Financial accounting 9th jamie pratt chapter 02

The Balance Sheet The balance sheet is represented by the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity A = L + SE  The effects of all business trans

The Financial Statements

Chapter 2

Flow of Capital

Business Management Activities

 Business activities are reflected in financial statements; business activities include:

Operating activities – production and sale of

goods and services

Investing activities – acquisition and sale of

productive assets

Financing activities – issue and

retirement/repayment of liabilities and equity

The Balance Sheet

• The balance sheet reports the financial

position at a point in time (end of the month,

The Balance Sheet

 The balance sheet is represented by the

fundamental accounting equation:

Assets = Liabilities + Shareholders’ Equity

A = L + SE

 The effects of all business transactions may be

represented in this formula

 Asset and Liability accounts are typically grouped

into more detailed classifications leading to the

Classified Balance Sheet.

Obligations resulting from transactions which may

result in the use of assets

 Current liabilities – expected to be relieved within 1 year

 Accounts payable

 Wages payable

 Interest payable

 Short-term notes payable

 Current maturities of long-term debt

 Deferred revenues

 Other payables

 Long-term liabilities

Shareholders’ (Owners’) Equity

Interest of the holders of shares in a company after liabilities have been relieved

Contributed capital – assets contributed by

owners

 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 over time.

Organizational Form Affects Equity

Figure 2-3

The Income Statement

 Other revenues and expenses: unusual

or infrequent

The Statement of Shareholders’ Equity (SSE)

 Explains changed in the shareholders’ equity

accounts over a period of time.

 The following formula represents the basic SSE:

Beginning shareholders’ equity Plus: Issuance of stock

Plus: Net income Less: Dividends Ending shareholders’ equity

SE + Issue + NI - D = SE

The Statement of Shareholders’ Equity (SSE)

 The second column represents retained earnings with the equation:

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.

Relationships Among the Financial

Statements

 An essential relationship exists between the different financial statements.

 A review of Figure 2-7 demonstrates this

relationship for Harbour Island Company

Relationships Among the Financial Statements

Statement of Cash Flows

Income Statement

Statement of Stockholders’ Equity

Ending Balance Sheet

Assets (Cash)

=

Liabilities

+

Equity

International Perspective – Balance Sheet

• Many non-U.S firms that publish IFRS-based balance

sheets add shareholders’ 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.

I B

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)

(3) RE(E) becomes RE(B) in the next year

Exercise, 2012

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, 2011

First, find RE(E):

RE(E) 2011 = RE(B) 2012 = 1.4

Now find Expenses:

RE(B) + Rev – Exp - Div = RE(E)

1.3 + 4.1 – Exp - 3 = 1.4

Exp = 3.7

Exercise, 2010

First, find RE(E):

RE(E) 2010 = RE(B) 2011 = 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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