
Cash paid to suppliers and employees (30,854)
Cash paid for interest (450)
Cash paid for taxes (1,190)
Net cash flow from operating activities 1,069
Investing Activities
Cash used to purchase equipment (1,625)
Net cash flow from investing activities (1,625)
Financing Activities
Cash received from bank loan 1,400
Cash dividends paid (1,000) •
SCF equation:
Net cash provided by financing activities 400
Net increase in cash (156) CFO + CFI + CFF
Cash at beginning of month 5,051 = Change in
Cash at end of month $ 4,895 Cash

Slide 25
E1-14: Prepare a Statement of Cash Flows

Slide 26
Relation Among the Statements
B/S: Assets = Liabilities + Stockholders’ Equity

 Cash + Other assets = Liab + (Cont. Capital + Retained Earnings)

 ΔCash + ΔOther Assets = ΔLiab + (ΔCont.Capital + ΔRE)

SCF: CFO + CFI + CFF = ΔCash

SRE: Beg. RE + NI – Dividends = End. RE

 ΔRE = NI – Dividends
ΔX means
(Xt – Xt-1 )

I/S: Revenue – Expense = Net Income

27
Slide 27
Relation among the statements: Dell Inc. case
 Income Statement and statement of Retained Earnings

 Retained Earnings and Balance Sheet

 Statement of Cash Flows and Balance Sheet

Slide 28
Footnotes

 Footnotes provide supplemental information about the

financial condition and results of operations of the company.
 Generally speaking, three types of notes:
 Description of the accounting rules
 Additional detail about a line on the financial statements
 Additional financial disclosures about items not listed in the financial
statements

Slide 29
Who are involved in financial reporting process
Regulators
Regulators SFO: Securities
Standard
Standard Setting
Setting and
and
Verification and Futures
Verification
SFC,
SFC, HKICPA,
HKICPA, IASB
IASB Commission

Hong Kong
IFRS
Engagement Management
Management
Standards Primary
Primary Responsibility
Responsibility
CFO,
CFO, CEO,
CEO,Accounting
Accounting Staff
Staff

Board
Board of
of Directors
Directors
Auditors
Auditors (CPAs)
(CPAs) Oversight
Oversight
Verification
Verification Audit
Audit Committee
Committee
(Independent
(Independent directors)
directors)

Primary responsibility for financial statement preparation

lies with management
Slide 30
Management Responsibility

To ensure the accuracy of the company’s

financial information, management:
 Maintains a system of controls.
 Hires outside independent auditors.
 Forms a board of directors to review these two
safeguards.

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Independent Auditors

 Examining the financial reports to ensure

compliance with GAAP/IFRS.
 Examining the underlying transactions
incorporated into the financial statements.
 Expressing an opinion as to the fairness of
presentation of financial information.
 Independent auditors have responsibilities
that extend to the general public.

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P1-1: Prepare an Income Statement,
Statement of Retain Earnings, and Balance
Sheet

Slide 33
P1-1: Prepare an Income Statement,
Statement of Retain Earnings, and Balance
Sheet

Slide 34
 What we will learn over the rest of the
semester?
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
2009
ASSETS
Cash $ 4,895
Accounts receivable 5,714
Inventories 8,517
Plant and equipment 7,154
Chapter 2: Land 981
Investing & Total assets $ 27,261
LIABILITIES
financing
Accounts payable $ 7,156
decisions & Notes payable 9,000
Balance Total liabilities 16,156
sheet STOCKHOLDERS' EQUITY
Contributed capital 2,000
Retained earnings 9,105
Total stockholders' equity 11,105
Total liabilities and stockholders' equity $ 27,261

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 What we will learn over the rest of the
semester?
Chapter 3: MAXIDRIVE CORP.
Operating Income Statement
decisions and For the Year Ended December 31, 2009
the income (in thousands of dollars)
statement Revenues
Sales revenue $ 37,436
Total revenues 37,436
Chapter 4:
Expenses
Adjustments,
Cost of goods sold expense 26,980
Financial Selling, general, and administrative expense 5,606
Statement, and Interest expense 450
the quality of Total expenses 33,036
earnings Operating income 4,400
Income tax expense 1,100
Net income $ 3,300

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What we will learn over the rest of the
semester?
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009 Chapter 6: Report and
(in thousands of dollars)
2009
interpret sales revenue,
ASSETS receivables and cash
Cash $ 4,895
Accounts receivable 5,714
Inventories 8,517 Chapter 8: Property, plant,
Plant and equipment 7,154
Land 981
and equipment; natural
Total assets $ 27,261 resources; and intangibles
LIABILITIES
Accounts payable $ 7,156 MAXIDRIVE CORP.
Notes payable 9,000 Income Statement
Total liabilities 16,156 For the Year Ended December 31, 2009
STOCKHOLDERS' EQUITY (in thousands of dollars)
Contributed capital Revenues
2,000
Retained earnings 9,105 Sales revenue $ 37,436
Total stockholders' equity 11,105 Total revenues 37,436
Total liabilities and stockholders' equity $ Expenses
27,261
Cost of goods sold expense 26,980
Selling, general, and administrative expense 5,606
Interest expense 450
Chapter 7: report and Total expenses 33,036
Operating income 4,400
interpret COGS and Income tax expense 1,100
inventory Net income $ 3,300

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What we will learn over the rest of the
semester?
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009 Chapter 9 &10: Reporting
(in thousands of dollars)
2009
and interpreting liabilities
ASSETS and bond
Cash $ 4,895
Accounts receivable 5,714
Inventories 8,517
Plant and equipment 7,154
Land 981
Total assets $ 27,261
LIABILITIES
Accounts payable $ 7,156 MAXIDRIVE CORP.
Notes payable 9,000 Income Statement
Total liabilities 16,156 For the Year Ended December 31, 2009
STOCKHOLDERS' EQUITY (in thousands of dollars)
Contributed capital Revenues
2,000
Retained earnings 9,105 Sales revenue $ 37,436
Total stockholders' equity 11,105 Total revenues 37,436
Total liabilities and stockholders' equity $ Expenses
27,261
Cost of goods sold expense 26,980
Selling, general, and administrative expense 5,606
Interest expense 450
Total expenses 33,036
Operating income 4,400
Income tax expense 1,100
Net income $ 3,300

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What we will learn over the rest of the
semester?
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
2009
ASSETS
Cash $ 4,895
Accounts receivable 5,714
Inventories 8,517
Plant and equipment 7,154
Land 981
Total assets $ 27,261
LIABILITIES
Accounts payable $ 7,156
Notes payable 9,000
Total liabilities 16,156
STOCKHOLDERS' EQUITY MAXIDRIVE CORP.
Contributed capital 2,000 Statement of Retained Earnings
Retained earnings 9,105
Total stockholders' equity 11,105 For the Year Ended December 31, 2009
Total liabilities and stockholders' equity $ 27,261 (in thousands of dollars)
Retained earnings, January 1, 2009 $6,805
Net income for 2009 3,300
Chapter 11: Reporting and Dividends for 2009 (1,000)
interpreting owners’ equity Retained earnings, December 31, 2009 $9,105
   

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 What we will learn over the rest of the
semester?
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(in thousands of dollars)
Operating activities
Cash collected from customers $ 33,563
Cash paid to suppliers and employees (30,854)
Cash paid for interest (450)
Cash paid for taxes (1,190)
Chapter 13: Net cash flow from operating activities 1,069
Statement of Investing Activities
Cash Flows Cash used to purchase equipment (1,625)
Net cash flow from investing activities (1,625)
Financing Activities
Cash received from bank loan 1,400
Cash dividends paid (1,000)
Net cash provided by financing activities 400
Net increase in cash (156)
Cash at beginning of month 5,051
Cash at end of month $ 4,895

Slide 40
Review problems and preparation for next
class
 Practice problems after class
 E1-3,4,8,9,12; P1-2,4; AP1-1, CP1-4
 Rearrange the consolidated balance sheet in Lenovo annual
report so that it is presented in the same format as Dell;
Illustrate the balance sheet equations for the two companies.
 Prepare for the next class
 Read chapter 2
 Try the following problems: E2-17, 18, P2-3

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