Balance Sheet - Liabilities


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Balance Sheet - Liabilities

  1. 1. UNDERSTANDING FINANCIAL STATEMENTS <ul><li>BALANCE SHEET – Liabilities & Stockholders’ Equity </li></ul>
  2. 2. LIABILITIES <ul><li>Liabilities- probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future, as a result of past transactions or events. </li></ul><ul><li>May be CURRENT or LONG-TERM -- same criteria of “one-year or operating cycle, whichever is longer” </li></ul>
  3. 3. Current Liabilities <ul><li>Accounts Payable </li></ul><ul><li>Short-term Notes Payable </li></ul><ul><li>Accrued Liabilities </li></ul><ul><li>Unearned Revenues (Deferred Credits) </li></ul><ul><li>Current Maturity Portion of Long-term Debt </li></ul><ul><li>Deferred Taxes </li></ul>
  4. 4. Long-Term Liabilities <ul><li>Notes or Mortgages Payables </li></ul><ul><li>Bonds Payable </li></ul><ul><li>Leases Payable (capital leases) </li></ul><ul><li>Pension Obligations </li></ul><ul><li>Post-retirement benefits other than pensions </li></ul><ul><li>Deferred Taxes </li></ul><ul><li>Warranty Obligations </li></ul><ul><li>Contingencies Payable </li></ul>
  5. 5. Accounts Payable <ul><li>Usually defined as obligations arising from purchases of merchandise for resale or of raw materials </li></ul><ul><li>Few valuation or reporting issues </li></ul><ul><li>Significant changes from period to period often result from changes in sales volume </li></ul>
  6. 6. Short-Term Notes Payable <ul><li>Promissory notes due within a year (or operating cycle if more appropriate) </li></ul><ul><li>Usually are interest-bearing </li></ul><ul><li>Usually reported at face value because of short-term nature </li></ul>
  7. 7. Accrued Liabilities <ul><li>Result from accrual basis of accounting </li></ul><ul><li>Represent expenses that have been INCURRED and thus ACCRUED, but have NOT BEEN PAID in cash </li></ul><ul><li>Examples are Interest Payable and Wages Payable </li></ul>
  8. 8. Unearned Revenue <ul><li>Examples: </li></ul><ul><li>Unearned rent revenue </li></ul><ul><li>Advances from customers </li></ul><ul><li>Sometimes called “deferred credits” </li></ul><ul><li>Results from a prepayment received in advance for services or products </li></ul><ul><li>Under accrual accounting, revenue is recognized when EARNED, not when received in cash -- in this case, cash flow precedes revenue recognition </li></ul>
  9. 9. Current Maturities - LT Debt <ul><li>Represent principal payments (not interest) on debt that are due within one year </li></ul><ul><li>Includes principal payments on notes, mortgages, bonds, leases </li></ul>
  10. 10. Long-term Liabilities <ul><li>Notes or Mortgages Payable </li></ul><ul><li>Bonds Payable </li></ul><ul><li>Leases Payable (Capital Leases Payable) - recorded at the present value of expected future cash outflows starting when the lease begins (PPE will also be recorded) </li></ul><ul><li>(Operating leases are recorded as lease expense and no liability nor PPE are recorded) </li></ul><ul><li>Pension Obligations - reported at the present value of expected future cash outflows </li></ul><ul><li>Warranty Obligations - Represent estimated liability of a firm to repair or replace merchandise that it sells </li></ul>
  11. 11. Long-term Liabilities <ul><li>Postretirement benefits other than pensions </li></ul><ul><li>A n estimate of the obligation for paying medical insurance premiums or medical expenses of retired employees and spouses. </li></ul><ul><li>T hese future benefits are accrued as the employees are working for the company. </li></ul>
  12. 12. Long-term Liabilities <ul><li>Contingencies – potential liabilities such as possible losses assessed in a lawsuit </li></ul><ul><li>If the loss is probable, then record the liability and loss and disclose in a footnote. If the loss is not estimable, then do not record the liability and loss, but must disclose in a footnote. </li></ul><ul><li>If the loss reasonably possible, then do not record the liability and loss, but must disclose in a footnote. </li></ul><ul><li>If remote, then do not record, must not disclose. </li></ul>
  13. 13. Deferred Income Taxes <ul><li>Taxes paid are based on taxable income on Tax Return </li></ul><ul><li>Tax expense reported on income statement is based on FINANCIAL Income Statement </li></ul><ul><li>Deferred Income Taxes result from TIMING (temporary) differences in taxable and financial statement income </li></ul><ul><li>Classification may be current or long-term depending on the asset or liability underlying the temporary difference </li></ul><ul><li>Examples: </li></ul><ul><ul><li>depreciation </li></ul></ul><ul><ul><li>pension expense </li></ul></ul><ul><ul><li>installment sale accounting </li></ul></ul>
  14. 14. OWNERS’ EQUITY <ul><li>Forms of business contrasted as to owners’ equity section. </li></ul><ul><li>a. Proprietorship: report owners’ equity as a single capital account. </li></ul><ul><li>b. Partnership: report separate capital account for each partner. </li></ul><ul><li>c. Capital account reflects all changes: investments, withdrawals, earnings, and losses. </li></ul><ul><li>d. Corporations report stockholders’ equity, including contributed capital and retained earnings. </li></ul>
  15. 15. STOCKHOLDERS’ EQUITY <ul><li>Common stock, at par value </li></ul><ul><li>Preferred stock </li></ul><ul><li>Additional Paid-in Capital (also called Paid- in Capital in Excess of Par) </li></ul><ul><li>Retained Earnings </li></ul><ul><li>Accumulated Other Comprehensive Income </li></ul><ul><li>Less: Treasury Stock (at cost) </li></ul><ul><li>Total Stockholders’ Equity </li></ul>
  16. 16. Common Stock and Additional Paid-In Capital <ul><li>Common stock represents ownership of the company </li></ul><ul><li>Voting privileges </li></ul><ul><li>No fixed return (no required dividend rate) </li></ul><ul><ul><li>But over the company’s lifetime the common stock dividends should be higher than the preferred stock dividends </li></ul></ul><ul><li>Must disclose par value and number shares: </li></ul><ul><ul><li>Authorized </li></ul></ul><ul><ul><li>Issued </li></ul></ul><ul><ul><li>Outstanding </li></ul></ul>
  17. 17. Preferred Stock <ul><li>No voting privileges </li></ul><ul><li>If company terminates, then their investment is returned before the common stockholders </li></ul><ul><li>Stated dividend rate (i.e., 8%) </li></ul><ul><li>Usually annual dividend is not required, but when dividends are declared by B of D, then the current year preferred stock dividends would be paid before the common stock dividends. </li></ul><ul><li>If “cumulative preferred stock”, then missed dividends (called dividends in arrears) would be paid first when dividends are declared by B of D. </li></ul><ul><li>If “redeemable preferred stock” (preferred stkhlders are repaid their investment after a stated period, like bonds), then the company is not allowed to show in SE section (show between liabilities and SE section. </li></ul>
  18. 18. Retained Earnings <ul><li>Represents the cumulative undistributed earnings of the business since its inception </li></ul><ul><li>Accumulated net income (net loss) less dividends declared since inception </li></ul><ul><li>Current year detail is shown in Statement of Retained Earnings (Beg. RE+Net Income-Dividends declared= Ending RE) </li></ul><ul><li>Only Ending RE balance is shown on BS </li></ul>
  19. 19. Treasury Stock <ul><li>Repurchased shares of stock to be retained and possibly reissued later is called Treasury Stock. </li></ul><ul><li>The stock may be repurchased: </li></ul><ul><li>To distribute the stock to employees under stock option plans or retirement plans. </li></ul><ul><li>To prevent a hostile takeover. </li></ul>
  20. 20. Treasury Stock <ul><li>The repurchase of a company’s own stock can be accounted for by one of two methods: </li></ul><ul><li>(1) At Cost Method (t he amount paid to repurchase the stock is shown as a separate line item as a subtraction from stockholders’ equity) </li></ul><ul><li>(2) Par Value Method (t he amount paid to repurchase the stock reduces Common Stock and Additional Paid-In Capital) </li></ul>