CP

The Balance Sheet 339

million in 2001. Management reported that the decline resulted from a three-month

strike that kept the firm from fully utilizing a new plant that had been financed mostly

with debt. However, management went on to paint a more optimistic picture for the

future, stating that full operations had been resumed, that several new products had

been introduced, and that 2003 profits were expected to rise sharply. Of course, the

profit increase may not occur, and analysts should compare management’s past state-

ments with subsequent results when judging the credibility of the projected improve-

ment. In any event, the information contained in an annual report is used by investors to help

form expectations about future earnings and dividends.Therefore, the annual report is ob-

viously of great interest to investors.

What is the annual report, and what two types of information are given in it?

Why is the annual report of great interest to investors?

What four types of financial statements are typically included in the annual report?

The Balance Sheet

The left-hand side of MicroDrive’s year-end 2002 and 2001 balance sheets,which

are given in Table 9-1, shows the firm’s assets, while the right-hand side shows the

liabilities and equity, or the claims against these assets. The assets are listed in order

of their “liquidity,” or the length of time it typically takes to convert them to cash. The

claims are listed in the order in which they must be paid: Accounts payable must

generally be paid within 30 days, notes payable within 90 days, and so on, down to

the stockholders’ equity accounts, which represent ownership and need never be

“paid off.”

Some additional points about the balance sheet are worth noting:

1.Cash versus other assets.Although the assets are all stated in terms of dollars,

only cash represents actual money. Note ,though ,that some types of marketable

securities have a very short time until maturity and can also be converted very

quickly into cash at prices close to their book values. These securities are called

TABLE 9-1 MicroDrive Inc.: December 31 Balance Sheets (Millions of Dollars)

Assets 2002 200 1Liabilities and Equity 2002 200 1

Cash and equivalents $ 10 $ 15 Accounts payable $ 60 $ 30
Short-term investments 0 65 Notes payable 110 60
Accounts receivable 375 315 Accruals 140 130
Inventories 615 415 Total current liabilities $ 310 $ 220
Total current assets $ 1,000 $ 810 Long-term bonds 754 580
Net plant and equipment 1,000 870 Total liabilities $ 1,064 $ 800
Preferred stock (400,000 shares) 40 40
Common stock (50,000,000 shares) 130 130
Retained earnings 766 710
Total common equity $ 896 $ 840
Total assets $ 2,000 $1,680 Total liabilities and equity $ 2,000 $1,680

Note: The bonds have a sinking fund requirement of $20 million a year. Sinking funds are discussed in Chapter 4, but in brief, a sinking fund simply in-
volves the repayment of long-term debt. Thus, MicroDrive was required to pay off $20 million of its mortgage bonds during 2002. The current portion of
the long-term debt is included in notes payable here, although in a more detailed balance sheet it would be shown as a separate item under current
liabilities.

See Ch 09 Tool Kit.xls
for details.

Financial Statements, Cash Flow, and Taxes 335