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TRANSCRIPT
BUSINESS ACQUISITIONS
BASIC ACCOUNTING CONCEPTS AND
FINANCIAL STATEMENTS
© 2006 Joseph D. Lehrer
PURPOSE FOR ACCOUNTING
• To Report Financial Results (Income Statement)– For a Period of Time (Usually One Year)– Revenue, Expenses and Profits
• To Report Financial Status (Balance Sheet)– Assets, Liabilities and Shareholders’ Equity
• To Report on the Sources and Uses of Cash (Statement of Cash Flows)
ACCOUNTING CONCEPTS
• Generally Accepted Accounting Principles (GAAP)
• Accrual vs. Cash Accounting
• Consolidation & Combination
CONCEPT OF GAAP
• Generally Accepted Accounting Principles (GAAP) are the General Accounting Rules used to Prepare Financial Statements
• Adopted by the Financial Accounting Standards Board (FASB) the American Institute of Certified Public Accountants and the Securities and Exchange Commission (SEC)
• Sarbanes Oxley Has Further Affected the Concept of GAAP by Instituting the Public Corporation Accounting Oversight Board (PCOAB)
SOX Accounting Provisions• §101,et. seq. Establishes PCAOB• Title II establishes Rules Relating to Auditor
Independence• §301 Places Accounting and Audit Oversight
Upon Audit Committee of the Board• §302 of SOX Requires Certification of Financial
Statements by the CEO and the CFO• §404 Requires Internal Audit Function, which is
Assessed by Management, which Assessment is Attested to and Confirmed by Independent Auditor
"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession (and if the Company’s stock is registered and publicly traded, in accordance with pronouncements of the PCOAB and the Securities and Exchange Commission)
AS DEFINED IN ACQUISITION AGREEMENTS
CONCEPT OF ACCRUAL BASED ACCOUNTING
• Revenue From Selling a Good or Service Is Recognized in the Period in Which the Good Is Sold or the Service Is Performed – As Opposed to Cash Basis Accounting Where
Revenue Is Recognized Only When Cash Is Received
• Expenses Recognized When Incurred– As Opposed to Cash Basis Accounting Where
Expenses Are Recognized Only When Actually Paid
CONCEPT OF CONSOLIDATION
• All Companies which are Commonly Controlled are Reported on a Consolidated” Basis– This is a Requirement of GAAP– Generally, 50% or More Owned Subsidiaries
will be Consolidated with the Parent– Transactions among Companies which are
included in a Consolidated Statement will be Eliminated
BASIC ACCOUNTING STATEMENTS
• Balance Sheet
• Income Statement
• Statement of Cash Flows
Reports the success or failure of the company’s operations for a period of time.
Reports the success or failure of the company’s operations for a period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
Reports assets and claims to
those assets at a specific point in
time.
Reports assets and claims to
those assets at a specific point in
time.
Income Statement
Balance Sheet
Statement of Cash Flows
Provides information about cash
receipts and cash payments of a business for a
specific period of time.
Provides information about cash
receipts and cash payments of a business for a
specific period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
TIMING OF ACCOUNTING STATEMENTS
BALANCE SHEET
• Indicates the Financial Status of a Company
• At a Specific Point in Time
• Has a Listing of Assets– Current Assets (e.g., cash, inventory & receivables– Non-Current Assets (e.g., buildings, equipment)– Other Assets (e.g., intangibles, goodwill)
• Has a Listing of Liabilities– Current (e.g., accounts payable, accrued expenses)– Long Term (e.g., loans and debt)
BASIC BALANCE SHEET FORMULA
TOTAL ASSETS – ALL LIABILITES = NET WORTH
OR
ASSETS – LIABILITES = SHAREHOLDERS’ EQUITY
BALANCE SHEET FORMULA
ASSETS = LIABILITES + SHAREHOLDERS’ EQUITY
OR
WHAT THE BUSINESS OWNS =WHAT IS OWED TO OTHERS
+SHAREHOLDERS’ EQUITY
ASSETS – LIABILITIES = SHAREHOLDERS’ EQUITY
ASSETS – LIABILITIES = NET WORTH
OR
OR
BALANCE SHEET FORMULA(A Balance Sheet Must Balance)
CURRENT ASSETS Cash $xxxxxxxxx Receivables $xxxxxxxxx Inventory $xxxxxxxxxTotal Current $xxxxxxxxx
FIXED ASSETS Land Improvements $xxxxxxxxx Equipment $xxxxxxxxx Depreciation ($xxxxxxx)Total $xxxxxxxx
TOTAL ASSETS $xxxxxxxx
CURRENT LIABILITIES Trade Payables $xxxxxxx Accrued Expenses $xxxxxxx Current portion of Long-Term Debt $xxxxxxxTotal Current $xxxxxxxLong Term Debt $xxxxxxxTOTAL LIABILITES $xxxxxxxSHAREHOLDERS EQUITYPaid In Capital $xxxxxxxCapital Surplus $xxxxxxxRetained Earnings $xxxxxxxTotal $xxxxxxxTOTAL LIABIITIES &S-H EQUITY $ xxxxxx
CONSOLIDATED BALANCE SHEETSACME WIDGET CORPORATION
DECEMBER 31, 2004(In Thousands)
ASSETSCURRENT ASSETS:
Cash and cash equivalents $ 5,393Accounts Receivable, less allowances of $420 12,345Inventories 10,645Prepaid Expenses 1,272
Total Current Assets 29,665PROPERTY AND EQUIPMENT:
Land and land improvements 5,340Buildings 23,948Leasehold Improvements 2,327Fixtures and equipment 22,375Less-accumulated depreciation 12,983
41,007OTHER ASSETS
Cash surrender value of life insurance 575Goodwill 14,240
Total Other Assets 14,815$ 85,487
LIABILITIES AND SHAREHOLDERSINVESTMENTCURRENT LIABILITIES
Accounts payable $ 8,325Accrued expenses 3,848Revolving credit facility 6,256Current Maturities of long term debt 752
Total current liabilities 19,181
LONG TERM DEBT 21,118
SHAREHOLDERS EQUITYCommon stock 5,876Capital in excess of par value 8,121Retained Earnings 31,191
Total shareholders' investment 45,188$ 85,487
SHAREHOLDERS EQUITY• Two Major Categories
– Capital Stock– Retained Earnings
• Capital Stock– Stated Capital– Capital in Excess of Par Value
• Retained Earnings– Total Cumulative Amount of Earnings Retained
by the Company (Cumulative Profits less Cumulative Dividends)
• Reduced by “Treasury Stock” (Stock Which has been Redeemed)
INCOME STATEMENTa/k/a Statement of Operations
Gross Sales
Net Sales (net of allowances & returns)
Cost of Sales (COGS)
Gross Margin
Operating Expenses (R & D, Admin., Selling)
Operating Income
Other Income & Expense (e.g., Interest)
Taxes
Net Income
INCOME STATEMENT
CONSOLIDATED STATEMENTS OF OPERATIONSACME WIDGET CORPORATION
For the Fiscal Year Ending December 31, 2004(In Thousands)
Gross Sales $ 223,256Allowances and Rebates 5,211
Net Sales 218,045Cost of sales 165,714
Gross Profit 52,331Operating expenses
Product research and development 5,235Selling and marketing 10,876General and administrative 18,723
Total operating expenses 34,834Income from operations 17,497
Other income (expense):Interest expense (2,491)Interest income 213Other, net 11
Other expense, net (2,267)Income before income taxes 15,230
Provision for income taxes 5,787Net income $ 9,443
ACCRUAL BASED ACCOUNTING
• Revenue is Recognized On Sale is Made or Services Performed, even though Cash is Not Received– When Sale is Made on Credit, Account
Receivable is Recognized on Balance Sheet– Revenue is Booked so that Revenue is
Recognized
• Expenses are Recognized before Bill is Paid– An Incurred Expense is Shown on Balance
Sheet as Account Payable or Accrued Expense– Expense is Booked as Operating Expense
CASH BASIS ACCOUNTING• Not Often Used, and Used Primarily by
Service Firms (Law, Engineering, …Etc.)
• Revenue Is Not Recognized Until the Cash Is Actually Received From the Customer
• Therefore, a Balance Sheet Does Not Reflect Accounts Receivables.
• Expenses Are Not Recorded Until the Money Is Actually Paid
• Accrued Expenses Are Not Reflected on the Balance Sheet.
Statement of Cash Flows
Determine Changes In Cash By Reason Of:
Cash from Operations
Net Income + Depreciation +/- Working Capital Changes
Cash Flows from Investing (Purchases and Sales of Assets)
Cash Flow From Financing (From Debt and Payments of Debt and Dividends)
Because revenues reported do not always equal
cash collected. . .
. . . and expensesreported do not
always equalcash paid . . .
Income isusually not equal
to the changein cash forthe period.
STATEMENT OF CASH FLOWS IS NECESSARY
STATEMENT OF CASH FLOWS
+/- Cash Generated or Used as the Result of Operations
+/- Cash Invested or Provided from Investment or Capital Activities
+/- Cash Paid or Received as the Result of Financing Activities
= Increase or Decrease in Cash
ACME WIDGET CORPORATIONCOMBINED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:Net income 9,443Adjustments to reconcile net income tonet cash provided (used) BY operations
Depreciation and Amortization 2,583Changes in operating assets andliabilities:
Accounts receivable (1,320)Payables 576Inventory (1,236)Accrued expenses 598Net cash provided (used) inoperations 10,644
Cash flows from investing activitiesPurchases of property and equipment (3,123)Acquisition of business, net of cashacquired (8,261)
Net cash used in investmentactivities (11,384)
Cash flows from financing activities:Increase in revolving credit facility 1,898Proceeds from term loans 5,000Payments on notes and term loans (2,327)Dividends paid (1,222)
Net cash provided by financingactivities 3,349
Net Increase in Cash 2,609Cash and equivalents at beginning of year 2,784Cash and equivalents at end of year 5,393