- The Letter to Shareholders gives a broad overview of the company’s business and financial performance.. - The financial statements generally consist of the balance sheet, income statement, state- ment of changes in shareholders’ equity, statement of cash flows and footnotes. - Following is a brief description or overview of the basic financial statements, including the footnotes:. - The Balance Sheet. - The balance sheet , also called statement of financial position, portrays the financial position of the company by showing what the company owns and what it owes at the report date. - equity reconciles the activity in the equity section of the balance sheet from period to period. - (Dividends are payments to shareholders to compensate them for their investment.) The Statement of Cash Flows. - The following pages show a sample of the core or basic financial statements—. - For instance, it does not include: (1) selected quarterly finan- cial information (including recent market prices of the company’s common stock), and (2) a listing of company directors and executive officers.. - Further, the “MD&A” will not be presented nor will examples of the “Letter to. - This makes it possible to compare the composition of the balance sheets on those dates.. - Generally, the amount of each of the above types of inven- tory would be disclosed either on the face. - of the balance sheet or in the footnotes. - products and an allocation (that is, an apportionment or dividing up) of the production expenses to make those products. - The generally accepted method for reporting fixed assets is cost minus the depreciation accumulated through the date of the balance sheet. - Using the “straight-line method of depreciation” (equal periodic depreciation charges over the life of the asset), $2,000 of the truck’s cost is charged or expensed to each year’s income statement. - accumulated depreciation (2,000) Net depreciated cost $ 8,000) At the end of the second year it would show:. - Thus, net property, plant and equipment is the amount reported for balance-sheet pur- poses of the investment in property, plant and equipment. - As explained previously, it consists of the cost of the various assets in this classification, less the depreciation accumulated to the date of the financial statement (net depreciated cost).. - (To “defer” means to put off or postpone to a future time.) The expenditure incurred will be gradually written off over the future period(s) that benefit from it, rather than fully charged off in the year payment is made. - Deferred charges would normally be included just before Intangibles in the Assets section of the balance sheet.. - This excess is presumed to be the value of the company’s name, reputa- tion, customer base, intellectual capital and workforce (their know-how, experience, managerial skills and so forth.). - The “current liabilities” item in the balance sheet is a companion to. - For now, however, the discussion will focus on the definition of the components of current liabilities.. - If money is owed to a bank, individual, corporation or other lender under a promissory note, and it is due within one year of the balance sheet date, it appears under notes payable. - The total amount of such items owed, but unpaid at the date of the balance sheet, are grouped as a total under accrued expenses.. - Simply stated, these are any other liabili- ties that are payable within 12 months, but which haven’t been captured in any of the other specific categories presented as cur- rent liabilities in the balance sheet.. - 17 Other liabilities $12,000 Current Portion of Long-Term Debt Current portion of long-term debt repre- sents the amount due and payable within 12 months of the balance-sheet date under all long-term (longer than one year) bor- rowing arrangements. - If Typical had a long-term borrowing calling for monthly payments (on a mortgage, for example), the sum of the principal pay- ments due in the 12 months following the balance-sheet date would appear here.. - 19 Total Current Liabilities $176,000 Finally, the “Total Current Liabilities” item sums up all of the items listed under this classification.. - Long-term liabilities are amounts due “after one year” from the date of the financial report, such as unfunded retiree. - One of the long-term liabilities on the sample balance sheet is deferred income taxes.. - The money was received by the company as a loan from the bondholders, who in turn were given certificates called bonds, as evidence of the loan. - Typical’s bond issue is called a debenture because the bonds are backed only by the general credit of the corporation rather than by specific company assets.. - Companies can also issue secured debt (for example, mortgage bonds), which offers bondholders an added safeguard because they are secured by a mortgage on all or some of the company’s property.. - Capital stock represents shares in the own- ership of the company. - (Par value is the nominal or face value of a security assigned to it by its issuer.) The $5.83 is the yearly per-share dividend to which each preferred shareholder is entitled before any dividends are paid to the common shareholders. - Of the is reported as common stock (500,000 shares at a par value of. - Additional paid-in capital is the amount paid by shareholders in excess of the par or stated value of each share. - If that requirement applies, the financial statements of the foreign entity (prepared in foreign currency) must be translated into U.S. - Remember, current liabilities are debts due within one year of the balance-sheet date. - yet that same inventory at the end of the season represents a weakness in the dealer’s financial condition.. - $180,000 represents 44% of the total cur- rent assets, which amounts to $405,800.. - Typical’s bond ratio is derived by dividing the face value of the bonds by the total value of bonds, preferred and common stock, additional paid-in capital, retained earn- ings, foreign currency transla- tion adjustments, unrealized gains on available-for-sale securities and treasury stock, less intangibles, which is. - The common stock ratio will be the difference between 100% and the total of the bond and preferred stock ratio—or about 72%. - In Typical Manufacturing’s income statement, it is shown as “net sales.” The. - $52,750 would be the end of the story.. - (net of tax benefit of Net Income—the “Bottom Line”. - $1,200 on its income statement under the category “equity in the earnings of uncon- solidated subsidiaries.” Typical would also be required to increase its investment in that company to the extent of the earnings it picked up in its (i.e., Typical’s) income statement. - Operating cost ratio is the complement of the operating margin. - How readily the company can pay the interest on this debt (i.e., the debt’s inter- est coverage) would be of great interest to an investor. - The average calculation is simply the arithmetic mean of the shares outstanding, on a pro rata basis, for the reporting peri- od. - Effect of the change in earnings from other expenses (such as profit-sharing expense rising due to the increased income from the reduction of interest expense from the assumed conversion of convertible debt). - Their value stems in large part from the value of the common to which they relate.. - When calcu- lating diluted earnings per share, first compare the impact of the most dilutive security to basic earnings per share. - Let’s examine an example of the dilution from the assumed conversion of options.. - All of the proceeds from the conversion of the in- the-money (current share price is greater than the exercise price) options are used to repurchase common shares at the average market price for the period.. - The net dilutive effects of the options would be an increase in 6,000 common shares (10,000 options less 4,000 repurchased), assuming the hypothetical conversion of the in-the-money options at the average share price for the period under the Treasury Stock Method.. - Let us now examine the effects of the potential common shares from the convert- ible bonds.. - Therefore, the conversion of the bonds would increase net income available to common shareholders by $36,000. - Adjustments to net income assuming con- version of the bonds:. - Adjusted net income $336,000 Additional common shares assuming conversion of the stock options and the bonds:. - the conversion of the bonds 20,000. - In fact, research earnings per share estimates are generally given as the expected diluted earnings per share of the company.. - It also shows that Typical experienced a foreign currency translation gain and an unrealized gain on investments classified as “available-for-sale.” The other. - Since the balance sheet shows that Typical has shares outstanding, the first thing to be learned here may be an important point to some potential investors—the dividend per share.. - Another statistic of great interest to many investors and analysts is the dividend yield, a percentage providing an estimate of the return per share on a given class of stock. - This indicates the percentage return that the annual common dividend provides based on the market price of the common stock. - $1.20, by the market price of the common stock, earlier determined to be $33 per share. - The market itself—the sum of all buyers and sellers—. - $33 Market price of the common stock. - This is because of the accrual method of accounting. - The annual reports of many companies contain this or a similar statement: “See the Accompanying Notes to the Consoli- dated Financial Statements” or “The Accompanying Notes are an Integral Part of the Financial Statements.” The reason is that the financial statements themselves simply report the balances in the various accounts. - Because there is no room on the face of the statements for a complete and adequate discussion relating to those balances, additional required disclosures are provided in the notes.. - Description of the company’s. - policies—disclosure of the company’s policies for depreciation, amortization, consolidation, foreign currency translation, earnings per share, etc.. - FIFO means the income statement reflects the cost of the oldest inventories. - Income tax provision—the breakdown by current and deferred taxes and its composition into federal, state, local and foreign tax, accompanied by a reconciliation from the statutory income tax rate to the effective tax rate for the company.. - “except for,” the reader should be on the alert, cautious and questioning. - Although the summary is not a part of the state-. - Earnings per share. - The economics of the country and the particular. - The management of the company must be studied and its plans for the future assessed. - The total excess of the sharehold- ers’ investment in the company over the par or stated value of its common and preferred stock. - Periodic charges to income to rec- ognize the distribution of the cost of the company’s intangible assets over the estimated useful lives of those assets.. - If the security lowers earnings per share relative to the base earnings per share, calculate the earnings per share assuming the conversion of the security.. - Balance Sheet (Pages 1, 8-26).. - The par or stated value of the common stock (the basic owner- ship interest in a corporation) issued by a company as reported in its balance sheet.. - The total cost to purchase and/or manufacture all of the company’s products that were sold during a period.. - The portion of long-term debt that is due within one year of the balance-sheet date.. - The dividend paid on each share of each class of stock as a percent- age of the market price of those shares. - translation of a foreign subsidiary’s local currency financial statements into the currency of the parent company.. - An intangible asset that represents the excess of the amount paid for an acquired company over the fair market value of the net assets of that company. - Basically, it is the value of the name and reputation of the acquired company.. - Formal, secured debt obligations that are backed by certain specific assets of the issuer.. - The comparison of the market price of a share of stock to the earnings per share of that stock,. - The total profit or loss of the company less the total of all dividends paid, since the company’s startup.. - The total of shareholders’ invest- ments in the company and total profits or losses since the start-up of the company, less all dividends and/or capital distributions, unreal- ized gain on available-for-sales securities and any foreign currency translation adjustments since the company’s start-up.. - The total cost of any of the compa- ny’s stock that has been repur- chased or otherwise reacquired from shareholders and held in the company’s treasury.. - Printed in the U.S.A.
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