{g,0}10.0 Part 10 Analysis of Financial Statements {s}
{d}
{b}Learning Objectives
In this final part you will learn:
1. The nature of the Statement of Changes in Financial Position.
2. The limitations of financial statement information.
3. An approach to analyzing financial statements.
4. Overall measures of performance.
5. Other ratios used in financial statement analysis.
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10.1 Statement of Changes in Financial Position
An income statement reports revenues and expenses during an
accounting period. Revenues increase {1,17} [what
balance sheet item?][two words], and expenses decrease this item.
*1
OWNERS' EQUITY - OK - Fine.
OWNER'S EQUITY - OK - Fine.
OWNERS EQUITY - OK - Fine.
RETAINED EARNINGS - OK - Fine.
- HINT - Revenues increase owners' equity.
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10.2
Most entities prepare another financial statement. It summarizes
changes in other balance sheet items during the accounting period. Since
the balance sheet shows the entity's {b}financial position{n} at one moment
of time, the statement of {b}changes{n} in balance sheet items is called
a Statement of Changes in F{1,19} [two words].
*1
INANCIAL POSITION - OK - Good.
FINANCIAL POSITION - OK - Good.
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10.3
A Statement of Changes in Financial Position (abbreviated {b}SCFP{n})
may focus either on events that changed cash or on events that changed
working capital. In your manual, Exhibit 12 shows the SCFP for
General Mills, Inc., which was prepared on a {1,16} basis.
(A) cash (B) working capital
*1
- POST - {b}{a,10,12}cash
CASH - OK - Yes, that's correct.
A - OK - Yes, that's correct.
WORKING CAPITAL - QUIT - No, look again. The statement focuses on CASH.
B - QUIT - No, look again. The statement focuses on CASH.
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10.4
As you can see from Exhibit 12, the SCFP has two main sections,
one showing the amount of cash P{1,8,3} during the period from operations,
and the other showing the amount of cash U{2,4,1} during the period for
various purposes.
*1
ROVIDED - OK - Ok.
PROVIDED - OK - Ok.
- HINT - Look again at Exhibit 12.
*2
SED - OK - Fine.
USED - OK - Fine.
- HINT - Look again at Exhibit 12.
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10.5
In most businesses, the principal source of cash during a period
is the profitable operation of the business. The results of operations
are summarized in the "bottom line" of the income statement. This
amount is the first item in Exhibit 12; it is labelled N{1,12}.
*1
ET EARNINGS - OK - Correct.
NET EARNINGS - OK - Correct.
- HINT - Profit is another name for net earnings.
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10.6
However, some transactions that affected net earnings in the
current year did not require the use of cash in that year. For
example, most of the plant assets used in the current year were
acquired in previous years. When these assets were acquired, cash or
its equivalent was paid for them, but the depreciation expense for
these plant assets during the current year {1,7} involve a cash
payment during the current year.
(A) did (B) did not
*1
- POST - {b}{a,16,28}did not{n}
DID NOT - OK - You got it right.
DIDN'T - OK - You got it right.
B - OK - You got it right.
DID - QUIT - No, depreciation does NOT involve cash in the current year.
A - QUIT - No, depreciation does NOT involve cash in the current year.
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10.7
Therefore, as shown in Exhibit 12, depreciation expense, a non-cash
item, is {1,17,3} net earnings to find the amount of
cash provided by operations.
(A) added to (B) subtracted from
*1
- POST - {a,8,13}{b}added to
ADDED TO - OK - Fine.
A - OK - Fine.
SUBTRACTED FROM - OK - No, depreciation expense {b}adds to{n} the net earnings.
B - OK - No, depreciation expense {b}adds to{n} the net earnings.
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10.8
Because depreciation expense is added to net earnings, some
people think that depreciation is a source of cash. {b}This is
{b}absolutely incorrect.{n} The source of cash is profitable operations.
The depreciation item merely adjusts this number to a cash basis.
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10.9
As you learned in Part 8, income tax expense reported on the
income statement is calculated by applying the income tax rate to the
corporation's reported earnings. If this amount is greater than the
amount of income tax paid, the difference is called Deferred Income
Taxes. Since Deferred Income Taxes is only an accounting calculation,
not requiring cash in the current year, this amount is {1,16,3}
net earnings in calculating the cash provided by operations.
(A) added to (B) subtracted from
*1
- POST - {a,16,13}{b}added to
ADDED TO - OK - Correct.
A - OK - Correct.
SUBTRACTED FROM - QUIT - No, deferred income taxes is also added to net earnings.
B - QUIT - No, deferred income taxes is also added to net earnings.
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10.10
As shown by the lower part of the statement, General Mills {b}used{n}{s}
{d}
funds to buy land, buildings, and equipment, ${1,-5} million. It{s}
{d}
{b}obtained{n} funds by the issuance of long-term debt, ${2,-4} million{s}
{d}
and common stock, ${3,-4} million.
*1
246.6 - OK - Correct.
- HINT - No, look again.
*2
37.0 - OK - Fine.
37 - OK - Fine.
- HINT - No, look again.
*3
23.0 - OK - Good.
23 - OK - Good.
- HINT - No, look again.
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10.11
As a review of earlier parts, you should study each item in
Exhibit 12. Although in some cases different words have been used,
the nature of each has been described earlier. If any term is not clear,
look it up in the Glossary in your manual.
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10.12
The SCFP (Statement of Changes in Financial Position) is a
rearrangement of information collected in the accounts for the main
purpose of preparing the balance sheet and income statement. It
{1,8,7} require additional accounts or journal entries.
(A) does (B) does not
*1
- POST - {a,10,29}{b}does not
DOES NOT - OK - Well done.
B - OK - Well done.
DOES - QUIT - No, that's wrong.
A - QUIT - No, that's wrong.
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10.13 Limitations on Financial Statement Analysis
In the remainder of this part, we shall describe how
information in financial statements is used. Before doing this,
let's review the reasons why accounting cannot provide a complete
picture of the status or performance of an entity.
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10.14
One limitation is suggested by the word {b}financial{n}; that is,
financial statements report only events that can be measured in
M{1,8} amounts.
*1
ONETARY - OK - Good.
MONETARY - OK - Good.
ONEY - OK - Good.
MONEY - OK - Good.
- HINT - Financial statements measure monetary amounts.
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10.15
A second limitation is that financial statements report only events
that {1,13,3}, whereas we are also interested in estimating events
(A) have happened (B) will happen
that {2,13,3}.
(A) have happened (B) will happen
The fact that an entity earned $1 million last year
{3,30,3} what it will earn next year.
(C) definitely predicts (D) does not necessarily indicate
*1
- POST - {a,6,13}{b}have happened
- POST - {s}{a,21,1}This is a function of the {b}Money Measurement Concept{n} which states that {a,22,1}accounting reports only those {b}facts{n} that can be stated in money amounts.
HAVE HAPPENED - OK - Right.
A - OK - Right.
WILL HAPPEN - QUIT - {a,23,1}No, that's incorrect.
B - QUIT - {a,23,1}No, that's incorrect.
*2
- POST - {a,10,37}{b}will happen
- POST - {a,20,1}The {b}Going-Concern Concept{n} states that accounting assumes that an entity {a,21,1}will continue to operate indefinitely, so we are interested in estimating {a,22,1}future events.
WILL HAPPEN - OK - Good.
B - OK - Good.
HAVE HAPPENED - QUIT - Incorrect.
A - QUIT - Incorrect.
*3
- POST - {a,16,39}{b}does not necessarily indicate
