Financial Statements and the Annual Report

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Chapter 2

• Financial Statements and the Annual Report

Financial Accounting, Alternate 4e by Porter and
Norton
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Primary Objective of Financial Reporting
Extend credit ??
Borrow ??
Invest??
Loan ??
Start new business??
Sell stocks or bonds??
3
Secondary Objectives of Financial Reporting
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Qualitative Characteristics
Understandability - Relevance
- Reliability -
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Qualitative Characteristics
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Qualitative Characteristics
Materiality
Conservatism
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Typical Operating Cycle

CASH
ACCTS. RECEIVABLE
INVENTORY
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Basic Structure of a Classified Balance Sheet

• Current assets
• Noncurrent (long-term) assets
• Total assets

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Monaco Coach CorporationConsolidated Balance
Sheets
A L SE
A
(in thousands)
Assets Dec. 29, Dec.
28, 2001 2002

• Current assets
• Trade receivables, net 82,885
  116,647
• Inventories 127,075 175,609
• Resort lot inventory 0
  26,883
• Prepaid expenses 2,063
  3,612
• Deferred income taxes 27,327
  33,379
• Total current assets 239,350
  356,130
• Notes receivable 8,157
  0
• Property, plant and equipment, net 122,795
  135,350
• Debt issuance costs, net 940
  683
• Goodwill, net 55,856 55,254
• 427,098 547,417

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Monarch Coach CorporationConsolidated Balance
Sheets
A L SE
Satisfied within one year or operating cycle
Liabilities and Stockholders' Equity

• Current liabilities
• Book overdraft 5,889
  3,518
• Line of credit 26,004 51,413
• Current portion of long-term note payable
  10,000 21,667
• Accounts payable 66,859 78,055
• Product liability reserve 19,856
  21,322 Product warranty reserve 27,799
  31,745
• Income taxes payable 0
  4,536
• Accrued expenses and other liabilities
  19,249 29,633 Total current liabilities
  175,656 241,889
• Long-term note payable 30,000
  30,333
• Deferred income taxes 8,312
  14,568
• Total liabilities 213,968
  286,790

L
Stockholders' equity Common stock
286 289 Additional paid-in capital
48,522 51,501 Retained earnings
164,322 208,837 Total stockholders'
equity 213,130 260,627
SE
427,098 547,417
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Analysis of Liquidity

Ability of company to pay debts as they come
due
Of particular interest to bankers and other
creditors
Working Capital
Current Ratio
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Monaco Coach's Liquidity
(in 000s)
2001 2002

• Current assets 239,350 356,130
• Current liabilities 175,656 241,889

What's the trend??
Current Current Assets 1.361
1.471 Ratio Current Liabilities
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Comparison of Liquidity

• Some 2002 current ratios
• Gap, Inc. 2.111
• Sprint 0.781
• McDonald's 0.711

Consider composition of current assets
and frequency of turnover
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Income Statement
Single Step

• Revenues
• Less expenses ()
• Net income

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Multiple-Step Income Statement
Sales Cost of goods sold Gross
profit Operating expenses
Selling expenses General and
administrative expenses Income from
operations / Other revenues and expenses
Income before income taxes Income tax
expense Net income
Four important subtotals
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Monaco Coach Corporation Consolidated Statements
of Operations
For the Years Ended 2001
2002

• Net Sales 937,073 1,222,689
• Cost of sales 823,083 1,059,560 Gross
  profit 113,990 163,129
• Selling, general and administrative
• expenses 70,687 87,202
• Amortization of goodwill 645
  0
• Operating income 42,658 75,927
• Other income, net 334
  105
• Interest expense (2,357)
  (2,752)
• Income before income taxes 40,635
  73,280
• Provision for income taxes 15,716
  28,765
• Net income
  24,919 44,515

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Analysis of Profitability
Of particular interest to current and
potential investors
Gross Profit
Profit Margin
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Monaco Coach Corporation's Profitability
(in 000s) 2000 2001
2002 Net sales 901,890 937,073 1,222,689 Cost
of sales 772,240 823,083 1,059,560 Gross
profit 129,650 113,990 163,129
Gross profit 14.4 12.2 13.3

• Gross Profit (Margin) Gross Profit
  
• Sales
• (How many cents on every of sales are left over
  
• after covering the cost of the product)

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Monaco Coach Corporation's Profitability
(in 000s) 2000 2001
2002 Net sales 901,890 937,073 1,222,689 Ne
t income 42,521 24,919
44,515
Profit margin 4.7 2.7 3.6

• Profit Margin Net Income
• Sales
• (How many cents on every of sales are left
• over after covering all expenses)

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Statement of Stockholders Equity

• Shows changes in all equity accounts including
• Sales and purchases of capital stock

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Basic Format of the Statement of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing
activities Net increase
in cash Cash at beginning of year
Cash at end of year
Reconciles change in cash for the period
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Basic Format for the Statement of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing
activities Net increase
in cash Cash at beginning of
year Cash at end of year

Involve the purchase and sale of products or
services
Involve the acquisition and sale of long-term
assets
Involve the issuance and repayment of long-term
liabilities and stock
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Elements of an Annual Report

• Report of independent accountants
• Management discussion analysis
• Summary of financial data
• Letter to stockholders
• Financial statements
• Notes to financial
• statements

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End of Chapter 2