Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet and Financial Disclosures 3.

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 2003Assets: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 CorporationBalance 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

CashCashCash EquivalentsCash Equivalents

Short-term InvestmentsShort-term InvestmentsReceivablesReceivablesInventoriesInventories

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







Cash that is restricted for a special purpose and not available for current operations

should not be classified as a current

asset.









3-9Operating 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 AssetsInvestments and Investments and

FundsFundsProperty, Plant, & Property, Plant, &

EquipmentEquipmentIntangiblesIntangibles

OtherOther

Investments and Investments and FundsFunds

Property, Plant, & Property, Plant, & EquipmentEquipmentIntangiblesIntangibles

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

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

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.

3-13

(In milions) 2004 2003Liabilities: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


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.

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 PayableNotes Payable

Accrued LiabilitiesCurrent Maturities of Long-Term Debt

Accounts PayableNotes Payable

Accrued LiabilitiesCurrent 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

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

Current Liabilities

3-15

Long-term Liabilities

Notes PayableMortgages

Bonds PayablePension ObligationsLease Obligations

Notes PayableMortgages

Bonds PayablePension ObligationsLease Obligations

Obligations that will not be

satisfied within one year or

operating cycle, whichever is

longer

Obligations that will not be

satisfied within one year or

operating cycle, whichever is

longer

Long-Term Liabilities

Long-Term Liabilities

3-16

(In millions, except shares) 2004 2003Common 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 2003Additional 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$


31-May

Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

Shareholders’ Equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

3-17

Shareholders’ Equity

Capital Stock

Capital Stock

Retained Earnings

Retained Earnings

Treasury Stock

Treasury Stock

Deferred Compensation

Deferred Compensation

Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income

3-18

Learning Objectives

Explain the purpose of financial statement disclosures.

3-19

Disclosure Notes

Summary of Significant

Accounting Policies

Conveys valuable information about the company’s choices from

among various alternative accounting methods.

Subsequent EventsA 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.

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.

3-22

Management’s Responsibilities

Preparing the financial statements and other information in the annual report.

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

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

QualifiedIssued when there is an exception

that is not of sufficient seriousness to invalidate the financial

statements as a whole

AdverseIssued when the exceptions are so serious that a qualified opinion is

not justified

DisclaimerIssued when insufficient

information has been gathered to express an opinion

3-26Compensation of Directors & Top Executives

Proxy Statement Information Summary compensation table Table of options granted 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.

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 AnalysisAllows 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 ratioCurrent assets

Current liabilities

Measures a company’s ability to satisfy its short-term liabilities

=Acid-test ratioQuick assets

Current liabilities

Provides a more stringent indication of a company’s ability to pay its current

liabilities

3-31

Liquidity Ratios—Federal Express

= 1.05 $4,970

$4,732

Current ratio

= .86$4,073

$4,732

Acid-test ratio

3-32

Financing Ratios

=Debt to equity ratio

Total liabilities

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

= 1.38$11,098

$8,036

Debt to equity ratio

Times interest earned ratio

= 10.70$1,455

$136

3-34

Appendix 3

Reporting Segment

Information

3-35

Reporting by Operating Segment

Reportable Operating Segment Characteristics

Engages in business activities from which it may earn revenues

and incur expenses

Many companies operate in several business segments as a strategy to achieve growth and to

reduce operating risk through diversification.

Segment reporting facilitates the financial statement analysis of diversified companies.

Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be

allocated to the segment and assess its performance

Discrete financial information is available

3-36What Amounts Are Reported By An Operating Segment

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

3-37

Segment Reporting

Reporting by 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

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet and Financial Disclosures 3.

Documents

balance sheet limitations

future cash flows

customer slide

current obligations

noncurrent assets investments

resources assets claims

current operations

resources liabilities