Foundations of Business

1
Foundations of Business

• Introduction to Financial Reporting
• The Balance Sheet

Financial Application Assignment
2
Basic Elements of Financial Statements

• What a business owns
• What a business owes
• Owners economic position in the business

• Assets
• Liabilities
• Equity

3
Balance Sheet Equation

• Assets
• (What a company owns)
• A

• Liabilities
• Stockholders Equity
• L OE

(Funds to purchase what a company owns)
4
Balance Sheet

• Funds to purchase what a company owns
• L OE

• What a Company owns
• A

5
Champ Creemee CompanyBalance Sheet (as of
12/31/07)
Shows the companys position on a fixed date
snapshot in time

• Accounts Payable 2,000
• Wages Payable 500 Current Liabilities
  2,500
• Notes Payable (L.T.) 5,000
• Total Liabilities 7,500
• Common Stock 10,000
• Retained Earnings 690 Total
  Shareholders
  Equity 10,690
• Total Liab. SH Equity 18,190

• Cash 8,690
• Accounts Receivable 3,000
• Inventory 3,500
• Current Assets 15,190
• Equipment 3,000
• Total Assets 18,190

6
How Transactions Impact Financial Statements

• Increase in something owned
• Increase in something owed
• Sale of Common stock
• Increase in Sales
• Increased Expenses associated with sales
• Increase in Net Income
• Pay dividend

• Asset
• Liability
• Common Stock
• Sales
• Net Income
• Expenses
• - Net Income
• Retained Earnings
• - Retained Earnings

7
Owners Equity

• Example Owning a house with a mortgage
• Value of the house ( asset) 300,000
• - Mortgage ( liability) 200,000
• Owners Equity 100,000
• Assets - Liabilities Equity
• (House) - (Mortgage) Equity
• 300,000 - 200,000 100,000

8
The 30 Companies in the Dow Jones Industrial
Average (DJIA)
Fall 2007
9
The Dow Jones Industrial Average (The DJIA or
the Dow)
10
The Dow vs. the SP 500 (Standard Poors 500)
SP500
11
3 major market indexesthe DJIA, SP 500, NASDAQ
12
Circuit City vs. Best Buy vs. Wal-Mart vs. the
SP 500 Index
Link to Financial Application Assignment
13
Effect of a company announcementon company stock
price
headline
Date, source
Company announcement
14
Effect of a company announcement on the companys
stock price
BBY outperforms the SP500 shortly after the
event but then performs with the SP 500 after
that.
Date of Announcement
15
Creating an Index
Base value 2
Base value 1
Index new value / base value 100
16
A major company eventAug. 16, 2005Effect on
company stock price?
17
Comparison chart The impact of a company event
on the companys stock price
Event Announcement of litigation filed against
Merck.
18
Creating an Index
Index new value / base value
19
Champ Creemee CompanyInventory
2 gallons of ice cream
cones
napkins