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FINANCIAL STATEMENTS ppt note s@ bec doms

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  2. 2. Part OneA. IntroductionB. Business ActivitiesC. Financial StatementsD. Balance SheetE. Balance Sheet ElementsF. Balance Sheet Equation
  3. 3. A. INTRODUCTION1. Accounting is a language – the language of business2. The purpose of any language is to convey information3. Accounting conveys information about business activities to interested parties4. Accounting information is communicated to interested parties outside the company via financial statements • Most important outside users of accounting information are investors and creditors5. Financial statements also provide information to managers inside the company
  4. 4. B. BUSINESS ACTIVITIESThere are three primary activities conducted by business enterprises: Two sources of financing: (a) equity financing (sale of capital Financing – obtaining (bank loans, issuance make1. stock) and (b) debt financingcash to be able to (a) of bonds) investments and (b) conduct operating activities –2. Investing – using cash to (a) purchase capital assets (e.g., buildings, machinery, equipment, land) needed to conduct operating activities, (b) purchase capital stock of other companies for strategic purposes (e.g., purchase of subsidiary), and (c) invest in income producing financial investments (e.g., government bonds or bonds of other companies) (cash management activity)3. Operating – producing and selling goods and services – includes using cash to purchase operating assets (such as inventories) and pay operating expenses (such as wages,
  5. 5. C. FINANCIAL STATEMENTSCompanies summarize the results of theirbusiness activities in four financial statements: 1. Balance sheet 2. Income statement 3. Retained earnings statement (or statement of stockholders’ equity) 4. Statement of cash flows (statement of changes in financial position) Balance sheet and income statement are primary Retained earnings statement and statement of cash flows are derived from the balance sheet and the income statement
  6. 6. D. BALANCE SHEET TYPICAL COMPANY Balance Sheet December 31, Year 1 (in thousands)ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT ASSETS CURRENT LIABILITIESCash $ 1,449 Accounts payable $ 5,602Marketable securities 246 Bank loan payable 1,000Accounts receivable, net 9,944 Accrued liabilities 876Inventories 10,623 Estimated tax liability 1,541Prepaid expenses 389 Current portion of long-term debt 500 Total current assets 22,651 Total current liabilities 9,519NONCURRENT ASSETS NONCURRENT LIABILITIESProperty, plant & equipment 26,946 Long-term debt 2,000less: Accumulated depreciation (13,534) Deferred income taxes 824Property, plant & equipment-net 13,412 Total liabilities 12,343Investments 1,110 STOCKHOLDERS’ EQUITYIntangible assets 403 Common stock 1,000Goodwill 663 Additional paid-in capital 11,256
  7. 7. D. BALANCE SHEETThe previous slide shows an example of a typicalbalance sheet.The balance sheet reports a company’s assets,liabilities, and stockholders’ equity at a particularpoint in time.The heading indicates: Name of company Name of statement (Balance sheet) Balance sheet date (the date at which the company’s “photograph” is being taken) Measurement unit (e.g., in thousands of dollars)
  8. 8. E. BALANCE SHEET ELEMENTS1. Assets a. Resources owned (or controlled) by the company b. Assets can be acquired in the following ways: 1. Incurring a liability 2. Selling company stock 3. Earning money through profitable operations c. Total Assets = Current Assets + Noncurrent Assets Current assets – cash and other assets expected to be converted into cash or used up within one year from the balance sheet date
  9. 9. E. BALANCE SHEET ELEMENTS (cont)2. Liabilities a. Obligations to outside parties who have provided resources to the company b. Total Liabilities = Current Liabilities + Noncurrent (or Long-term) Liabilities Current liabilities – obligations that must be paid within one year from the balance sheet date Long-term liabilities – obligations that will be paid after one year from the balance sheet date Example – on December 31, Year 1, a bank loan to be repaid on December 15, Year 2 is a current liability, but a bank loan to be repaid on January 5, Year 3 is long-term
  10. 10. E. BALANCE SHEET ELEMENTS (cont)3. Equity a. Owners’ investment in the company (e.g., stockholders’ equity) b. Includes amount invested through the purchase of stock (paid-in capital) and earnings reinvested in the company (retained earnings) c. Total Equity = Paid-in Capital + Retained Earnings d. Paid-in Capital – usually divided between the par value of stock (Common Stock account) and the amount at which stock was sold above par value (Additional Paid-in Capital account); for example, 100 shares of $5 par stock is sold for $30 per share: Common Stock (100 x $5) $ 500 Additional Paid-in Capital (100 x $25) 2,500 Total Paid-in Capital $3,000 e. Retained Earnings – the amount of income that has been generated by the company since its formation that has not been paid out to the stockholders as dividends: Cumulative net income Less: Cumulative dividends paid to stockholders Equals: Retained Earnings
  11. 11. E. BALANCE SHEET ELEMENTS (cont) Summary of a balance sheet: Balance SheetAssets LiabilitiesCurrent assets Current liabilitiesNoncurrent assets Long-term liabilities Total Stockholders’ equity Paid-in capital Retained earnings
  12. 12. E. BALANCE SHEET ELEMENTS (cont) The balance sheet summarizes the resources (assets) in which a company has invested on the left side and How the money was raised to acquire the resources on the right side Debt financing (liabilities) Equity financing (stockholders’ equity) The left side of the balance sheet summarizes the company’s investing activities The right side of the balance sheet summarizes the company’s financing activities(Operating activities are summarized on the income statement)
  13. 13. F. BALANCE SHEET EQUATION1. Assets = Liabilities + Equity (A = L + E) a. This equation is fundamental – after accounting for each transaction, the equation must remain in balance2. Balance sheet equation can be rearranged as: Assets – Liabilities = Equity a. Creditors can sue the company if amounts due are not paid b. Equity investors have only a residual claim to assets after liabilities have been paid c. Assets – Liabilities also is referred to as net assets