Understanding the Balance Sheet and Statement of Owners by hcj

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									Understanding the Balance Sheet and
   Statement of Owners’ Equity

             Chapter 3

       Robinson, Munter, Grant
                  Learning Objectives
• Understand all components of the Balance
  sheet including
     – Assets
     – Liabilities
     – Owners’ Equity
• Current and long-term assets and liabilities
• Evaluate the balance sheet in a critical
  fashion
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                  Assets = Claims
              The Accounting Equation
• Assets are the cash, property or other
  resources controlled by the entity used to
  provide future economic benefits.
• Claims are the contractual and other
  obligations held against the firm’s assets.
     – Liabilities – creditors’ claims
     – Owners’ equity – residual claim

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         Basic Financial Statements
• Balance sheet
     – Assets = Liabilities + Owners’ Equity
     – A snapshot at a particular moment in time
• Income statement
     – Revenue – Expenses
     – Covers a period of time
• Cash flow statement
     – Changes in cash during the period
• Equity statement
     – Changes in equity during the period
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 Articulation of Financial Statements

Income Statement             Balance Sheet
Revenue                         Assets
-Expenses   Equity Statement       =       Cash Flows
Net Income Beginning balance   Liabilities Beginning cash
            + Net Income           +       ± Operating
            - Dividends          Equity    ± Investing
            Ending balance                 ± Financing
                                           Ending cash




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                           Assets
                           (GAAP)
Probable future economic benefits obtained or
  controlled by a particular entity as a result of past
  transactions or events
• List in order of liquidity
     – Begin with cash
     – IAS does not specify an order
• Differentiate between current and long-term
     – Longer of one year or the operating cycle
     – Current ratio = Current assets/Current liabilities

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                  Current Assets
• Cash and cash equivalents
• Accounts receivable (net of estimated bad debts)
• Inventory
     – Raw material, work in process, finished goods,
       merchandise
     – LIFO, FIFO, Weighted average, Specific identification
     – At lower of historical cost or current market value
• Prepaid expenses
• Marketable securities
     – At market value

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                     Noncurrent Assets
• Property, plant and equipment
     – Net book value
           • Historical cost less accumulated depreciation
                  – Except for land which is not depreciated
     – Include all costs incurred in preparing the asset for use
     – Construction period (capitalized) interest for self-
       constructed assets
• Be aware of exceptions to historical cost (IAS 16)


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                  Noncurrent Assets
                    Intangible assets
• Copyrights, trademarks
     – Historical cost less accumulated amortization
• Amortization is similar to straight-line
  depreciation
• Goodwill
     – Excess acquisition cost beyond current market value of
       net assets acquired
     – Tested for impairment annually (GAAP)
     – Amortized over no more than 20 years (IAS)
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                  Special assets
• Deferred tax asset
     – Results from a current tax payment that relates
       to a future financial statement expense
     – A prepayment (a deferred tax liability
       represents a deferred payment)
• Inventory reserves
     – Reflect a reduction of market value below
       historical cost
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                        Claims
• Liabilities (GAAP)
     – Probable future economic sacrifices arising
       from present obligations as a result of past
       transactions
     – Claims that must be paid first are listed first
       (GAAP)
     – IAS does not specify an order
• Equity
     – Residual claims against assets
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                  Current Liabilities
• Accounts payable to suppliers
     – Purchase material without paying cash
• Accrued expenses
     – Interest, taxes, wages…
• Current portion of debt
     – Principal to be paid within the next year



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                  Noncurrent Liabilities
• Principal associated with
     – Long-term portion of Loans, Notes, Mortgages,
       Bonds
•   Interest is a component of Current liabilities
•   Current portion of debt is a Current liability
•   Net of discounts or premiums
•   Details are discussed in the notes to the
    statements
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                  Owners’ Equity
                           Stock
• Value listed
     – Par or stated value
     – Additional paid in capital
     – Reflects what was paid for stock at original issuance
• Number of shares
     – Authorized – Upper limit of number of shares that can be
       issued
     – Issued – Sold to investors
     – Outstanding – Held by investors (Issued less Treasury)
     – Treasury – Firm purchased its own shares on the market

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                  Owners’ Equity
• Retained earnings
     – Increased (decreased) by net income (loss)
     – Decreased by dividends paid
• Comprehensive income
     – Nonowner changes to equity




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                  Owners’ Equity
                  Preferred Stock
• Listed after Liabilities and before Common
  stock
• Shares properties of debt and equity
• In the event of liquidation, receive funds
  before Common shareholders
• Dividend specified as dollar amount or
  percentage of par

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            Nonowner changes to equity
        Other comprehensive income (GAAP)

• Adjustments to fair value for available-for-sale securities
  (Chapter 13)
• Foreign currency translation adjustment (Chapter 17)
• Gains/losses on cash flow hedge derivatives (Chapter 16)
• Gains/losses on investment hedge instruments (Chapter 16)
• Adjustments related to underfunding a defined benefit
  pension plan (Chapter 15)




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            Statement of Shareholders’ Equity


•   Provides details of changes in Equity
•   Stock
•   Other comprehensive income
•   Retained earnings
•   Includes beginning and ending balances in
    accounts

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 Motorola, Inc. and Subsidiaries




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       Nokia Statement of Changes in Shareholders’ Equity
                     (partial, IAS, EURm)




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                  Summary
• The Balance sheet is a snapshot of a firm’s
  financial position at a point in time
• Assets = Liabilities + Equity
• Statement of Stockholders’ equity depicts
  changes in owners’ claims over time



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