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Lecture Financial reporting for managers: A value-creation perspective - Chapter 2

Chapter 2 - The financial statements - a closer look. The following will be discussed in this chapter: Operating activities, the financial statements, and value creation; operating performance and the income statement; operating performance and cash provided by operating activities; investing activities, asset management, and financial statement and value creation; working capital management; long-term (producing) assets;. | CHAPTER 2 The Financial Statements A Closer Look Relationships Among the Financial Statements Statement of Cash Flows Income Statement Statement of Stockholders’ Equity Ending Balance Sheet Assets (Cash) = Liabilities + Equity Beginning Balance Sheet Assets (Cash) = Liabilities + Equity Operating Activities in the Financial Statements The Income Statement reflects operating performance (net income) after interest and taxes. The Statement of Cash Flows reflects net cash provided by operating activities Operating Performance in the Income Statement Operating Revenues Sales Fees earned Operating Expenses Cost of goods sold Wages and salaries Rent expense Selling expense Depreciation expense Amortization expense Other expenses (insurance, advertising, utilities, taxes, maintenance, etc.) Other Revenues and Expenses Operating Performance and Cash Provided by Operating Activities The Income Statement measures performance in terms of revenues and expenses. This accrual basis measurement is not the same as the measurement of cash flow. Accrual basis measures economic events as they occur, regardless of when the related cash flow takes place. Operating Performance and Cash Provided by Operating Activities Cash provided by operations is computed by adjusting net income (accrual basis) to cash flows from operations (cash basis). The adjustments account for the differences between the two measures (cash and accrual) of operating performance. Depreciation is an adjustment because it reduces net income but doesn’t effect cash flow. Operating Section-Statement of Cash Flows Net income $3,148 Adjustments to reconcile net income to cash provided by operations - Depreciation 1,157 Amortization of intangible assets 227 Other adjustments (708) Increase in operating assets (255) Decrease in operating liabilities 167 _ Cash provided by operating activities $3,736 The Statement of Cash Flows Cash flows from operating activities: Cash flows associated with the acquisition and sale of a company’s products and services Collections from sales, rent, interest, etc. Cash paid to suppliers and employees, and for rent, selling activities, interest, and taxes etc. Cash flows from investing activities: Does not measure operating activity. Cash flows from financing activities: Does not measure operating activity. Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.