1、The Balance Sheet and the Statement of Changes in Stockholders EquityChapter3An electronic presentation by Douglas Cloud Pepperdine University1.1.Understand the purposes of the balance sheet.2.Define the elements of a balance sheet.3.Explain how to measure the elements of a balance sheet.4.Classify

2、the assets of a balance sheet.5.Classify the liabilities of a balance sheet.6.Report the stockholders equity of a balance sheet.ObjectivesContinued2. 7.Prepare a statement of changes in stockholders equity. 8.Understand the other disclosure issues for a balance sheet. 9.Describe the SEC integrated d

3、isclosures.10.Explain the reporting techniques used in an annual report.Objectives3.FASB Statement of Concepts No. 5FASB Statement of Concepts No. 5 recommends that a full set of financial statements for an accounting period should show a companys.4.(1)Financial position at the end of the period.(2)

4、Net income for the period.(3)Comprehensive income for the period.(4)Cash flows for the period.(5)Investments by and distributions to owners for the period.FASB Statement of Concepts No. 55.Interrelationship of Financial StatementsBeginning Balance Sheet Assets Liabilities Stockholders EquityTransact

5、ions and Events Continued6.Transactions and Events Income Statement Revenues ExpensesStatement of Cash Flows Operating Activities Investing Activities Financing ActivitiesContinuedInterrelationship of Financial Statements7.Income Statement Revenues ExpensesStatement of Cash Flows Operating Activitie

6、s Investing Activities Financing ActivitiesEndingBalance Sheet Assets Liabilities Stockholders EquityInterrelationship of Financial Statements8.Basic Accounting EquationAssets=Liabilities+Stockholders EquityEconomic resourcesEconomic obligationsNet assets9.LiquidityThe term liquidity is used to desc

7、ribe how quickly an asset can be converted into cash or a liability paid.10.Financial FlexibilityFinancial flexibility refers to the ability of a company to use its financial resources to adapt to change.11.Operating CapabilityOperating capability refers to the ability of a company to maintain a giv

8、en physical level of operations.12.Three-Stage Process for Disclosing Information on the Balance Sheet1.Identification of what items meet the definition of the elements.2.Measurement (valuation) of the elements.3.Reporting (classification) of the elements.13.Elements of the Balance Sheet AssetsAsset

9、s are probable future economic benefits obtained or controlled by a company as a result of past transactions or events.14.1.The resource must be able to contribute directly or indirectly to the companys future net cash inflows.2.The company must be able to obtain the future benefit and control other

10、s access to it.3.The transaction or event giving the company the right to or control over the benefit must have occurred.Elements of the Balance Sheet Assets15.Assets may be natural or man-made, tangible or intangible, and exchangeable or useful only in the companys activities.Elements of the Balanc

11、e Sheet Assets16.Liabilities are probable future sacrifices of economic benefits arising from present obligations.LElements 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.17.Elements of t

12、he Balance Sheet Stockholders EquityAssets=Liabilities+Stockholders EquityEquity is residual interest in the assets of a company that remain after deducting liabilities.18.Measurement of the Elements of the Balance SheetHistorical CostCurrent CostCurrent Market ValueNet Realizable ValuePresent Value

13、19.Measurement of the Elements of the Balance Sheet (Assets)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 th

14、e 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 t

15、o 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 future cash inflows into which the asset is expected to be converted less the present value of future cash outflows necessary to obtain those inflows.20.Mea

16、surement of the Elements of the Balance Sheet (Liabilities)Initially, the amount of cash received when an obligation was incurred (historical proceeds); subsequent to incurrence, the historical amount may be adjusted for amortization.The current proceeds is the amount of cash that would be obtained

17、if the same obligation were incurred.The current market value of a liability is the amount of cash that would be required currently to eliminate the liability.The net realizable value of a liability is the amount of cash expected to be paid to eliminate the liability in due course of business.The pr

18、esent value of future cash outflows to eliminate the liability in due course of business.21.Limitations of the Balance SheetUse of historical cost to value assets and liabilities does not help assess the likely amounts of future cash flows.“Human resources or “intellectual capital, such as high-qual

19、ity management or highly creative employees are not included as assets.Many of the amounts that a company reports are based on estimates.In periods of inflation, the amounts listed do not show the “purchasing power of its assets and liabilities.22.Current AssetsCurrent assets are cash and other asse

20、ts that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.23.Operating CycleAn operating cycle is the average time taken by a company to spend cash for inventory,.process and sell the inventory, and collect the receivables, c

21、onverting them back into cash.24.Operating Cycle FlowMake Collections of Accounts Receivable 1. Collect cash 2. Incur bad debtsMake Sales )Revenues 1.Collect cash 2.Increase accounts receivable 3.Reduce deferred revenuesIncur Cost of Goods Sold 1. Reduce inventoryAcquire Inventory 1. Pay cash 2. Inc

22、ur accounts payable25.Current AssetsCash 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.26.Current Asse

23、tsTemporary investments in marketable securities include debt and equity securities that are classified as “trading securities and “available-for-sale securities.27.Current AssetsReceivables include accounts receivable and notes receivable with short-term maturity dates. They are listed at their est

24、imated 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 inventories.Prepaid items include insurance, rent, office supplies and taxes that will not be

25、 converted into cash but will be consumed.28.Current LiabilitiesCurrent liabilities are those obligations whose liquidation is expected to require the use of existing current assets, or the creation of other current liabilities.29.Current LiabilitiesObligations for items that have entered into the o

26、perating cycle (accounts payable and salaries payable).Advance collections for the future delivery of goods or performances of service (unearned rent and unearned ticket sales).3.Other obligations that will be paid within one year or the operating cycle (estimated liabilities for short-term product

27、warranties).30.Working CapitalCurrent Assets Current Liabilities=Working Capital31.Long-Term InvestmentsInvestment 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.32.The company expects the

28、 market value of the investment to increase.The company wishes to receive income from interest or dividends.The company may desire to exercise control over another company or a supplier.The company may acquire property, plant, or equipment for future operations.Long-Term InvestmentsA company makes i

29、nvestments for a variety of reasons.33.Property, Plant, and EquipmentProperty, plant, and equipment includes the tangible assets used in the firms operations.Also called fixed assets34.Intangible AssetsIntangible assets are those noncurrent economic resources that are used in the operations of the b

30、usiness but have no physical existence.PatentsCopyrightsFranchisesTrademarks a registered trademarkComputer software costsGoodwill35.Intangible AssetsA company may have three categories of intangible assets:1.Intangible assets with finite useful lives.2.Intangible assets with indefinite lives.3.Good

31、will.36.Other AssetsThe Other Assets section occasionally is used to report miscellaneous assets that may not be readily classified within one of the previous sections.Sometimes referred to as “deferred charges37.Long-Term LiabilitiesLong-term liabilities are those obligations that are not expected

32、to require the use of current assets or not expected to create current liabilities within one year or the normal operating cycle (whichever is longer).38.Other LiabilitiesDeferred tax liabilities and obligations of a component of the company that is being discontinued are examples of items that migh

33、t be included as other liabilities.39.Conceptual GuidelinesReporting assets according to their type or expected function in the central operations or other activities of the company.Reporting as separate items assets and liabilities that affect the financial flexibility of the company differently.Re

34、porting assets and liabilities according to measurement method used to value the items.FASB suggested guidelines for developing homogeneous classes of assets and liabilities.40.Stockholders EquityStockholders equity is the residual interest of the stockholders in the assets of the corporation.A part

35、nership 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.41.Contributed capitalRetained earningsAccu

36、mulated other comprehensive incomeStockholders EquityComponents of Stockholders Equity42.Stockholders EquityLegal capital is the minimum amount of stockholders equity that the corporation may not distribute as dividends.Preferred stock receives preference in declared dividends.Common stock carries t

37、he right to vote at the annual stockholders meeting and to share in residual profits.Contributed Capital43.Stockholders EquityA corporation sells 100 shares of its $5 par common stock for $30 per share.Cash3,000Common Stock, $5 par500Additional Paid-in Capital on Common Stock2,500Contributed Capital

38、44.A corporation sells 20 shares of its $100 par preferred stock for $110 per share.Cash2,200Preferred Stock, $100 par2,000Additional Paid-in Capital on Preferred Stock200Stockholders EquityContributed Capital45.A corporation sells 100 shares of its no-par common stock at $50 per share.Cash5,000Comm

39、on StockNo-Par Value5,000Stockholders EquityContributed Capital46.Retained earnings is the total amount of corporate net income that has not been distributed to stockholders as dividends.Uses of net incomeTo use in daily operationsTo maintain its productive facilitiesFor growthStockholders Equity47.

40、1.Unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-sale securities.2.Transaction adjustments from converting the financial statements of a companys foreign operations into U. S. dollars.3.Certain gains and losses on “derivative financial instrume

41、nts.4.Certain pension liability adjustments.Comprehensive income includes both net income and other comprehensive income. Accumulated other comprehensive income might include four items:Stockholders Equity48.If a corporation has more than one item of other comprehensive income, it may report the amo

42、unt of each item in stockholders equity.Stockholders Equity49.Or, it may report the total amount of accumulated other comprehensive income for all the items in stockholders equity. This approach requires a note to the statements.Stockholders Equity50.Statement of Changes in Stockholders EquityA corp

43、oration 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.51.Statement of Changes in Stockholders EquityFASB Statement of Concepts No. 6 defined inv

44、estments by owners and distributions to owners, as follows:Investments by owners are increases in the equity of a company resulting from transfers of something valuable to the company from other entities in order to obtain or increase ownership interests.Distributions to owners are decreases in the

45、equity of a company caused by transferring assets, rendering services, or incurring liabilities to owners.52.Balance, Jan. 1, 2004$65,000$143,400$ 64,900 $10,000$283,300 Unrealized increase in value of available- for-sale securities2,0002,000 Net income62,500 62,500 Cash dividends paid(11,200)(11,20

46、0)Common stock issued 6,500 30,500 37,000 Balance, Dec. 31, 2004$71,500$173,900$116,200 $12,000$373,600 Statement of Changes in Stockholders EquitySCHEDULE ACARON MANUFACTURING COMPANY Accumulated Common Additional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income TotalStatem

47、ent of Changes in Stockholders EquityFor Year Ended December 31, 2004Exhibit 3-853.Summary of Accounting PoliciesA selection from existing acceptable alternatives.Principles and methods peculiar to the industry in which the company operates.Unusual or innovative applications of GAAP.APB Opinion No.

48、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-54.Derivative Financial InstrumentsFASB Statement No. 107 requires a company to disclose the fair value of

49、all its financial instruments, whether recognized or not on its balance sheet. The Statement also requires a company to disclose all significant concentrations of credit risk due to its financial instruments. A company typically makes these disclosures in the notes to its financial statements.55.Der

50、ivative Financial InstrumentsFASB 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

51、 in a current transaction between willing parties.56.The type of derivative instruments it holds.Its objectives in holding the instruments.Its strategies for achieving these objectives.Derivative Financial InstrumentsFASB Statement No. 133 also requires the following information:57.Contingent Liabil

52、ities and AssetsLossProbable (?)Reasonably estimated (?)NoNoorDisclosureandYesYesReport amount in financial statementsReasonably possibleDisclose in notes to the financial statements58.Subsequent EventsA subsequent event is one that occurs between the balance sheet date and the date of issuance of the annual report.End of Accounting PeriodAnnual Report Publication DateSubsequent Events59.SEC Integrated DisclosuresThe Securities and Exchange Commission has the legal authority to prescribe accounting principles and reporting practices for all regulated companies.A regulated company must fil