Additional Activities:
6.1 Company Financial Reports Research
6.2 Calculating Company Profitability and Financial Ratios:
Timeframe: 5+3 Days
Student Handout and Activities
Additional Activities will be Uploaded into Schoology
Performance Indicators:
6.1 Describe the nature of income statements
6.2 Explain the nature of balance sheets
6.3 Describe the nature of cash flow statements
6.4 Discuss the nature of annual reports
6.5 Interpret financial statements
Unit Project:
Financial Statements: Under the Microscope & Rubric
Project: ACCT PLACEMENT, BAL. SHEET & INCOME STATEMENT (KEY)
Objectives:
a. Define the terms: income statement, profit-and-loss statement, revenue, cost of goods sold, gross profit, operating expenses, and net income.b. Explain the purpose of an income statement.c. Identify other names by which an income statement is known.d. Describe the categories of components on an income statement.e. Explain why an income statement is cumulative.f. Describe how financial ratios are determined.g. Explain how financial ratios calculated from the income statement are used in business decision making.h. Explain who analyzes the information found in income statements.Activity:
Assume you are the chairperson of the board of a major company and that you have been asked to present the company’s income statement to its stockholders at its annual meeting. To help stockholders understand the income statement’s importance, you should identify ways that stockholders can use the statement. Prepare an outline of their presentations the link here:
Income Statements—Discussion Guide
Slide #1 THINK ABOUT IT - Each of the three core financial statements provides its own set of information that might be useful to external users. Of these three, the income statement is widely regarded as the most important financial statement. It shows a business’s “bottom line,” or whether a business is generating profit.
KEY CONCEPTS
Slide #2 An income statement, sometimes called a profit and loss statement, is a financial statement that records the amount of a business’s revenues and expenses over a specified amount of time, usually a single accounting period.
It is prepared before the other core financial statements and is widely considered to be the most important of the three.The income statement shows how well the business is operating as a profit-creating entity.Slide #3 The format of income statements is not defined by accounting standards or frameworks like the GAAP.
Instead, each business will choose how to compile the information in its income statement based on the particulars of the business itself and the needs of the financial statement users who are likely to read it.Slide #4 More detailed income statements might include additional lines for income tax expense, post-tax profits, or additional calculations for different amounts that might be useful for the financial statement users.
These additional calculations may include:
Discussion #1: Ask students to discuss what extra information might be obtained by listing the information on an income statement alongside the same information from previous accounting periods. What could this information be used for?
For more information about income statements, in addition to examples of different formats, click here: https://www.accountingtools.com/articles/2017/5/17/the-income-statement.Activity:
Compare the components of the three different balance sheets, identify similarities and differences, and to explain in detail reasons for the differences.
Need help - How to analyze a balance sheet
Reading the balance sheet. [Video & article].
Ethics Case for Students: Jin is preparing a balance sheet, and his supervisor stops by to review it. She asks him to add revenue to the balance sheet that won’t be processed or received until next month. Usually, Jin does not record revenue until the transfer of goods has occurred. His supervisor says that it’s okay to use a different system once in a while, as long as they keep a record of it. Jin isn’t sure this is ethical. What is the right thing to do? (Ethical Principles Involved: Integrity, Transparency, Rule of Law)
Balance Sheets—Discussion Guide
THINK ABOUT IT
Slide #1 - Financial statement users who are interested in the current state of a company’s finances frequently want to know how much the company owns in comparison to how much it owes. This information can be found in a report called a balance sheet.
KEY CONCEPTS
Slide #2 A balance sheet is a financial statement that reports the balances of a business’s asset, liability, and equity accounts at a specific moment in time.
Balance sheets are prepared second during the financial statements stage of the accounting cycle (between the income statement and the cash flow statement), before temporary account balances are transferred to the permanent accounts through closing entries.
Unlike the balances of temporary revenue and expense accounts that accumulate over the entire accounting period, the balances of permanent accounts can increase and decrease with each transaction.
The balance sheet, therefore, is often called a “snapshot” of a business’s finances.
A number of important ratios are calculated using the information in a balance sheet including the debt-to-equity ratio (D/E ratio) that is one of many factors used by lenders to determine if the business should be given credit.
Slide #3 Accounting standards do not require a specific format for balance sheets.
However, they typically contain the following categories:
Within each of these main categories, accounts are listed in the order of their liquidity (the amount of time required to convert an item to cash).
After all of the accounts are listed with their balances, a total is calculated for each category.
For more information, including a sample balance sheet, click here: https://www.accountingtools.com/articles/2017/5/17/the-balance-sheet.
Activity:
Get into a group of four. Your group should participate in a game of Monopoly.
You can play online with the Pass n Play feature - https://boardgamesonline.net/Games/online/play/monopoli
Or if in person - bring in your board game!!!
Each of you should make a list of all of the monies that flowed into and out of her/his hands and why.
Here is your monopoly tracking spreadsheet (make a copy for your group)
How did the game of Monopoly provide a lesson about cash flow?
Cash Flow Statements—Discussion Guide
Slide #1 THINK ABOUT IT
After completing the income statement and balance sheet, accountants prepare the last of the three core financial statements: the cash flow statement.
KEY CONCEPTS
Slide #2 The movement of money into and out of a business is called cash flow.
Monitoring cash flow can provide some important insights into how well a business is performing.
The amount of difference between incoming and outgoing cash during a set period of time is called net cash flow.
Investors and creditors can learn a lot about a company by looking at the money that comes in and comparing it to the money that goes out.
Information about cash flow should be evaluated along with other information about a company in order to arrive at a more complete financial picture.
Slide #3 A cash flow statement is a financial statement that summarizes how much money flowed into and out of a business during a specific accounting period.
Cash flow statements allow financial statement users such as investors or creditors to evaluate how a company’s day-to-day operations are running, and whether cash flows are sufficient for the business’s short-term success.
Many investors feel that cash flow statements provide the clearest picture of any of the financial statements.
Creditors also use cash flow statements to help make decisions about whether a business is likely to have the necessary cash available to pay its bills on time.
Discussion #1: Ask students to discuss why the cash flow statement is considered to be the “clearest” picture of a business’s finances. The theory is that businesses can hide information in the other statements. What might be hidden in the other statements that cannot be hidden in a cash flow statement?
Slide #4 Cash flow statements almost always list inflows and outflows pertaining to three
main types.
They are:
A net total is provided for each of the first three categories, and these balances are used to calculate the final net change in cash from the opening cash balance to the closing cash balance.
For a sample cash flow statement, click here: https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-flow-statement%E2%80%8B/.
Activity:
Use Microsoft’s most recent annual report to answer the following questions. In each of your responses, identify the section of the annual report in which you found the information. Record your answers on a separate piece of paper.
Note:
Access Microsoft’s 2018 Annual Report here: 2018 Report
Or 2019’s Report
Annual Reports—Discussion Guide
Slide #1 THINK ABOUT IT
At the end of each fiscal year, businesses collect the financial information from the previous year and compile it into an annual report of the company’s financial data.
KEY CONCEPTS
Slide #2 A fiscal year is a 12-month period identified by an organization as a single year for accounting purposes.
While the start of a fiscal year can be chosen as any date in the calendar year, they typically begin at the start of a quarter (such as January, April, July, or October 1st) and tend to coincide with the completion of that organization’s business cycle.
An annual report is a publication prepared at the end of each fiscal year that serves as a record of an organization’s financial activities during that time period.
Discussion #1: Ask students to discuss why companies choose different fiscal years. Why doesn’t every company just use the calendar year? If they had to choose a start date for the fiscal year for a high school, when would it be? Why?
Slide #3 The specific sections and contents of annual reports will vary by organization and industry.
Most annual reports include:
To view the 2018 annual report for Maryland’s own Under Armour, click here: https://about.underarmour.com/investor-relations/financials/annual-reports.
Slide #4 In addition to the production of an annual report, all public corporations must also file a more detailed report called a Form 10-K with the Securities and Exchange Commission (SEC).
Form 10-K reports are famously long, dense, and complicated documents filled with legal and high-level financial language.
The five main sections of a 10-K are:
For the SEC’s detailed list of Form 10-K contents, click here: https://www.investor.gov/news-alerts/investor-bulletins/how-read-10-k.
Activity:
Select a publicly-traded corporation (Individually or As a Group), analyze the company’s financial ratios, and determine whether each ratio reflects positively or negatively on the business. (You can make a copy of the Ratio-Analysis-Spreadsheet)
Benchmark companies’ information to assist in these determinations.
For each poor result, you should brainstorm changes that could be made to improve it.
Uses your findings and ideas to present to the board of the company. You can write a one-page report, do a 5 page google slide, a pamphlet, or a 3 minute video explaining the company’s financial condition.
Interpret Financial Statements—Discussion Guide
Slide #1 THINK ABOUT IT
Financial statements contain a lot of data, but these facts and figures alone may not be enough for users to make decisions. Knowing how to turn the financial data into useful financial information is an important step for gaining as much insight as possible from the core financial statements.
KEY CONCEPTS
Slide #2 Each of the three core financial statements (income statements, balance sheets, and cash flow statements) is a report of raw financial data and numbers.
The real value for financial statement users comes from the information that can be calculated and interpreted from this raw data.
There are two basic approaches to interpreting financial statements: vertical and horizontal.
Slide #3 One of the most important places to start when interpreting financial statements is the business’s profitability.
To do this, analysts begin to calculate the business’s margins with information from the income statement.
In financial accounting, a business’s margins are the percentages of sales revenue that amount to gross profit, operating income, and net profit.
A business’s gross profit margin shows how well management is controlling costs.
Operating profit margin is a measure of the business’s quality of operation.
Net profit margin shows how much profit is generated from each dollar of a business’s revenue.
To display these margins as percentages, multiply calculated margin amounts by 100.
Discussion #1: Ask students to discuss situations in which each of these margins would be useful. If they were investors, would they prefer one over the other? Why? What if they were lenders?
Slide #4 Balance sheets are used to asses a business’s working capital and other indications of its financial strength and liquidity.
Working capital is calculated as the difference between a business’s current assets and its current liabilities.
In addition to working capital, the balance sheet can be used to calculate a number of ratios that measure a business’s liquidity, such as the current ratio, quick ratio, and debt-to-equity ratio.
The current ratio is a measure of a business’s ability to pay its current liabilities.
The quick ratio (sometimes called the acid-test ratio) is a measure of how much of a business’s assets can be converted into cash immediately.
A business’s debt-to-equity ratio or D/E ratio is a measure of what amount of the business is indebted.
Slide #5 A business’s cash flow statement contains a lot of useful information for shareholders regarding stock values and the paying of dividends.
This can be of great use to investors who are curious about a potential return on their investment.
In addition to shareholder information, the amount of net cash flow from operating activities can be used along with the amount of revenue listed on the income statement to arrive at the operating cash flow-to-sales ratio, which is a measure of how much cash is generated from every dollar from sales.