1 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: p The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. p Resources such as employee skills and reputation are not recorded in the balance sheet. Usefulness: p The balance sheet describes many of the resources a company has available for generating future cash flows. p It provides liquidity information useful in assessing a company’s ability to pay its current obligations. p 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. 2 3-4 Resources (Assets) Claims against resources (Liabilities) 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 a ssets 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 & ele ctronic 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. 3 3-7 CashCash Cash EquivalentsCash Equivalents ShortShort term Investmentsterm Investments ReceivablesReceivables InventoriesInventories PrepaymentsPrepayments 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. Current Current AssetsAssets 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. Cash that is restricted for a special purpose and not available for current operations should not be classified as a current asset. CashCash Cash EquivalentsCash Equivalents ShortShort term Investmentsterm Investments ReceivablesReceivables InventoriesInventories PrepaymentsPrepayments Current Current AssetsAssets 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 4 3-10 Noncurrent Assets Investments and Investments and FundsFunds Property, Plant, & Property, Plant, & EquipmentEquipment IntangiblesIntangibles OtherOther 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 longerlonger Noncurrent Noncurrent AssetsAssets 3-11 Noncurrent Assets Other Assets 1. Includes long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications Investments and Funds 1. Not used in the operations of the business 2. Includes both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes Property, Plant and Equipment 1. Are tangible, long-lived, and used in the operations of the business 2. Includes land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells 3. Reported at original cost less accumulated depreciation (or depletion for natural resources) Intangible Assets 1. Used in the operations of the business but have no physical substance 2. Includes patents, copyrights, and franchises 3. Reported net of accumulated amortization © 3-12 Learning Objectives Identify and describe the two balance sheet liability classifications. 5 3-13 (In milions) 2004 2003 Liabilities: Current liabilities: Current portion of long-term debt 750$ 308$ Accrued salaries & employee benefits 1,062 724 Accounts payable 1,615 1,168 Accrued expenses 1,305 1,135 Total current liabilities 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 591 536 Deferred lease obligations 503 466 426 455 Other liabilities 60 57 Total other long-term liabilities 3,529 3,053 Total liabilities 11,098 8,097 Deferred gains, principally related to aircraft transactions FedEx Corporation Balance Sheet 31-May Pension, postretirement healthcare and other benefit obligations Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events. 3-14 Current Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer Current Liabilities 3-15 Long-term Liabilities Notes Payable Mortgages Bonds Payable Pension Obligations Lease Obligations Obligations that will not be satisfied within one year or operating cycle, whichever is longer Long-Term Liabilities 6 3-16 (In millions, except shares) 2004 2003 Common Stockholders' Investment: Common stock, $.10 par value, 800 million shares authorized, 300 million shares issued for 2004 and 299 million shares 30$ 30$ issued for 2003 Additional paid-in capital 1,079 1,088 Retained earnings 7,001 6,250 Accumulated other comprehensive loss (46) (30) 8,064 7,338 Less deferred compensation and treasury stock at cost 28 50 Total common stockholders' investment 8,036$ 7,288$ FedEx Corporation Balance Sheet 31-May Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting liabilities. 3-17 Shareholders’ Equity Capital Stock Retained Earnings Treasury Stock Deferred Compensation Accumulated Other Comprehensive Income 3-18 Learning Objectives Explain the purpose of financial statement disclosures. 7 3-19 Disclosure Notes Summary of Significant Accounting Policies Conveys valuable information about the company’s choices from among 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. 3-20 Learning Objectives Explain the purpose of management’s discussion and analysis. 3-21 Management Discussion and Analysis Provides a biased but Provides a biased but informed perspective of informed perspective of a company’s a company’s operations, liquidity, operations, liquidity, and capital resources.and capital resources. 8 3-22 Management’s Responsibilities p Preparing the financial statements and other information in the annual report. p Maintaining and assessing the company’s internal control procedures. 3-23 Learning Objectives Explain the purpose of an audit and describe the content of the audit report. 3-24 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 9 3-25 Auditors’ Opinions Unqualified Issued when the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP Qualified Issued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a whole Adverse Issued when the exceptions are so serious that a qualified opinion is not justified Disclaimer Issued when insufficient information has been gathered to express an opinion 3-26 Compensation of Directors & Top Executives Proxy Statement Information p Summary compensation table p Table of options granted p Table of options holdings A proxy statement is sent each year to all shareholders, usually in the same mailing with the annual report. 3-27 Learning Objectives Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. 10 3-28 Using Financial Statement Information Comparative Financial Statements Allow financial statement users to compare year-to-year financial position, results of operations, and cash flows Horizontal Analysis Expresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount) Vertical Analysis Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year. Ratio Analysis Allows analysts to control for size differences over time and among firms 3-29 Learning Objectives Identify and calculate the common liquidity and financing ratios used to assess risk. 3-30 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 [...]... make decisions about resources to be allocated to the segment and assess its performance What Amounts Are Reported By An Operating Segment 3-36 General information about the operating segment Segment profit or loss, segment assets, and the basis of measurement Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items Interim period information 12... strategy to achieve growth and to reduce operating risk through diversification Segment reporting facilitates the financial statement analysis of diversified companies Reportable Operating Segment Characteristics Engages in business activities from which it may earn revenues and incur expenses Discrete financial information is available Operating results are regularly reviewed by the enterprise’s chief... 86 Acid-test ratio 3-32 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 3-33 Financing Ratios—Federal Express $11,098 = 1.38 $8,036 Debt to equity... Geographic Area SFAS 131 requires an enterprise to report certain geographic information unless it is impracticable to do so Information About Major Customers Revenues from customers generating 10% or more of the revenue of an enterprise must be disclosed 3-38 End of Chapter 3 13 . 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. balance sheet and understand its usefulness and limitations. 3-3 The Balance Sheet Limitations: p The balance sheet does not portray the market value of the entity as a going concern nor its liquidation. value. p Resources such as employee skills and reputation are not recorded in the balance sheet. Usefulness: p The balance sheet describes many of the resources a company has available for