Financial accounting in an economic context 8e chapter 02

The Balance Sheet is also called:  Statement of Financial Position The components of the Balance Sheet are:  Assets  Liabilities  Shareholders’ Owners’ Equity...  Contributed capita

Chapter 2

The Financial Statements

Business Activities

statements; business activities include:

services.

of productive assets.

retirement/repayment of liabilities and

equity.

The Balance Sheet

The balance sheet reports the financial position

at a point in time (end of the quarter or year).

The Balance Sheet is also called:

 Statement of Financial Position

The components of the Balance Sheet are:

 Assets

 Liabilities

 Shareholders’ (Owners’) Equity

The Balance Sheet

fundamental accounting equation:

Assets = Liabilities + Shareholders’ Equity

A = L + SE

may be represented in this formula

– Short-term notes payable

– Current maturities of long-term debt

– Deferred revenues

– Other payables

 Long-term liabilities

Owners’ (Shareholders’) Equity

Definition?

 Contributed capital

– Shareholders’ equity (par or stated value)

– Paid-in capital in excess of par value

 Earned capital

- Earned Capital has 2 components: Retained Earnings and Other accumulated comprehensive income We will cover other

accumulated comprehensive income in Chapter 13.

– Retained earnings represent the excess earnings retained in the company after dividends have been paid to shareholders This represents the equity generated by the company for the

shareholders.

The Statement

of Shareholders’ Equity (SSE)

The following formula represents the

SEBegin + Issue + NI - D = SEEnd

The Statement

of Retained Earnings

The statement of retained earnings is a

subset of the SSE, and calculates the

changes in the retained earnings component.

Beginning retained earnings Plus: Net income

Less: Dividends Ending retained earnings

International Perspective – Balance

Sheet

 Many non-U.S firms that publish IFRS-based balance sheets add shareholder’s equity to non-current liabilities,

referring to the total as capital employed Consequently,

the balance sheet format looks like:

Non-current assets + Current assets - Current

liabilities = Non-current liabilities + Shareholders’ equity

 Under U.S GAAP balance sheet accounts are listed in order of liquidity Many non-U.S firms that publish

IFRS-based balance sheets list their assets in the

opposite order, starting with non-current assets, followed

by current assets

 Many non-U.S companies, especially in Europe, use the term “turnover” instead of revenue

The Income Statement

 Other revenues and expenses: unusual

or infrequent

 Disposal of a business segment

 Extraordinary items:

The Statement of Cash Flows

 Cash flows from operating activities:

– Cash flows associated with the acquisition and sale of a company’s products and services

– Collections from sales, rent, interest, etc.

– Cash paid to suppliers and employees, and for rent, selling activities, interest, and taxes etc.

 Cash flow from investing activities:

– Cash flows associated with the purchase and sale of a company’s investments.

– Proceeds from sale of investment securities, land, buildings,

equipment, etc

– Purchase of investment securities, land, buildings, equipment, etc.

 Cash flow from financing activities:

– Cash flows associated with a company’s two sources of outside

capital: liabilities and contributed capital.

– Proceeds from issuance of notes, debt, sale of equity, etc.

– Payments on notes, debt, dividends, etc.

Classifying Financing, Investing, and

Operating Transactions

Financing and Investing

Transactions

Operating Transactions

Group A

Normal and recurring operating revenues and expenses

Group B

Revenues and expenses from activities not germane to a company’s primary

activity

Extraordinary

items

Disposals of segments

Other revenues and expenses

Relationships Among the

Financial Statements

Statement of Cash Flows

Income Statement

Statement of Stockholders’ Equity

Ending Balance Sheet

=

Liabilities

+

Equity

I B

B

B B B

I B

B

Now, using the following formulas and

relationships, solve for the other missing items:

(1) Rev - Exp = NI

(2) RE(B) + NI - Div = RE(E)

Exercise, 2010

Solve for RE(B) using:

RE(B) + NI - Div = RE(E)

NI = 4.4 – 3.9 = 5

RE(B) + 5 - 3 = 1.6

RE(B) = 1.4

Exercise, 2009

First, find RE(E):

RE(E) 2009 = RE(B) 2010 = 1.4

Now find Expenses:

RE(B) + Rev – Exp - Div = RE(E)

1.3 + 4.1 – Exp - 3 = 1.4

Exp = 3.7

Exercise, 2008

First, find RE(E):

RE(E) 2008 = RE(B) 2009 = 1.3

Now find Div:

RE(B) + Rev – Exp - Div = RE(E)

1.2 + 3.9 – 3.5 – Div = 1.3

Div = 3

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