The Balance Sheet and the Statement of Changes in Stockholders’ Equity C hapter 3
<ul><li>Understand the purposes of the balance sheet. </li></ul><ul><li>Define the elements of a balance sheet. </li></ul>...
<ul><li>Prepare a statement of changes in stockholders’ equity. </li></ul><ul><li>Understand the other disclosure issues f...
FASB Statement of Concepts No. 5 … recommends that a full set of financial statements for an accounting period should show...
<ul><li>Financial position at the end of the period. </li></ul><ul><li>Net income for the period. </li></ul><ul><li>Compre...
Interrelationship of  Financial Statements <ul><li>Beginning  </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Assets </l...
Interrelationship of  Financial Statements Transactions and Events  <ul><li>Income Statement </li></ul><ul><li>Revenues </...
Interrelationship of  Financial Statements <ul><li>Income Statement </li></ul><ul><li>Revenues </li></ul><ul><li>Expenses ...
Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity Economic resources Economic obligations Net assets
Liquidity The term  liquidity  is used to describe how quickly an asset can be converted into cash or a liability paid.
Financial Flexibility Financial flexibility  refers to the ability of a company to use its financial resources to adapt to...
Operating Capability Operating capability  refers to the ability of a company to maintain a given physical level of operat...
Process for Disclosing Information on the Balance Sheet <ul><li>Identification of what items meet the definition of the el...
Elements of the Balance Sheet -- Assets Assets  are probable future economic benefits obtained or controlled by a company ...
<ul><li>The resource must be able to contribute directly or indirectly to the company’s future net cash inflows. </li></ul...
Elements of the Balance Sheet -- Assets Assets  may be natural or man-made, tangible or intangible, and exchangeable or us...
Elements of the Balance Sheet -- Liabilities Liabilities   are probable future sacrifices of economic benefits arising fro...
Elements of the Balance Sheet -- Stockholders’ Equity Assets = Liabilities Equity is residual interest in the assets of a ...
Measurement of the Elements of the Balance Sheet Historical Cost Current Cost Current Market Value Net Realizable Value Pr...
Measurement of the Elements of the Balance Sheet The  historical cost  of an asset is the exchange price in the transactio...
Limitations of the Balance Sheet <ul><li>Use of historical cost to value assets and liabilities does not help assess the l...
Current Assets Current assets  are cash and other assets that are expected to be converted into cash, sold, or consumed wi...
Operating Cycle An  operating cycle  is the average time taken by a company to spend cash for inventory,... … process and ...
Current Assets Cash  includes cash on hand and readily available in checking and savings accounts. Cash equivalents  are r...
Current Assets Temporary investments in marketable securities  include debt and equity securities that are classified as “...
Current Assets Receivables   include accounts receivable and notes receivable with short-term maturity dates.  They are li...
Current Liabilities Current liabilities  are those obligations whose liquidation is expected to require the use of existin...
Long-Term Investments Investment items that management expects to hold for more than one year or the operating cycle, whic...
<ul><li>The company expects the market value of the investment to increase. </li></ul><ul><li>The company wishes to receiv...
Property, Plant, and Equipment Property, plant, and equipment  includes the tangible assets used in the firm’s operations....
Intangible Assets Intangible assets   are those noncurrent economic resources that are used in the operations of the busin...
Long-Term Liabilities Long-term liabilities   are those obligations that are  not  expected to require the use of current ...
Other Liabilities Deferred tax liabilities and obligations of a segment of the company that is being discontinued are exam...
Conceptual Guidelines <ul><li>Reporting assets according to their type or expected function in the central operations or o...
Stockholders’ Equity Stockholders’ equity  is the residual interest of the stockholders in the assets of the corporation. ...
<ul><li>Contributed capital </li></ul><ul><li>Retained earnings </li></ul><ul><li>Accumulated other comprehensive income <...
Stockholders’ Equity Legal capital   is the minimum amount of stockholders’ equity that the corporation may not distribute...
Stockholders’ Equity A corporation sells 100 shares of its $5 par common stock for $30 per share. Cash 3,000 Common Stock,...
Stockholders’ Equity A corporation sells 20 shares of its $100 par preferred stock for $110 per share. Cash 2,200 Preferre...
Stockholders’ Equity A corporation sells 100 shares of its no-par common stock at $50 per share. Cash 5,000 Common Stock--...
Stockholders’ Equity Retained earnings  is the total amount of corporate net income that has not been distributed to stock...
Stockholders’ Equity Retained earnings  is the total amount of corporate net income that has not been distributed to stock...
<ul><li>Unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-sale securi...
Stockholders’ Equity A company is required to report its total comprehensive income for the accounting period.
Statement of Changes in Stockholders’ Equity A corporation must disclose the changes in its stockholders’ equity account w...
Balance, Jan. 1, 2000 $65,000 $143,400 $  64,900  $10,000 $283,300  Unrealized increase in value of available- for-sale se...
Summary of Accounting Policies <ul><li>A selection from existing acceptable  alternatives . </li></ul><ul><li>Principles a...
Derivative Financial Instruments FASB Statement No. 133 requires a company to recognize all derivative financial instrumen...
<ul><li>The type of derivative instruments it holds. </li></ul><ul><li>Its objectives in holding the instruments. </li></u...
Contingent Liabilities and Assets Loss Disclosure Probable (?) Reasonably estimated (?) No No or and Yes Yes Report amount...
Subsequent Events A  subsequent event  is one that occurs between the balance sheet date and the date of issuance of the a...
SEC Disclosures The Securities and Exchange Commission has the legal authority to prescribe accounting principles and repo...
SEC Disclosures The SEC requires comparative balance sheets for  two  years and comparative income statements and statemen...
Balance Sheet Formats Most companies use the report form or the account form format in presenting their balance sheets.
Balance Sheet Formats Report Form Assets xxxx $xxx xxxx xxx Total assets $xxx Liabilities and Stockholders’ Equity xxxx $x...
Balance Sheet Formats Account Form Liabilities and   Stockholders’ Equity xxxx $xxx xxxx xxx Total liab. & stock. eq. $xxx...
C hapter 3 The End
Upcoming SlideShare
Loading in …5
×

Download

697 views
635 views

Published on

1 Comment
0 Likes
Statistics
Notes
  • Be the first to like this

No Downloads
Views
Total views
697
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
21
Comments
1
Likes
0
Embeds 0
No embeds

No notes for slide
  • 1 1 1 1
  • 2 4 2 2
  • Download

    1. 1. The Balance Sheet and the Statement of Changes in Stockholders’ Equity C hapter 3
    2. 2. <ul><li>Understand the purposes of the balance sheet. </li></ul><ul><li>Define the elements of a balance sheet. </li></ul><ul><li>Explain how to measure the elements of a balance sheet. </li></ul><ul><li>Classify the assets of a balance sheet. </li></ul><ul><li>Classify the liabilities of a balance sheet. </li></ul><ul><li>Report the stockholders’ equity of a balance sheet. </li></ul>Objectives
    3. 3. <ul><li>Prepare a statement of changes in stockholders’ equity. </li></ul><ul><li>Understand the other disclosure issues for a balance sheet. </li></ul><ul><li>Describe the SEC integrated disclosures. </li></ul><ul><li>Explain the reporting techniques used in an annual report. </li></ul>Objectives
    4. 4. FASB Statement of Concepts No. 5 … recommends that a full set of financial statements for an accounting period should show a company’s...
    5. 5. <ul><li>Financial position at the end of the period. </li></ul><ul><li>Net income for the period. </li></ul><ul><li>Comprehensive income for the period. </li></ul><ul><li>Cash flows for the period. </li></ul><ul><li>Investments by and distributions to owners for the period. </li></ul>FASB Statement of Concepts No. 5
    6. 6. Interrelationship of Financial Statements <ul><li>Beginning </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Stockholders’ Equity </li></ul>Transactions and Events
    7. 7. Interrelationship of Financial Statements Transactions and Events <ul><li>Income Statement </li></ul><ul><li>Revenues </li></ul><ul><li>Expenses </li></ul><ul><li>Statement of </li></ul><ul><li>Cash Flows </li></ul><ul><li>Operating Activities </li></ul><ul><li>Investing Activities </li></ul><ul><li>Financing Activities </li></ul>
    8. 8. Interrelationship of Financial Statements <ul><li>Income Statement </li></ul><ul><li>Revenues </li></ul><ul><li>Expenses </li></ul><ul><li>Statement of </li></ul><ul><li>Cash Flows </li></ul><ul><li>Operating Activities </li></ul><ul><li>Investing Activities </li></ul><ul><li>Financing Activities </li></ul><ul><li>Ending </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Stockholders’ Equity </li></ul>
    9. 9. Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity Economic resources Economic obligations Net assets
    10. 10. Liquidity The term liquidity is used to describe how quickly an asset can be converted into cash or a liability paid.
    11. 11. Financial Flexibility Financial flexibility refers to the ability of a company to use its financial resources to adapt to change.
    12. 12. Operating Capability Operating capability refers to the ability of a company to maintain a given physical level of operations.
    13. 13. Process for Disclosing Information on the Balance Sheet <ul><li>Identification of what items meet the definition of the elements. </li></ul><ul><li>Measurement (valuation) of the elements. </li></ul><ul><li>Reporting (classification) of the elements. </li></ul>
    14. 14. Elements of the Balance Sheet -- Assets Assets are probable future economic benefits obtained or controlled by a company as a result of past transactions or events.
    15. 15. <ul><li>The resource must be able to contribute directly or indirectly to the company’s future net cash inflows. </li></ul><ul><li>The company must be able to obtain the future benefit and control others’ access to it. </li></ul><ul><li>The transaction or event giving the company the right to or control over the benefit must have occurred. </li></ul>Elements of the Balance Sheet -- Assets
    16. 16. Elements of the Balance Sheet -- Assets Assets may be natural or man-made, tangible or intangible, and exchangeable or useful in the company’s activities.
    17. 17. Elements of the Balance Sheet -- Liabilities Liabilities are probable future sacrifices of economic benefits arising from present obligations... L Elements of the Balance Sheet -- Liabilities … of a company to transfer assets or provide services to other entities in the future as a result of past transactions or events.
    18. 18. Elements of the Balance Sheet -- Stockholders’ Equity Assets = Liabilities Equity is residual interest in the assets of a company that remain after deducting liabilities. + Stockholders’ Equity
    19. 19. Measurement of the Elements of the Balance Sheet Historical Cost Current Cost Current Market Value Net Realizable Value Present Value
    20. 20. Measurement of the Elements of the Balance Sheet The historical cost of an asset is the exchange price in the transaction in which the asset was acquired. The current cost of an asset is the amount of cash (or equivalent) that would be required on the date of the balance sheet to obtain the same asset. The current market value of an asset is the amount of cash (or equivalent) that could be obtained on the date of the balance sheet by selling the asset in an orderly liquidation. The net realizable value of an asset is the amount of cash (or equivalent) into which the asset is expected to be converted in the ordinary operations of the company, less any expected conversion costs. The present value of an asset is the net amount of discounted expected cash inflows less the discounted expected cash outflows related to the asset.
    21. 21. Limitations of the Balance Sheet <ul><li>Use of historical cost to value assets and liabilities does not help assess the likely amounts of future cash flows. </li></ul><ul><li>“ Human resources” such as high-quality management or highly motivated workers are not included as assets. </li></ul><ul><li>Many of the amounts that a company reports are based on estimates. </li></ul><ul><li>In periods of inflation, the amounts listed do not show the “purchasing power” of assets and liabilities. </li></ul>
    22. 22. Current Assets Current assets are cash and other assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.
    23. 23. Operating Cycle An operating cycle is the average time taken by a company to spend cash for inventory,... … process and sell the inventory, and collect the receivables, converting them back into cash.
    24. 24. Current Assets Cash includes cash on hand and readily available in checking and savings accounts. Cash equivalents are risk-free securities, such as money market funds and treasury bills that will mature in three months or less from the date acquired by the holder.
    25. 25. Current Assets Temporary investments in marketable securities include debt and equity securities that are classified as “trading securities” and “available-for-sale securities.”
    26. 26. Current Assets Receivables include accounts receivable and notes receivable with short-term maturity dates. They are listed at their estimated collectible amounts (net realizable values). Inventories include goods held for resale in the normal course of business plus, in the case of a manufacturing company, raw materials and goods in process. Prepaid items include insurance, rent, office supplies and taxes that will not be converted into cash but will be consumed.
    27. 27. Current Liabilities Current liabilities are those obligations whose liquidation is expected to require the use of existing current assets, or the creation of other current liabilities.
    28. 28. Long-Term Investments Investment items that management expects to hold for more than one year or the operating cycle, whichever is longer, are classified as long-term (noncurrent) investments.
    29. 29. <ul><li>The company expects the market value of the investment to increase. </li></ul><ul><li>The company wishes to receive income from interest or dividends. </li></ul><ul><li>The company may desire to exercise control over another company or a supplier. </li></ul><ul><li>The company may acquire property, plant, or equipment for future expansion. </li></ul>Long-Term Investments A company makes investments for a variety of reasons.
    30. 30. Property, Plant, and Equipment Property, plant, and equipment includes the tangible assets used in the firm’s operations. Also called fixed assets
    31. 31. Intangible Assets Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence. Patents Copyrights Franchises Trademarks ® a registered trademark Computer software costs Goodwill
    32. 32. Long-Term Liabilities Long-term liabilities are those obligations that are not expected to require the use of current assets or not expected to create current liabilities within one year or the normal operating cycle (if longer than a year).
    33. 33. Other Liabilities Deferred tax liabilities and obligations of a segment of the company that is being discontinued are examples of items that might be included in this section.
    34. 34. Conceptual Guidelines <ul><li>Reporting assets according to their type or expected function in the central operations or other activities of the company. </li></ul><ul><li>Reporting as separate items assets and liabilities that affect the financial flexibility of the company differently. </li></ul><ul><li>Reporting assets and liabilities according to measurement method used to value the items. </li></ul>FASB suggested guidelines for developing homogeneous classes of assets and liabilities.
    35. 35. Stockholders’ Equity Stockholders’ equity is the residual interest of the stockholders in the assets of the corporation. A partnership involves two or more persons who have agreed to combine their capital and efforts in the operations of a company. A sole proprietorship is a single-owner company. The corporation is a complex business organization. Usually there is absentee ownership.
    36. 36. <ul><li>Contributed capital </li></ul><ul><li>Retained earnings </li></ul><ul><li>Accumulated other comprehensive income </li></ul>Stockholders’ Equity Components of Stockholders’ Equity
    37. 37. Stockholders’ Equity Legal capital is the minimum amount of stockholders’ equity that the corporation may not distribute as dividends. P Preferred stock receives preference in declared dividends. Common stock carries the right to vote at the annual stockholders’ meeting and to share in residual profits. Contributed Capital
    38. 38. Stockholders’ Equity A corporation sells 100 shares of its $5 par common stock for $30 per share. Cash 3,000 Common Stock, $5 par 500 Additional Paid-in Capital on Common Stock 2,500 Contributed Capital
    39. 39. Stockholders’ Equity A corporation sells 20 shares of its $100 par preferred stock for $110 per share. Cash 2,200 Preferred Stock, $100 par 2,000 Additional Paid-in Capital on Preferred Stock 200 Contributed Capital
    40. 40. Stockholders’ Equity A corporation sells 100 shares of its no-par common stock at $50 per share. Cash 5,000 Common Stock--No-Par Value 5,000 Contributed Capital
    41. 41. Stockholders’ Equity Retained earnings is the total amount of corporate net income that has not been distributed to stockholders as dividends. Uses of net income To use in daily operations To maintain its productive facilities For growth
    42. 42. Stockholders’ Equity Retained earnings is the total amount of corporate net income that has not been distributed to stockholders as dividends. Uses of net income To use in daily operations To maintain its productive facilities For growth Click to review the balance sheet.
    43. 43. <ul><li>Unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-sale securities. </li></ul><ul><li>Transaction adjustments from converting the financial statements of a company’s foreign operations into U. S. dollars. </li></ul><ul><li>Certain gains and losses on “derivative” financial instruments. </li></ul><ul><li>Certain pension liability adjustments. </li></ul>Stockholders’ Equity Comprehensive income includes both net income and other comprehensive income. Accumulated other comprehensive income might include four items:
    44. 44. Stockholders’ Equity A company is required to report its total comprehensive income for the accounting period.
    45. 45. Statement of Changes in Stockholders’ Equity A corporation must disclose the changes in its stockholders’ equity account when issuing financial statements. This statement should show investments by and distributions to owners during the period, among other items.
    46. 46. Balance, Jan. 1, 2000 $65,000 $143,400 $ 64,900 $10,000 $283,300 Unrealized increase in value of available- for-sale securities 2,000 2,000 Net income 62,500 62,500 Cash dividends paid (11,200) (11,200) Common stock issued 6,500 30,500 37,000 Balance, Dec. 31, 2000 $71,500 $173,900 $116,200 $12,000 $373,600 Statement of Changes in Stockholders’ Equity SCHEDULE A CARON MANUFACTURING COMPANY Accumulated Common Additional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income Total Statement of Changes in Stockholders’ Equity For Year Ended December 31, 2000 Exhibit 3-8
    47. 47. Summary of Accounting Policies <ul><li>A selection from existing acceptable alternatives . </li></ul><ul><li>Principles and methods peculiar to the industry in which the company operates. </li></ul><ul><li>Unusua l or innovative applications of GAAP. </li></ul>APB Opinion No. 22 requires that a company include a description of all significant accounting policies as an integral part of its financial statements. In particular, when these principles and methods involve--
    48. 48. Derivative Financial Instruments FASB Statement No. 133 requires a company to recognize all derivative financial instruments as either assets or liabilities on the balance sheet. These instruments should be measured at fair value. Fair value is the amount at which the instrument could be purchased or sold in a current transaction between willing parties.
    49. 49. <ul><li>The type of derivative instruments it holds. </li></ul><ul><li>Its objectives in holding the instruments. </li></ul><ul><li>Its strategies for achieving these objectives. </li></ul>Derivative Financial Instruments FASB Statement No. 133 also requires the following information:
    50. 50. Contingent Liabilities and Assets Loss Disclosure Probable (?) Reasonably estimated (?) No No or and Yes Yes Report amount in financial statements Reasonably possible Disclose in notes to the financial statements
    51. 51. Subsequent Events A subsequent event is one that occurs between the balance sheet date and the date of issuance of the annual report. End of Accounting Period Annual Report Publication Date Subsequent Events
    52. 52. SEC Disclosures The Securities and Exchange Commission has the legal authority to prescribe accounting principles and reporting practices for all regulated companies. A regulated company must file a Form 10-K annual report with the SEC within 90 days of its fiscal year-end. This report must be filed electronically according to the EDGAR requirements. Continued
    53. 53. SEC Disclosures The SEC requires comparative balance sheets for two years and comparative income statements and statements of cash flows for three years. The SEC requires specific disclosures of important accounting information for a five-year period. These include net sales or operating revenues, income (loss) from continuing operations, and related earnings per share, total assets, long-term obligations and redeemable stock, and cash dividends declared per share.
    54. 54. Balance Sheet Formats Most companies use the report form or the account form format in presenting their balance sheets.
    55. 55. Balance Sheet Formats Report Form Assets xxxx $xxx xxxx xxx Total assets $xxx Liabilities and Stockholders’ Equity xxxx $xxx xxxx xxx Total liabilities and stockholders eq. $xxx
    56. 56. Balance Sheet Formats Account Form Liabilities and Stockholders’ Equity xxxx $xxx xxxx xxx Total liab. & stock. eq. $xxx Assets xxxx $xxx xxxx xxx Total assets $xxx In the seldom-used financial position format, current assets and current liabilities are listed first to emphasize working capital.
    57. 57. C hapter 3 The End

    ×