Foundations of Business

Introduction to Financial Reporting

The Balance Sheet

Financial Application Assignment

Basic Elements of Financial Statements

Assets =

Liabilities =

Equity =

What a business owns

What a business owes

Owners’ economic position in the business

Balance Sheet Equation

Assets = (What a

company owns)

A =

Liabilities

+ Stockholders’ Equity

L + OE

(Funds to purchase what a company owns)

Balance Sheet

What a Company = owns

A =

Funds to purchase what a company owns

L + OE

Champ Creemee CompanyBalance Sheet (as of 12/31/10)

Cash $8,690

Accounts Receivable 3,000

Inventory 3,500

Current AssetsCurrent Assets 15,190

Equipment 3,000

Total AssetsTotal Assets $18,190$18,190

Accounts Payable $2,000

Wages Payable 500

Current Liabilities 2,500 Notes Payable (L.T.) 5,000

Total Liabilities Total Liabilities 7,5007,500

Common Stock 10,000 Retained Earnings 690

Total Shareholders’ Equity 10,690

Total Liab. & SH EquityTotal Liab. & SH Equity $18,190

Shows the company’s position on a fixed date; “snapshot” in time

How Transactions Impact How Transactions Impact Financial StatementsFinancial 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

Owners’ EquityOwners’ Equity

Example: Owning a house with a mortgage

Value of the house (= asset): $300,000- Mortgage (= liability): $200,000Owners’ Equity: $100,000

Assets - Liabilities = Equity(House) - (Mortgage) = Equity$300,000 - $200,000= $100,000

The 30 Companies in the Dow Jones Industrial Average (DJIA)3M Company

(MMM)Alcoa Inc. (AA) Amer. Express

(AXP)AT&T (T) Bank of

America (BAC)

Boeing (BA) Caterpillar Inc. (CAT)

ChevronCorporation

(CVX)

Cisco Systems (CSCO)

Coca-Cola (KO)

DuPont (DD) Exxon Mobil Corp. (XOM)

Gen'l Electric (GE)

Hewlett- Packard

(HPQ)

Home Depot (HD)

Intel (INTC) Int'l Business Mach. (IBM)

Johnson & Johnson (JNJ)

JPMorgan Chase (JPM)

Kraft Foods (KFT)

McDonald's Corp.

(MCD)

Merck & Co. (MRK)

Microsoft Corp. (MSFT)

Pfizer, Inc. (PFE)

Procter & Gamble (PG)

Travelers (TRV)

United Technologies

(UTX)

Verizon Communic.

(VZ)

Wal-Mart Stores

(WMT)

Walt Disney (DIS)

Spring 2011

The Dow Jones Industrial Average

(The DJIA or the “Dow”)

Source: Google Finance

= Dow Jones

The Dow vs. the S&P 500 (Standard & Poor’s 500)

= S&P 500= Dow Jones

Source: Google Finance

3 major market indexesthe DJIA, S&P 500, NASDAQ

Source: Google Finance

=NASDAQ

BP vs. Exxon Mobil vs. the S&P 500

Link to Financial Application Assignment

Source: Google Finance

A major company event—Jan. 13, 2011

Effect on company stock price?

Merck clot drug seen unfit for strokeTop experimental drug found unfit for stroke patients* Vorapaxar acquired in Merck's buy of Schering-Plough* Dashed drug hopes pose challenge to new CEO* Merck shares drop 6.6 pct (Adds Merck drag on Dow, drug sales potential,

stroke statistics)By Ransdell PiersonNEW YORK, Jan 13 (Reuters) - One of Merck & Co's (MRK) most important

experimental drugs, blood clot preventer Vorapaxar, has been deemed inappropriate for patients who have suffered a stroke, dashing investor hopes and erasing nearly $8 billion from its market value.

Vorapaxar, meant to prevent heart attacks and strokes or their recurrence, was considered a crown jewel in Merck's $41 billion acquisition in late 2009 of Schering-Plough Corp and deemed capable of generating annual sales of more than $3 billion.

Jan. 13, 2011

Date, source

headline

Company announcement

Comparison chart: The impact of a company event on the

company’s stock price

Event: Announcement by Merck of Vorapaxar’s ineffectiveness

Effect of a company announcement on the company’s stock price

Date of Announcement

MRK’s stock price underperforms the S&P500 slightly before the event but then experiences a sharp decline on the day of the event and continues to

underperform the S&P 500 for the next 5 days.

Creating an Index

DATE S&P 500 ACTUAL VALUE(Close)

S& P 500 INDEX VALUE(calculated)

MERCK ACTUAL STOCK

PRICE (Close)

MERCK INDEX VALUE

(calculated)

1/10/11 1269.75 100 $37.20 100

1/11/11 1274.48 1274.48 / 1269.75 x 100 = 100.37

$36.95 36.95 / 37.20 x 100 = 99.33

1/12/11 1285.96 1285.96 / 1269.75 x 100 = 101.28

$37.15 37.15 / 37.20 x 100 = 99.87

1/13/11 1283.76 1283.76 / 1269.75 x 100 = 101.10

$34.69 34.69 / 37.20 x 100 = 93.25

1/14/11 1293.24 1293.24 / 1269.75 x 100 = 101.85

$34.23 34.23 / 37.20 x 100 = 92.02

1/18/11 1295.02 1295.02 / 1269.75 x 100 =101.99

$33.87 33.87 / 37.20 x 100 = 91.05

1/19/11 1281.92 1281.92 / 1269.75 x 100 =100.96

$33.91 33.91 / 37.20 x 100 = 91.16

1/20/11 1280.26 1280.26 / 1269.75 x 100 =100.83

$34.05 34.05 / 37.20 x 100 = 91.53

1/21/11 1283.35 1283.35 / 1269.75 x 100 = 101.07

$33.90 33.90 / 37.20 x 100 = 91.13

Index = new value / base value * 100

Base value 1

Base value 2

Champ Creemee CompanyInventory

2 gallons of ice cream

cones napkins