Chapter 5:Financial Reporting and Analysis

Learning Objective 1

Explain the needs of financial statement users.

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The Needs of Financial Statement Users

Managers Directors

Creditors Investors

Government

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Learning Objective 3

Prepare a comparative balance sheet, multistep income

statement, and statement of stockholders’ equity.

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March 31, 2008

March 31, 2007

AssetsCurrent AssetsCash 1,396$ 384$ Short-Term Investments 53 570 Accounts Receivables 203 149 Inventories 147 91 Other Current Assets 180 207 Total Current Assets 1,979 1,401 Property and Equipment, net 55 47 Other Noncurrent Assets 217 151 Goodwill 279 195 Total Assets 2,530$ 1,794$

Current LiabilitiesAccounts Payable 130$ 136$ Accrued and Other Liabilities 426 205 Total Current Liabilities 556 341 Other Noncurrent Liabilities 26 41 Total Liabilities 582 382

Contributed Capital 1,175 984 Retained Earnings 773 428 Total Stockholders' Equity 1,948 1,412 Total Liabilities and Stockholders' Equity 2,530$ 1,794$

Stockholders' Equity

ACTIVISION, INC. Balance Sheet

(in millions of U.S. dollars)

Liabilities and Stockholders' Equity

Comparative Financial Statements

A comparative format reveals changes over time, such as Activision’s

huge increase in Cash and decline in

Short-term Investments.

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2008 2007 2006Sales and Service Revenues 2,898$ 1,513$ 1,468$ ExpensesCost of Sales 1,645 979 942 Research and Development 270 133 132 Marketing and Sales 308 196 283 General and Administrative 195 132 96 Total Operating Expenses 2,418 1,440 1,453 Income from Operations 480 73 15 Revenue from Investments 51 37 31 Income before Income Tax Expense 531 110 46 Income Tax Expense 186 24 6 Net Income 345$ 86$ 40$

Year Ended March 31,

ACTIVISION, INC.Income Statement

(in millions of U.S. dollars)

Multistep Income Statements

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Contributed Capital

Retained Earnings

Balances at March 31, 2007 984$ 428$ Net Income 345 Dividends Declared - Issued Shares of Stock 191 Repurchased Shares of Stock - Balances at March 31, 2008 1,175$ 773$

(in millions of U.S. dollars)For the Year Ended March 31, 2008

ACTIVISION, INC.Statement of Stockholders' Equity

Statement of Stockholders’ Equity

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Learning Objective 7

Calculate and interpret the debt-to-assets, asset turnover,and net profit margin ratios.

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A Basic Business ModelMost businesses can be broken down into 4 elements:

(1)Obtain financing from lenders and investors, which is used to invest in assets,

(2)Invest in assets, which are used to generate revenues,

(3)Generate revenues, which produce net income,

(4)Produce net income, which is needed to satisfy lenders and investors.

(2) Assets (3) Revenues

Operating

Investing

Financing

Inve

sted

in

generate produce

(1) Debt & Equity Financing

(4) Net Income

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Financial Statement Ratios

In addition to making it possible to compare companies of different sizes, a benefit of ratio analysis

is that it enables comparisons between companies reporting in different currencies

(dollars vs. euros).

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Financial Statement Ratios

The debt-to-assets ratio provides the percentage of assets financed by debt. A higher ratio means greater financial risk.

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The asset turnover ratio measures how well assets are used to generate sales. A higher ratio means greater efficiency.

The net profit margin ratio measures the ability to generate sales while controlling expenses. A higher ratio means better performance.

How Transactions Affect Ratios

Three-step process:1.Analyze the transaction to determine its effects on the accounting equation.

2.Relate the effects in step 1 to the ratio’s components, to determine whether each component increases, decreases, or stays the same.

3.Evaluate the combined impact of the effects in step 2 on the overall ratio.

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