Foundations of Business Introduction to Financial Reporting The Balance Sheet Financial Application Assignment
Basic Elements of Financial Statements n Assets = What a business owns n Liabilities = What a business owes n Equity = Owners’ economic position in the business
Balance Sheet Equation n n Assets = (What a company owns) n A = L Liabilities + Stockholders’ Equity + OE (Funds to purchase what a company owns)
Balance Sheet What a Company owns A = Funds to purchase what a company owns = L + OE
Champ Creemee Company Balance Sheet (as of 12/31/10) Cash Accounts Receivable Inventory $8, 690 3, 000 3, 500 Current Assets 15, 190 Equipment Total Assets 3, 000 $18, 190 Shows the company’s position on a fixed date; “snapshot” in time Accounts Payable Wages Payable Current Liabilities Notes Payable (L. T. ) Total Liabilities Common Stock Retained Earnings Total Shareholders’ Equity Total Liab. & SH Equity $2, 000 500 2, 500 5, 000 7, 500 10, 000 690 10, 690 $18, 190
How Transactions Impact Financial Statements n Increase in something owned n + Asset n Increase in something owed n + Liability n Sale of Common stock n + Common Stock n Increase in Sales n n n Increased Expenses associated with sales n Increase in Net Income n Pay dividend + Sales + Net Income n + Expenses - Net Income n + Retained Earnings n - Retained Earnings n
Owners’ Equity Example: Owning a house with a mortgage Value of the house (= asset): - Mortgage (= liability): Owners’ Equity: $300, 000 $200, 000 $100, 000 Assets - Liabilities (House) - (Mortgage) $300, 000 - $200, 000 Equity $100, 000 = = =
The 30 Companies in the Dow Jones Industrial Average (DJIA) 3 M Company (MMM) Alcoa Inc. (AA) Amer. Express (AXP) AT&T (T) Bank of America (BAC) Boeing (BA) Caterpillar Inc. (CAT) Chevron Corporation (CVX) Cisco Systems (CSCO) Coca-Cola (KO) Gen'l Electric (GE) Hewlett - Packard (HPQ) Home Depot (HD) JPMorgan Chase (JPM) Kraft Foods (KFT) Du. Pont (DD) Exxon Mobil Corp. (XOM) Intel (INTC) Int'l Business Mach. (IBM) Mc. Donald's Corp. (MCD) Merck & Co. (MRK) Travelers (TRV) United Technologies (UTX) Johnson & Johnson (JNJ) Microsoft Corp. (MSFT) Pfizer, Inc. (PFE) Verizon Communic. (VZ) Wal-Mart Stores (WMT) Procter & Gamble (PG) Walt Disney (DIS) Spring 2011
The Dow Jones Industrial Average (The DJIA or the “Dow”) = Dow Jones Source: Google Finance
The Dow vs. the S&P 500 (Standard & Poor’s 500) = Dow Jones Source: Google Finance = S&P 500
3 major market indexes the DJIA, S&P 500, NASDAQ =NASDAQ Source: Google Finance
BP vs. Exxon Mobil vs. the S&P 500 Source: Google Finance Link to Financial Application Assignment
A major company event—Jan. 13, 2011 Effect on company stock price? Merck clot drug seen unfit for stroke headline Top experimental drug found unfit for stroke patients * Vorapaxar acquired in Merck's buy of Schering-Plough * Dashed drug hopes pose challenge to new CEO * Merck shares drop 6. 6 pct (Adds Merck drag on Dow, drug sales potential, stroke statistics) Date, source By Ransdell Pierson NEW YORK, Jan 13 (Reuters) - One of Merck & Co's (MRK) most important experimental drugs, blood clot preventer Vorapaxar, has been deemed inappropriate for patients who have suffered a stroke, dashing investor hopes and erasing nearly $8 billion from its market value. Vorapaxar, meant to prevent heart attacks and strokes or their recurrence, was considered a crown jewel in Merck's $41 billion acquisition in late 2009 of Schering-Plough Corp and deemed capable of generating annual sales of more than $3 billion. Jan. 13, 2011 Company announcement
Comparison chart: The impact of a company event on the company’s stock price Event: Announcement by Merck of Vorapaxar’s ineffectiveness
Effect of a company announcement on the company’s stock price underperforms the S&P 500 slightly before the event but then MRK’s stock price experiences a sharp decline on the day of the event and continues to underperform the S&P 500 for the next 5 days. 104. 00 102. 00 100. 00 98. 00 96. 00 94. 00 92. 00 90. 00 INDEX VALUES Merck 88. 00 INDEX VALUES S&P 500 86. 00 1 /2 01 1 21 1/ /2 01 1 20 1/ /2 01 1 1/ 19 01 1 /2 18 1/ /2 01 17 1/ /2 1/ 01 1 1 Date of Announcement 16 /2 1/ 15 01 01 1 1 /2 1/ 14 /2 01 13 /2 1/ 12 01 1 1 01 /2 1/ 11 1/ 1/ 10 /2 01 1 84. 00
Creating an Index Base value 1 Base value 2 Index = new value / base value * 100 DATE S&P 500 ACTUAL VALUE (Close) S& P 500 INDEX VALUE (calculated) MERCK ACTUAL STOCK PRICE (Close) MERCK INDEX VALUE (calculated) 1/10/11 1269. 75 100 $37. 20 100 1/11/11 1274. 48 / 1269. 75 x 100 = 100. 37 $36. 95 / 37. 20 x 100 = 99. 33 1/12/11 1285. 96 / 1269. 75 x 100 = 101. 28 $37. 15 / 37. 20 x 100 = 99. 87 1/13/11 1283. 76 / 1269. 75 x 100 = 101. 10 $34. 69 / 37. 20 x 100 = 93. 25 1/14/11 1293. 24 / 1269. 75 x 100 = 101. 85 $34. 23 / 37. 20 x 100 = 92. 02 1/18/11 1295. 02 / 1269. 75 x 100 =101. 99 $33. 87 / 37. 20 x 100 = 91. 05 1/19/11 1281. 92 / 1269. 75 x 100 =100. 96 $33. 91 / 37. 20 x 100 = 91. 16 1/20/11 1280. 26 / 1269. 75 x 100 =100. 83 $34. 05 / 37. 20 x 100 = 91. 53 1/21/11 1283. 35 / 1269. 75 x 100 = 101. 07 $33. 90 / 37. 20 x 100 = 91. 13
Champ Creemee Company Inventory 2 gallons of ice cream cones napkins
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