FINANCIAL STATEMENT FORMAT
Financial statements have a standard format whether an enterprise is as small as Nutrivite or as large as a major corporation. For example, a recent set of financial statements for Microsoft Corporation can be summarized in millions of dollars as follows:
The Microsoft financial statements contain numbers very much greater than those for Nutrivite. But there is no difference in the general format of these two sets of financial statements.
Frequently Asked Questions
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Ans: Here is a brief list of who uses financial statements and why. This list gives
only a few examples and is by no means complete.
1. Existing equity investors and lenders, to monitor their investments and to
evaluate the performance of management.
2. Prospective equity investors and lenders, to decide whether or not to
invest.
3. Investment analysts, money managers, and stockbrokers, to make
buy/sell/hold recommendations to their clients. view more..
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Ans: When Pat arrived home, she carefully reviewed the projected financial statements,
then made notes about what she had learned.
1. The basic form of the balance sheet is Assets = Liabilities + Owner Equity.
2. Assets are the expenditures made for items, such as Inventory and Equipment,
that are needed to operate the business. The Liabilities and Owner
Equity reflect the funds that financed the expenditures for the Assets. view more..
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Ans: Pat was applying for a bank loan to start her new business, Nutrivite, a retail
store selling nutritional supplements, vitamins, and herbal remedies. She de-
scribed her concept to Kim, a loan officer at the bank view more..
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Ans: Financial statements have a standard format whether an enterprise is as small
as Nutrivite or as large as a major corporation. For example, a recent set of financial
statements for Microsoft Corporation can be summarized in millions of
dollars as follows: view more..
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Ans: We check the financial health of a company in much the same fashion by
analyzing the financial statements. The vital signs are tested mostly by various
financial ratios that are calculated from the financial statements. These vital
signs can be classified into three main categories: view more..
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Ans: Some important points to keep in mind when using financial ratios are:
• Whereas all balance sheet numbers are end-of-period numbers, all income
statement numbers relate to the entire period. For example, when
calculating the ratio for Accounts Receivable Turnover, we use a numerator
of Credit Sales, which is an entire-period number from the income
statement, and a denominator of Accounts Receivable, which is an end-ofperiod
number from the balance sheet. view more..
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Ans: Up to this point we have considered financial ratios one at a time. However,
there is a useful method for combining financial ratios known as Dupont1
analysis. To explain it, we first need to define some financial ratios, together
with their abbreviations, as follows: view more..
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Ans: Financial ratios are useful not only to assess the past or present condition of
an enterprise, but also to reliably predict its future solvency or bankruptcy.
This type of information is of critical importance to present and potential
creditors and investors. There are several different methods of analysis for
obtaining this predictive information. view more..
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Ans: A special committee of the American Institute of Certified Public Accountants
(AICPA) concluded the following about earnings and the needs of those
who use financial statements:
Users want information about the portion of a company’s reported earnings
that is stable or recurring and that provides a basis for estimating sustainable
earnings. view more..
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Ans: Defining nonrecurring items is difficult. Writers often begin with phrases like
“unusual” or “infrequent in occurrence.” Donald Keiso and Jerry Weygandt in
their popular intermediate accounting text use the term irregular to describe
what most statement users would consider nonrecurring items. view more..
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Ans: Careful analysis of past financial performance aimed at removing the effects
of nonrecurring items is a more formidable task than one might suspect. This
task would be fairly simple if (1) there was general agreement on just what constitutes
a nonrecurring item and (2) if most nonrecurring items were prominently
displayed on the face of the income statement. view more..
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Ans: An examination of the income statement, the first step in the search sequence,
requires an understanding of the design and content of contemporary income
statements. This knowledge will aid in the location and analysis of nonrecurring view more..
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Ans: After the income statement, the operating activities section of the statement
of cash flows is an excellent secondary source to use in locating nonrecurring
items (step 2 in the search sequence in Exhibit 2.3). The diagnostic value of
this section of the statement of cash flows results from two factors. First,
gains and losses on the sale of investments and fixed assets must be removed
from net income in arriving at cash flow from operating activities. Second,
noncash items of revenue or gain and expense or loss must also be removed
from net income. view more..
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Ans: The carrying values of inventories maintained under the LIFO method are
sometimes significantly understated in relationship to their replacement cost.
For public companies, the difference between the LIFO carrying value and
replacement cost (frequently approximated by FIFO) is a required disclosure
under SEC regulations. An example of a substantial difference between
LIFO and current replacement value is found in a summary of the inventory
disclosures of Handy and Harman Inc. in Exhibit 2.17. view more..
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Ans: Income tax notes are among the more challenging of the disclosures found in
annual reports. They can, however, be a rich source of information on nonrecurring
items. Fortunately, our emphasis on the persistence of earnings requires
a focus on a single key schedule found in the standard income tax note.
The goal is simply to identify nonrecurring tax increases and decreases in this
schedule. view more..
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Ans: An “other income (expense), net,” or equivalent line item is commonly found in
both the single- and multistep income statement. In the case of the multistep
format, the composition of other income and expenses is sometimes detailed on
the face of the income statement. In both the multi- and single-step formats,
the most typical presentation is a single line item with a supporting note. Even
though a note detailing the contents of other income and expense may exist,
companies typically do not specify its location. Other income and expense
notes tend to be listed close to the end of the notes to the financial statements view more..
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Ans: Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is an annual and a quarterly Securities and Exchange
Commission reporting requirement. Provisions of this regulation have a direct
bearing on the goal of locating nonrecurring items. As part of the MD&A, the
SEC requires registrants to: view more..
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Ans: Typically, most material nonrecurring items will have been located by proceeding
through the first six steps of the search sequence in Exhibit 2.3. However,
some additional nonrecurring items may be located in other notes. Nonrecurring
items can surface in virtually any note to the financial statements. We will
now discuss three selected notes that frequently contain other nonrecurring
items: notes on foreign exchange, restructuring, and quarterly and segment financial
data. Recall that inventory, income tax, and other income and expense
notes have already been discussed in steps 3 to 5. view more..
Recommended Posts:
- THE PROCESS OF IDENTIFYING NONRECURRING ITEMS
- NONRECURRING ITEMS IN THE INCOME STATEMENT
- NONRECURRING ITEMS IN THE STATEMENT OF CASH FLOWS
- NONRECURRING ITEMS IN THE INVENTORY DISCLOSURES OF LIFO FIRMS
- NONRECURRING ITEMS IN THE INCOME TAX NOTE
- NONRECURRING ITEMS IN THE OTHER INCOME AND EXPENSE NOTE
- NONRECURRING ITEMS IN MANAGEMENTS DISCUSSION AND ANALYSIS (MD&A)
- NONRECURRING ITEMS IN OTHER SELECTED NOTES
- EARNINGS ANALYSIS AND OTHER COMPREHENSIVE INCOME
- SUMMARIZING NONRECURRING ITEMS AND DETERMINING SUSTAINABLE EARNINGS
- THE SUSTAINABLE EARNINGS WORKSHEET
- ROLE OF THE SUSTAINABLE EARNINGS BASE
- APPLICATION OF THE SUSTAINABLE EARNINGS BASE WORKSHEET: BAKER HUGHES INC.
- THE BAKER HUGHES WORKSHEET ANALYSIS
- SOME FURTHER POINTS ON THE BAKER HUGHES WORKSHEET
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