financial analysis- for students-part 1

8/10/2019 Financial Analysis- For Students-Part 1

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Financial aFinancial a

nalysis ofnalysis of

companiescompanies

PhD Natasa Bogavac-CvetkovicPhD Natasa Bogavac-Cvetkovic

Full-time professorFull-time professor


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Financial aFinancial analyzes of businessnalyzes of business

of companiesof companies AccountingAccountingis a process of identifyingis a process of identifying,, recording, summarizing, andrecording, summarizing, andreporting economic information to decision makers.reporting economic information to decision makers.

FinanFinancialcialaccountingaccounting The field of accounting that serves externalThe field of accounting that serves externaldecision makers, such as stockholders, suppliers, banks, anddecision makers, such as stockholders, suppliers, banks, andgovernment agencies.government agencies.

Management accountingManagement accounting -- The field of accounting that servesThe field of accounting that servesinternal decision makers, such as top executives, department heads,internal decision makers, such as top executives, department heads,college deans, hospital administrators and people at othercollege deans, hospital administrators and people at othermanagement levels within an organization.management levels within an organization.

Accounting information help into making decisions and they areAccounting information help into making decisions and they arepresented in reports called financial statement.presented in reports called financial statement.

To prepare these statements, accountants analyze, record, quantify,To prepare these statements, accountants analyze, record, quantify,accumulate, summarize, classify, report, and interpret economicaccumulate, summarize, classify, report, and interpret economicevents and their financial affects on the organization.events and their financial affects on the organization.


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Exhibit 1 -1Exhibit 1 -1:: Dow IndustrialsDow IndustrialsAsset and Owners' Equity as of Spring 2000Asset and Owners' Equity as of Spring 2000

($ in billions)($ in billions)


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ImportantImportant accountingaccounting

informationinformation Accounting is very important aid to decision makingAccounting is very important aid to decision making Accounting helps decision makingAccounting helps decision making - --- -- by showing where andby showing where and

when money has been spentwhen money has been spent

-- by evaluating performanceby evaluating performance

-- predict the future effects of decisionspredict the future effects of decisions -- direct attention to current problemsdirect attention to current problems


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BBasic relationships in theasic relationships in the

decision-making processdecision-making process


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BBasiasisson financial andon financial and

management accountingmanagement accounting

!he financial statements are common to all!he financial statements are common to allareas of accounting"areas of accounting"

#Financial accounting# is often distinguished#Financial accounting# is often distinguished

from $management accounting%"from $management accounting%"

!he field of!he field of financial accountingfinancial accounting servesserves

e&ternal decision makerse&ternal decision makers''stockholdersstockholders

suppliers bankssuppliers banks"""("""(""

Management accountingManagement accountingserves internalserves internaldecision makersdecision makers''top e&ecutivestop e&ecutives

department heads college deans hospitaldepartment heads college deans hospital

administrators and people at otheradministrators and people at other

management levels within an organi)ationmanagement levels within an organi)ation((""


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FinanFinancial statementscial statements

The Balance SheetThe Balance Sheet Income StatementsIncome Statements

Statement of Cash FlowStatement of Cash Flow


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The Balance SheetThe Balance Sheet


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The Balance heetThe Balance heet The balance sheetThe balance sheet** is one of the ma+or financialis one of the ma+or financial

statements prepared by the accounting system" ,tstatements prepared by the accounting system" ,tshows the financial status of a company at a particularshows the financial status of a company at a particularinstant in time"instant in time"

!he balance sheet has two counterbalancing sections"!he balance sheet has two counterbalancing sections" !he left side lists asset which represent the resources!he left side lists asset which represent the resources

of the firm 'from cash to buildings etc"(" !he right sideof the firm 'from cash to buildings etc"(" !he right sidelists liabilities and owners e.uity which represent thelists liabilities and owners e.uity which represent thesources of resources used to ac.uire the assetssources of resources used to ac.uire the assets

!he other financial statements focus on the performance!he other financial statements focus on the performanceover time"over time"

!he most common source of financial information used!he most common source of financial information usedby investors and managers is the annual report"by investors and managers is the annual report"

The annual reportThe annual report ** is a document prepared byis a document prepared bymanagement and distributed to current and potentialmanagement and distributed to current and potential

investors to inform them about the company/s past andinvestors to inform them about the company/s past andfuture prospects"future prospects"


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The Balance heetThe Balance heet AAssetssetsse.ualse.uals liabilitiesliabilities plusplus owners/ e.uityowners/ e.uity

!e ele"ents in t!e balan#e s!eet for" t!e!e ele"ents in t!e balan#e s!eet for" t!e balancebalancesheet e!uationsheet e!uation

AAssetsssets%% &iabilities&iabilities Owners equityOwners equity

""ssetsssets E#ono"i# resour#es t!at are e*pe#ted to E#ono"i# resour#es t!at are e*pe#ted to!elp generate future #as! inflows or !elp redu#e future!elp generate future #as! inflows or !elp redu#e future

#as! outflows+#as! outflows+ #iabilities#iabilitiesE#ono"i# obligations of t!e organi,ationE#ono"i# obligations of t!e organi,ation

to outsiders- or #lai"s against its assets by outsiders+to outsiders- or #lai"s against its assets by outsiders+ $%ners& e!uity$%ners& e!uity !e residual interest in t!e !e residual interest in t!e

organi,ationsorgani,ations assets after dedu#ting liabilitiesassets after dedu#ting liabilities

Owners equityOwners equity% A% Assetsssets &iabilities&iabilities


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Balance heet TransactionsBalance heet Transactions .alan#e s!eets are effe#ted by e/ery transa#tion t!at.alan#e s!eets are effe#ted by e/ery transa#tion t!at

a #o"pany or an entity !as+a #o"pany or an entity !as+ "n entity"n entityisisan organi,ation or a se#tion of anan organi,ation or a se#tion of an

organi,ation t!at stands apart fro" ot!erorgani,ation t!at stands apart fro" ot!er

organi,ations and indi/iduals as a separate e#ono"i#organi,ations and indi/iduals as a separate e#ono"i#

unit+unit+ " transaction" transactionis any e/ent t!at bot! affe#ts t!eis any e/ent t!at bot! affe#ts t!e

finan#ial position of an entity and #an be reliablyfinan#ial position of an entity and #an be reliably

re#orded in "oney ter"s+re#orded in "oney ter"s+ !e equity of t!e balan#e s!eet equation is!e equity of t!e balan#e s!eet equation is

"aintained for e/ery transa#tion"aintained for e/ery transa#tion

.alan#e s!eets "ust balan#e.alan#e s!eets "ust balan#e++


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Example 'Bi%heels (ompanyExample 'Bi%heels (ompany


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TransactionTransaction1 -1 - lnitial Investmentlnitial Investment

1.1. De#e"ber 1-De#e"ber 1-203203

SS"it! deposited $400-000 in a"it! deposited $400-000 in a

business ban5 a##ount entitled tobusiness ban5 a##ount entitled to.iw!eels 6o"pany.iw!eels 6o"pany


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TransactionTransaction2 -2 - Loan from BankLoan from Bank

))++ On 7anuary se#ond (2)- 20*2-On 7anuary se#ond (2)- 20*2-.iw!eels 6o"pany borrows fro" a.iw!eels 6o"pany borrows fro" a

ban5- signing a pro"issory note forban5- signing a pro"issory note for

$00-000+ !e $00-000 is added to$00-000+ !e $00-000 is added to


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TransactionTransaction3 3

Acquire Inventory for CashAcquire Inventory for Cash3.0n 1anuary 2 2342 Biwheels ac.uiresbicycles from a manufacture for 5673"333 cash"


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TransactionsTransactions

EExhibitxhibit

Transaction 1Transaction 1,, Initial InvestmentInitial Investment TransactionTransaction2,2, Loan from BankLoan from Bank TransactionTransaction3,3,Acquire Inventory for CashAcquire Inventory for Cash

.iw!eels.iw!eels #an prepare a balan#e s!eet at any point#an prepare a balan#e s!eet at any pointin ti"e- e/en after e/ery transa#tionin ti"e- e/en after e/ery transa#tion++ !e balan#e!e balan#e

s!eet for 7anuary 2- after t!e first t!ree transa#tionss!eet for 7anuary 2- after t!e first t!ree transa#tions

woud li5e t!iswoud li5e t!is

"ssets #iabilities and $%ners* E!uity6as! $180+000 &iabilities (note payable) $00+0009er#sandisein/entory

80+000 S"it!- #apital 400+000

otal assets $800+000 otal liabilities andowners' equity

800+000


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T+","(TI$, ","#IT+","(TI$, ","#I


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T+","(TI$, ","#IT+","(TI$, ","#I A##ountants re#ord transa#tions in an organi,ationsA##ountants re#ord transa#tions in an organi,ations

a##ounts+a##ounts+ An a##ount is a su""ary re#ord of t!e #!anges in aAn a##ount is a su""ary re#ord of t!e #!anges in a

parti#ular asset- liability- or owners equity- and t!eparti#ular asset- liability- or owners equity- and t!e

a##ount balan#e is t!e total of all entries to t!ea##ount balan#e is t!e total of all entries to t!e

a##ount to date+a##ount to date+ :or ea#! transa#tion- t!e a##ountant deter"ines:or ea#! transa#tion- t!e a##ountant deter"ines ()()

w!i#! spe#ial a##ounts are affe#tedw!i#! spe#ial a##ounts are affe#ted(2)(2) w!et!er t!ew!et!er t!e

a##ount balan#es are in#reased or de#reased- anda##ount balan#es are in#reased or de#reased- and(1)(1)t!e a"ount of t!e #!ange in ea#! a##ount balan#et!e a"ount of t!e #!ange in ea#! a##ount balan#e


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T+","(TI$, ","#I IIT+","(TI$, ","#I II (onsider ho% each of the fol(onsider ho% each of the folllo%ing additional transactions iso%ing additional transactions is

analyzed:analyzed:

..// 77anuaranuary 1y 1+ .iw!eels+ .iw!eels buys bi#y#les for $buys bi#y#les for $0+000+0+000+ !e "anufa#turer!e "anufa#turerrequiresrequires$ 4+000$ 4+000 byby77anuaranuaru 0u 0--and t!e balan#e inand t!e balan#e in10 da10 daysys 0/0/ 77anuaranuaryy 4+ .iw!eels4+ .iw!eels a#quires assorted store equip"ent for a total ofa#quires assorted store equip"ent for a total of

$8+000+ A$8+000+ A#as! down pay"ent of#as! down pay"ent of $ 4+000$ 4+000 is "adeis "ade++ !e re"aining balan#e!e re"aining balan#e"ust be paid in"ust be paid in;0 da;0 daysys++

//77anuaranuaryy 8+ .iw!eels8+ .iw!eels sells a store s!ow#ase to a business neig!bor aftersells a store s!ow#ase to a business neig!bor after

S"it!S"it! de#ides !e disli5es itde#ides !e disli5es it++ Its selling pri#e-Its selling pri#e- $ +000-$ +000- !appens to be e*a#tly!appens to be e*a#tlyequal to its #ost+ !e neig!bor agrees to pay wit!inequal to its #ost+ !e neig!bor agrees to pay wit!in 10 da10 daysys++ 2/2/77anuaranuaryy ;+ .iw!eels;+ .iw!eels returns so"e in/entory (w!i#! !ad been a#quired onreturns so"e in/entory (w!i#! !ad been a#quired on

77anuaranuary 1 fory 1 for $


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","#I $F","#I $F

T+","(TI$,T+","(TI$,


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T+","(T+","(TI$,TI$,. 6. 6

Purchase on creditPurchase on credit

44" '" '11anuaranuary 8(y 8(" Biwheels" Biwheels buys bicycles for 5buys bicycles for 563"333"63"333" !he!hemanufacturer re.uiresmanufacturer re.uires5 9"3335 9"333 by 1by 1anuaranuary 63y 63and theand the

balance inbalance in83 da83 daysys

AsAs:&hibit 6-2 shows for this merchandise purchase on:&hibit 6-2 shows for this merchandise purchase onaccount the merchandise inventory 'an asset account( ofaccount the merchandise inventory 'an asset account( of

Biwheels is increased and an account payable 'a liabilityBiwheels is increased and an account payable 'a liabilityaccount( is also increased in the amount of 563333 to keepaccount( is also increased in the amount of 563333 to keep

the e.uation in balance"the e.uation in balance"

"ssets #iabilities 7 $%ner*sE!uity

6as! 9er#!andiseIn/entory %

>ote?ayable

A##ounts?ayable

S"it!-6apital

.al+ 180+000 80+000 00+000 400+000(4) 0+000 0+000.al+ 180+000 ;0+000 00+000 0+000 400+000

8015/555 8015/555


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T+","(T+","(TI$,TI$,0 60 6

Purchase for Cash Plus CreditPurchase for Cash Plus Credit

5.5.77anuaranuaryy 4+ .iw!eels4+ .iw!eels a#quires assorted store equip"enta#quires assorted store equip"ent

for a total offor a total of$8+000+ A$8+000+ A#as! down pay"ent of#as! down pay"ent of $ 4+000$ 4+000 isis

"ade"ade++ !e re"aining balan#e "ust be paid in!e re"aining balan#e "ust be paid in;0 da;0 daysys++

!is transa#tion illustrates a!is transa#tion illustrates a compound entrycompound entry be#ause itbe#ause itaffe#ts "ore t!an two balan#e s!eet a##ounts (two assetaffe#ts "ore t!an two balan#e s!eet a##ounts (two asset

a##ounts and one liability a##ount in t!is #ase)a##ounts and one liability a##ount in t!is #ase)"ssets #iabilities 7 $%ner*s E!uity

6as! 9er#!andise

In/entory

Store

Equpi"ent%

>ote

?ayable

A##ounts

?ayable

S"it!-

6apital

.al+ 180+000 ;0+000 00+000 0+000 400+000(8) @4+000 '8+000 '+000.al+ 14;+000 ;0+000 8+000 00+000 2+000 400+000

80)1/555 80)1/555


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T+","(T+","(TI$,TI$, 6 6

ale on Cre!itale on Cre!it 6.6.11anuaranuaryy 7; Biwheels7; Biwheels sells a store showcasesells a store showcaseto a business neighbor afterto a business neighbor after ote

?ayable

A##ounts

?ayable

S"it!-

6apital

.al+ 14;+000 ;0+000 8+000 00+000 2+000 400+000

(;) '+000 @+000.al+ 14;+000 +000 ;0+000 4+000 00+000 2+000 400+000

80)1/555 80)1/555


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T+","(T+","(TI$,TI$,2 62 6

"eturn of Inventory to u##lier"eturn of Inventory to u##lier++

;; 11anuaranuaryy =" Biwheels=" Biwheels returns somereturns someinventory 'which had been ac.uired oninventory 'which had been ac.uired on

11anuaranuary 8 fory 8 for 5>33(5>33( to the manufacturer forto the manufacturer for

full creditfull credit ''anan 5>335>33 reduction of the amountreduction of the amount

that Biwheels owes the manufacturerthat Biwheels owes the manufacturer("("

TTransacransactiontion, !eturn of Inventory to "u##lier

"ssets #iabilities 7 $%ner*s E!uity

6as! A##ountse#ei/able

9er#!andiseIn/entory

StoreEqupi"ent %

>ote?ayable

A##ounts?ayable

S"it!-6apital

.al+ 14;+000 +000 ;0+000 4+000 00+000 2+000 400+000(=) @


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I 6 0I 6 0;" ?rite and e&plain balance sheet e.uation"

" :&plain the meaning of assets liabilities notes payable and owners/" :&plain the meaning of assets liabilities notes payable and owners/

e.uity"e.uity"

63" ?hat is entity@63" ?hat is entity@

66" ?hat is transaction@66" ?hat is transaction@

62" Analy)e business transactions and relate them to changes in the62" Analy)e business transactions and relate them to changes in the

balance sheet"balance sheet"

68" :&plain the meaning of inventory account open account account68" :&plain the meaning of inventory account open account account

payable compound entry creditor and debtor"payable compound entry creditor and debtor"

69" Classify operating investing and financing activities in a cash flow69" Classify operating investing and financing activities in a cash flow

statements"statements"


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T!"#S"CTI$#S "#"%&SIST!"#S"CTI$#S "#"%&SIS

eview of analy)ed nineeview of analy)ed ninedifferent transactionsdifferent transactions


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T+","(T+","(TI$,TI$,3 63 6

$ayments to Cre!itors$ayments to Cre!itors '.'.11anuaranuaryy 63 Biwheels pa63 Biwheels paysys59"33359"333 to theto the

manufacturer described in transitionmanufacturer described in transition 9"9"

''!ransaction!ransaction 9; 19; 1anuaranuary 8y 8" Biwheels" Biwheels buys bicyclesbuys bicycles

for 5for 563"333"63"333" !he manufacturer re.uires!he manufacturer re.uires5 9"3335 9"333

by 1by 1anuaranuary 63y 63and the balance inand the balance in83 da83 days"ys"


6as! A##ountse#ei/able

9er#!andiseIn/entor

y

StoreEqupi"ent %

>ote?ayable

A##ounts?ayable

S"it!-6apital

.al+ 14;+000 +000 8B+200 4+000 00+000 20+200 400+000(


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TTransacransactiontion$,$, Collections fromCollections from

%e&tors%e&tors

AA (ebtor(ebtoris one who owes moneyis one who owes money"" )*)*BiwheelsBiwheels collectscollects533 o533 of thef the56"33356"333 owned by theowned by the

business neighbor for transactionbusiness neighbor for transaction ==

''!ransaction!ransaction 6.6.11anuaranuaryy 7; Biwheels7; Biwheels sells a storesells a store

showcase to a business neighbor aftershowcase to a business neighbor after ote?ayable

A##ounts?ayable

S"it!-6apital

.al+ 142+000 +000 8B+200 4+000 00+000 ;+200 400+000(B) =00 @=00.al+ 142+=00 100 8B+200 4+000 00+000 ;+200 400+000

801/)55 801/)55


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e/iew of analy,ed ninee/iew of analy,ed nine

different transa#tionsdifferent transa#tions !!ransactions typical for any small businessransactions typical for any small business"" !!here are more types of transactions but these ninehere are more types of transactions but these nine

are the basic ones"are the basic ones" !!hey are the following;hey are the following;

Transaction +Transaction + lnitial ,nvestment" lnitial ,nvestment"

Transaction ,Transaction , oan from Bank" oan from Bank" Transaction 3Transaction 3 Ac.uire ,nventory for Cash Ac.uire ,nventory for Cash

Transaction 4Transaction 4 Purchase on Credit Purchase on Credit

Transaction 5Transaction 5 Purchase for Cash plus Credit Purchase for Cash plus Credit

Transaction 6Transaction 6


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=+E="+I,> T?E B"#",(E=+E="+I,> T?E B"#",(E

?EET?EET ..alan#e s!eet represents t!e finan#ial i"pa#t of allalan#e s!eet represents t!e finan#ial i"pa#t of alltransa#tions up to a spe#ifi# point in ti"e- !ere 7transa#tions up to a spe#ifi# point in ti"e- !ere 7anuaranuary 2-y 2-20*2+20*2+

As noted earlier Biwheels could prepare a new balance sheetAs noted earlier Biwheels could prepare a new balance sheet

after each transaction"after each transaction"

0bviously such a practice would not be necessary" !herefore0bviously such a practice would not be necessary" !hereforebalance sheets are usually produced once a month"balance sheets are usually produced once a month"

Bi%heels (ompany.alan#e S!eet 7anuary 2- 20*2+


6as! $142+=00 00+000A##ountsre#ei/able

100 ;+200

9er#!andisein/entory

8B+200 ;+200

Store equpi"ent 4+000 400+000otal 8;+200 8;+200


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-"M/%-S $F "CT0"% C$!/$!"T--"M/%-S $F "CT0"% C$!/$!"T-

B"%"#C- S1--TB"%"#C- S1--T


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E@"A=#E $F "(Tet property- plant andequip"ent

4+


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((

#I"BI#ITIE#I"BI#ITIE (urrent assets(urrent assets are #as! and t!ose ot!er assets t!atare #as! and t!ose ot!er assets t!at

are e*pe#ted to be #on/erted to #as!- sold- orare e*pe#ted to be #on/erted to #as!- sold- or

#onsu"ed during t!e ne*t 2 "ont! (or wit!in t!e#onsu"ed during t!e ne*t 2 "ont! (or wit!in t!e

nor"al operating #y#le if longer t!an a year)+nor"al operating #y#le if longer t!an a year)+ (urrent liabilities(urrent liabilitiesare t!ose liabilities t!at fall dueare t!ose liabilities t!at fall due

wit!in t!e #o"ing year (or wit!in t!e nor"al operatingwit!in t!e #o"ing year (or wit!in t!e nor"al operating

#y#le if longer t!an a year)+#y#le if longer t!an a year)+


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Exhibit 1-Exhibit 1-6o"parati/e 6onsolidated 6ondensed6o"parati/e 6onsolidated 6ondensed

.alan#e S!eets.alan#e S!eets !here are consolidated condensed balance sheets of two big!here are consolidated condensed balance sheets of two bigbusinesses listed"businesses listed"

!hese are DuPont and Cisco!hese are DuPont and Cisco corporations"corporations" DuPont CorporationDuPont Corporation-- two entries are dominant amongtwo entries are dominant among

current assets" !hese are; accounts and notes receivablecurrent assets" !hese are; accounts and notes receivableandandinventories"inventories" !he most valuable entry among the remaining!he most valuable entry among the remaining

categories of assetscategories of assetsis net propertyis net property'569>6 million("'569>6 million(" million""

AAccounts payable are at the reasonable level especially asccounts payable are at the reasonable level especially as

compared to receivables which are almost double thatcompared to receivables which are almost double that

amount"amount"


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Exhibit 1-Exhibit 1-

6o"parati/e 6onsolidated 6ondensed .alan#e6o"parati/e 6onsolidated 6ondensed .alan#eS!eetsS!eets Cisco CorporationCisco Corporation-- tthreehreeentries are dominantentries are dominant

among current assets" !hese are;among current assets" !hese are; cashcash accounts andaccounts and

notes receivablenotes receivableandandother"other" !he most valuable entry!he most valuable entry

among the remaining categories of assetsamong the remaining categories of assets

isis

investment '568=>> million("investment '568=>> million("


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SStatement oftatement of CCashash FFlowslows

tatement oftatement of ((ashash FFlo%slo%s I- I


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tatement oftatement of ((ashash FFlo%slo%s- I- I BBalance sheetalance sheet pro/ides /ery i"portant infor"ation about t!epro/ides /ery i"portant infor"ation about t!e

#o"pany's status at a point in ti"e- it is also i"portant to 5now w!at#o"pany's status at a point in ti"e- it is also i"portant to 5now w!at

!appens o/er ti"e!appens o/er ti"e++ 6o"panies do t!ree basi# t!ingsC t!ey in/est in assets to #ondu#t6o"panies do t!ree basi# t!ingsC t!ey in/est in assets to #ondu#t

business- t!ey raise "oney to finan#e t!ese assets- and t!ey use t!ebusiness- t!ey raise "oney to finan#e t!ese assets- and t!ey use t!e

assets and t!e "oney t!ey raise to operate t!eir business+assets and t!e "oney t!ey raise to operate t!eir business+

!ese a#ti/ities lead to a syste" for #lassifying ea#! #as! flow as an!ese a#ti/ities lead to a syste" for #lassifying ea#! #as! flow as anoperating- in/esting- or finan#ing a#ti/ity+operating- in/esting- or finan#ing a#ti/ity+ 6o"panies t!en prepare a #as! flow state"ent to report t!is6o"panies t!en prepare a #as! flow state"ent to report t!is

infor"ation+infor"ation+ !e #reation of t!e state"ent of #as! flows!e #reation of t!e state"ent of #as! flows @@list t!e a#ti/ities t!at in#reased #as!list t!e a#ti/ities t!at in#reased #as!and t!ose t!at de#reased #as!and t!ose t!at de#reased #as!

@@pla#e ea#! #as! inflow and outflow into one of t!e t!reepla#e ea#! #as! inflow and outflow into one of t!e t!ree

#ategories#ategories operating a#ti/ities- in/esting a#ti/ities- or finan#ingoperating a#ti/ities- in/esting a#ti/ities- or finan#ing

a#ti/ities+a#ti/ities+

t t t ft t t f (( hh FFll IIII


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tatement oftatement of ((ashash FFlo%slo%s- II- II Operating activitiesOperating activitiesinclude the sale andinclude the sale and

the purchase or production of goods andthe purchase or production of goods andservices including collecting payments fromservices including collecting payments from

customers paying suppliers or employeescustomers paying suppliers or employees

and paying for items such as rent ta&es andand paying for items such as rent ta&es and

interest"interest" Investing activitiesInvesting activitiesinclude ac.uiring andinclude ac.uiring and

selling assets and securities held for long-selling assets and securities held for long-

term investment purposes"term investment purposes" Financing activitiesFinancing activitiesinclude obtaininginclude obtaining

resources from owners and creditors andresources from owners and creditors and

repaying amounts borrowed"repaying amounts borrowed"


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Exhibit 1-.Exhibit 1-..iw!eels 6o"pany.iw!eels 6o"pany

State"ent of 6as! :low for t!e ?eriod Ended 7anuary 2- 2032State"ent of 6as! :low for t!e ?eriod Ended 7anuary 2- 2032


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ole #ro#rietorshi#sole #ro#rietorshi#s AA sole proprietorshipsole proprietorshipis a separateis a separate

organi)ation with a single owner"organi)ation with a single owner"

Eost often the owner is also the manager"Eost often the owner is also the manager"

!herefore sole proprietorships tend to be!herefore sole proprietorships tend to be

small retail establishments and individualsmall retail establishments and individualprofessional business such as those ofprofessional business such as those of

dentists physicians and attorneys"dentists physicians and attorneys"

From an accounting viewpoint each soleFrom an accounting viewpoint each sole

proprietorship is a separate entity that isproprietorship is a separate entity that is

distinct from the proprietor"distinct from the proprietor"


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==artnershipsartnerships

//artnershipartnership is an organi)ation thatis an organi)ation that+oins two or more individuals who act+oins two or more individuals who act

as co-owners"as co-owners"

Eany retail establishments areEany retail establishments arepartnerships and dentists physicianspartnerships and dentists physicians

attorneys and accountants oftenattorneys and accountants often

conduct their activities as partnerships"conduct their activities as partnerships"

Partnerships can be huge"Partnerships can be huge"

!he largest international accounting!he largest international accounting

firms have thousands of partners"firms have thousands of partners"

CCor#orationsor#orations


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CCor#orationsor#orations CorporationsCorporationsare business organi)ations created underare business organi)ations created under

state law in the nited


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""#T"-S "#""#T"-S "#

IS""#T"-S $F T1-IS""#T"-S $F T1-

C$!/$!"T- F$!MC$!/$!"T- F$!M

"D",T">E ",D DI"D",T">E $F"D",T">E ",D DI"D",T">E $F


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"D",T">E ",D DI"D",T">E $F"D",T">E ",D DI"D",T">E $FT?E ($+=$+"TE F$+AT?E ($+=$+"TE F$+A

"(antages"(antagesof corporatof corporations*ions*

77 imited liability is foremost" ,f a corporation drifts intoimited liability is foremost" ,f a corporation drifts intofinancial trouble its creditors cannot look for repaymentfinancial trouble its creditors cannot look for repayment

beyond the corporation itself"beyond the corporation itself"

- A- As formal evidence of ownerships formal evidence of ownershipeasy transfer ofeasy transfer of

ownership" ,n selling shares in its ownership theownership" ,n selling shares in its ownership thecorporation usually issuescorporation usually issuescapital stoc8 certificatescapital stoc8 certificates""

-- corporations have the advantage of ease in raisingcorporations have the advantage of ease in raising

ownership capital from hundreds or thousands ofownership capital from hundreds or thousands of

potential stockholders"potential stockholders" -- continuity of e&istence" !he life of a corporation iscontinuity of e&istence" !he life of a corporation is

indefinite in the sense that it continues even if itsindefinite in the sense that it continues even if its

ownership changesownership changes -- !he effects of the form of ownership on income ta&es!he effects of the form of ownership on income ta&es

may vary significantlymay vary significantly


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"(($ F$+ $,E+*"(($ F$+ $,E+*

E;


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Exhibit 1-0Exhibit 1-0Owners' Equity for Different Organi,ationsOwners' Equity for Different Organi,ations

T?E AE",I,> $F ="+T?E AE",I,> $F ="+


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T?E AE",I,> $F ="+T?E AE",I,> $F ="+

"#


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::or"ulasor"ulas w!i#!w!i#! s!ow #o"ponentss!ow #o"ponents

of t!e total paid@in #apitalof t!e total paid@in #apital !otal paid-in capital H Capital stock at par I!otal paid-in capital H Capital stock at par I

Paid-in capital in e&cess of parPaid-in capital in e&cess of par

Capital stock at par H Number of sharesCapital stock at par H Number of sharesissued 4 Par value per shareissued 4 Par value per share

Paid-in capital in e&cess of par H !otal paid-inPaid-in capital in e&cess of par H !otal paid-in

capital - Capital stock at parcapital - Capital stock at par

!otal paid-in capital H Number of shares!otal paid-in capital H Number of shares

issued 4 Average issue price per shareissued 4 Average issue price per share

E hibit 1E hibit 1


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Exhibit 1-Exhibit 1-

:&hibit 6-= shows par value and paid-in capital for EcDonalds and Jap ,nc"in panel A" Panel B shows the relationship between par value and market

value of common stock including A!K!" As you see there is no relationship"


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+ecapitulation+ecapitulation

CorporationCorporationis a business organi)ation that isis a business organi)ation that iscreated by individual state laws"created by individual state laws"

%imite( liabilit2%imite( liabilit2is a feature of the corporate form ofis a feature of the corporate form of

organi)ation whereby corporate creditors ordinarilyorgani)ation whereby corporate creditors ordinarily

have claims against the corporate assets only" !hehave claims against the corporate assets only" !heowners personal assets are not sub+ect to theowners personal assets are not sub+ect to the

creditors grasp"creditors grasp"

/ublicl2 owne(/ublicl2 owne(is a corporation in which shares inis a corporation in which shares in

the ownership are sold to the public"the ownership are sold to the public"

/riatel2 owne(/riatel2 owne( is a corporation owned by a familyis a corporation owned by a family

a small group of shareholders or a single individuala small group of shareholders or a single individual

in which shares of ownership are not publicly soldin which shares of ownership are not publicly sold..


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;


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ST$C>1$%-!S "# T1- B$"! $FST$C>1$%-!S "# T1- B$"! $F

I!-CT$!SI!-CT$!S

T$(G?$#DE+ ",D T?E B$"+D $FT$(G?$#DE+ ",D T?E B$"+D $F


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T$(G?$#DE+ ",D T?E B$"+D $FT$(G?$#DE+ ",D T?E B$"+D $F

DI+E(T$+DI+E(T$+,n ownerships the managerial tasks may be shared delegated by theowners" ,n corporations the ultimate responsibility for management isdelegated by the stockholders to the board of directors as indicated inthe following diagram;


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((orporate line of responsibilitiesorporate line of responsibilities An advantage of the corporate form ofAn advantage of the corporate form oforgani)ation is that it separates ownership andorgani)ation is that it separates ownership and

management"management" ?T T$ +EAEABE+


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?I>?#I>?T T$ +EAEABE+?I>?#I>?T T$ +EAEABE+ ::&plain how accounting information assists in&plain how accounting information assists in

making decisions@making decisions@ Describe the components of the balanceDescribe the components of the balance

sheet"sheet"

Analy)e business transactions and relate themAnaly)e business transactions and relate them

to changes in the balance sheet"to changes in the balance sheet" Classify operating investing and financingClassify operating investing and financing

activities in a cash flow statement"activities in a cash flow statement"

CCompare the features of proprietorshipsompare the features of proprietorshipspartnerships and corporations"partnerships and corporations"

financial analysis- for students-part 1

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