Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet and Financial Disclosures 3 3-2 Learning Objectives Describe the purpose of the balance sheet and understand its usefulness and limitations. 3-3 The Balance Sheet Limitations: The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. Resources such as employee skills and reputation are not recorded in the balance sheet. Limitations: The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. Resources such as employee skills and reputation are not recorded in the balance sheet. Usefulness: The balance sheet describes many of the resources a company has available for generating future cash flows. It provides liquidity information useful in assessing a company’s ability to pay its current obligations. It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure. Usefulness: The balance sheet describes many of the resources a company has available for generating future cash flows. It provides liquidity information useful in assessing a company’s ability to pay its current obligations. It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure. The purpose of the balance sheet is to report a company’s financial position on a particular date. 3-4 Resources (Assets) Resources (Assets) Claims against resources (Liabilities) Claims against resources (Liabilities) Remaining claims accruing to owners (Owners’ Equity) Remaining claims accruing to owners (Owners’ Equity) Balance Sheet 3-5 Learning Objectives Distinguish between current and noncurrent assets and liabilities. Identify and describe the various balance sheet asset classifications. 3-6 (In millions) 2004 2003 Assets: Current assets: Cash and cash equivalents 1,046$ 538$ Receivables, less allowances 3,027 2,627 Spare parts, supplies, and fuel 249 228 Deferred income taxes 489 416 Prepaid expenses and other 159 132 Total current assets 4,970$ 3,941$ Property and equipment, at cost: Aircraft and related equipment 7,001$ 6,624$ Package handling & ground support equipment and vehicles 5,296 5,013 Computer & electronic equipment 3,537 3,180 Other 4,477 4,200 20,311 19,017 Less accumulated depreciation 11,274 10,317 Net property and equipment 9,037 8,700 Other long-term assets: Goodwill 2,802 1,063 Prepaid pension cost 1,127 1,269 Intangible and other assets 1,198 412 Total other long-term assets 5,127 2,744 Total Assets 19,134$ 15,385$ FedEx Corporation Balance Sheet 31-May Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. 3-7 Cash Cash Cash Equivalents Cash Equivalents Short-term Investments Short-term Investments Receivables Receivables Inventories Inventories Prepayments Prepayments Cash Cash Cash Equivalents Cash Equivalents Short-term Investments Short-term Investments Receivables Receivables Inventories Inventories Prepayments Prepayments Current Assets Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer. Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer. Current Current Assets Assets Current Current Assets Assets Cash equivalents include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills. 3-8 Current Assets Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer. Will be converted Will be converted to cash or to cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer. longer. Cash that is restricted for a special purpose and not available for current operations should not be classified as a current asset. Cash Cash Cash Equivalents Cash Equivalents Short-term Investments Short-term Investments Receivables Receivables Inventories Inventories Prepayments Prepayments Cash Cash Cash Equivalents Cash Equivalents Short-term Investments Short-term Investments Receivables Receivables Inventories Inventories Prepayments Prepayments Current Current Assets Assets Current Current Assets Assets 3-9 Operating Cycle of a Typical Manufacturing Company Use cash to acquire raw materials Convert raw materials to finished product Deliver product to customer Collect cash from customer 3-10 Noncurrent Assets Investments and Investments and Funds Funds Property, Plant, & Property, Plant, & Equipment Equipment Intangibles Intangibles Other Other Investments and Investments and Funds Funds Property, Plant, & Property, Plant, & Equipment Equipment Intangibles Intangibles Other Other Not expected to Not expected to be converted to be converted to cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer longer Not expected to Not expected to be converted to be converted to cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle, whichever is whichever is longer longer Noncurrent Noncurrent Assets Assets Noncurrent Noncurrent Assets Assets [...]... whichever is longer Accounts Payable Accounts Payable Notes Payable Notes Payable Accrued Liabilities Accrued Liabilities Current Maturities Current Maturities of Long-Term Debt of Long-Term Debt 3-1 5 Long-term Liabilities Long-Term Long-Term Liabilities Liabilities Obligations that Obligations that will not be will not be satisfied within satisfied within one year or one year or operating cycle, operating... other classifications 3-1 2 Learning Objectives Identify and describe the two balance sheet liability classifications FedEx Corporation Balance Sheet 31-May (In milions) Liabilities: Current liabilities: Current portion of long-term debt Accrued salaries & employee benefits Accounts payable Accrued expenses Total current liabilities Long-term debt, less current portion Other long-term liabilities Deferred... shareholders, usually in the same mailing with the annual report 3-2 6 3-2 7 Learning Objectives Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis 3-2 8 Using Financial Statement Information Comparative Financial Statements Allow financial statement users to compare year-to-year financial position, results of operations, and cash flows... firms 3-2 9 Learning Objectives Identify and calculate the common liquidity and financing ratios used to assess risk 3-3 0 Liquidity Ratios Current ratio = Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities Acid-test ratio = Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities 3-3 1... liabilities liabilities 3-1 7 Shareholders’ Equity Capital Capital Stock Stock Deferred Deferred Compensation Compensation Retained Retained Earnings Earnings Treasury Treasury Stock Stock Accumulated Other Comprehensive Income Accumulated Other Comprehensive Income 3-1 8 Learning Objectives Explain the purpose of financial statement disclosures 3-1 9 Disclosure Notes Summary of Significant Accounting Policies... company’s internal control procedures 3-2 3 Learning Objectives Explain the purpose of an audit and describe the content of the audit report 3-2 4 Auditors’ Report Expresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principles Must comply with specifications of the AICPA and the PCAOB 3-2 5 Auditors’ Opinions Unqualified... Pension Obligations Pension Obligations Lease Obligations Lease Obligations 3-1 6 FedEx Corporation Balance Sheet 31-May (In millions, except shares) Common Stockholders' Investment: Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares issued for 2003 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Less deferred... long-term liabilities Deferred income taxes Pension, postretirement healthcare and other benefit obligations Self-insurance accruals Deferred lease obligations Deferred gains, principally related to aircraft transactions Other liabilities Total other long-term liabilities Total liabilities 3-1 3 2004 $ 2003 750 $ 308 1,062 724 1,615 1,168 1,305 1,135 4,732 3,335 2,837 1,709 1,181 882 768 591 503 657 536... various alternative accounting methods Subsequent Events A significant development that takes place after the company’s fiscal year-end but before the financial statements are issued Noteworthy Events and Transactions Transactions or events that are potentially important to evaluating a company’s financial statements, e.g., related parties, errors and irregularities, and illegal acts 3-2 0 Learning Objectives... 1.05 Current ratio $4,073 $4,732 Acid-test ratio = 86 3-3 2 Financing Ratios Total liabilities Debt to equity = ratio Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources Times interest earned ratio = Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors 3-3 3 Financing Ratios—Federal Express . result of past transactions or events. 3-7 Cash Cash Cash Equivalents Cash Equivalents Short-term Investments Short-term Investments Receivables Receivables Inventories Inventories Prepayments Prepayments Cash Cash Cash. 4,732 3,335 Long-term debt, less current portion 2,837 1,709 Other long-term liabilities Deferred income taxes 1,181 882 768 657 Self-insurance accruals