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1 The Balance Sheet and the Statement of Changes in Stockholders’ Equity C hapte r 3
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The Balance Sheet and the Statement of
Changes in Stockholders’ Equity
The Balance Sheet and the Statement of
Changes in Stockholders’ Equity
Chapter3
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Understand the purposes of the balance sheet. Define the elements of a balance sheet. Explain how to measure the elements of a
balance sheet. Classify the assets of a balance sheet. Classify the liabilities of a balance sheet. Report the stockholders’ equity of a balance
sheet.
ObjectivesObjectives
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Prepare a statement of changes in stockholders’ equity.
Understand the other disclosure issues for a balance sheet.
Describe the SEC integrated disclosures. Explain the reporting techniques used in an
annual report.
ObjectivesObjectives
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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 company’s...
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Financial position at the end of the period. Net income for the period. Comprehensive income for the period. Cash flows for the period. Investments by and distributions to owners
for the period.
Financial position at the end of the period. Net income for the period. Comprehensive income for the period. Cash flows for the period. Investments by and distributions to owners
for the period.
FASB Statement of Concepts No. 5FASB Statement of Concepts No. 5
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Interrelationship of Financial StatementsInterrelationship of
Financial Statements
Beginning Balance Sheet
Assets Liabilities Stockholders’ Equity
Transactions Transactions and Events and Events
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Interrelationship of Financial StatementsInterrelationship of
Financial Statements
Transactions Transactions and Events and Events
Income Statement Revenues Expenses
Statement of Cash Flows
Operating Activities Investing Activities Financing Activities
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Interrelationship of Financial StatementsInterrelationship of
Financial Statements
Income Statement Revenues Expenses
Statement of Cash Flows
Operating Activities Investing Activities Financing Activities
EndingBalance Sheet
Assets Liabilities Stockholders’ Equity
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Basic Accounting EquationBasic Accounting Equation
Assets = Liabilities + Stockholders’ Equity
Economic resources
Economic obligations
Net assets
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LiquidityLiquidity
The term liquidity is used to describe how quickly an asset can
be converted into cash or a liability paid.
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Financial FlexibilityFinancial Flexibility
Financial flexibility refers to the ability of a company to use its
financial resources to adapt to change.
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Operating CapabilityOperating Capability
Operating capability refers to
the ability of a company to
maintain a given physical level of
operations.
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Process for Disclosing Information on the Balance Sheet
Process for Disclosing Information on the Balance Sheet
Identification of what items meet the definition of the elements.
Measurement (valuation) of the elements.
Reporting (classification) of the elements.
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Elements of the Balance Sheet -- Assets
Elements of the Balance Sheet -- Assets
Assets are probable future economic benefits obtained or controlled by a
company as a result of past transactions or events.
Assets are probable future economic benefits obtained or controlled by a
company as a result of past transactions or events.
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The resource must be able to contribute directly or indirectly to the company’s future net cash inflows.
The company must be able to obtain the future benefit and control others’ access to it.
The transaction or event giving the company the right to or control over the benefit must have occurred.
Elements of the Balance Sheet -- Assets
Elements of the Balance Sheet -- Assets
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Elements of the Balance Sheet -- Assets
Elements of the Balance Sheet -- Assets
Assets may be natural or man-made, tangible or intangible, and
exchangeable or useful in the company’s activities.
Assets may be natural or man-made, tangible or intangible, and
exchangeable or useful in the company’s activities.
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Elements of the Balance Sheet --Liabilities
Elements of the Balance Sheet --Liabilities
Liabilities are probable future sacrifices of
economic benefits arising from present obligations...L
Liabilities are probable future sacrifices of
economic benefits arising from present obligations...L
Elements of the Balance Sheet -- Liabilities
Elements 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.
… of a company to transfer assets or provide services to other entities in the future as a result of
past transactions or events.
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Elements of the Balance Sheet --Stockholders’ Equity
Elements of the Balance Sheet --Stockholders’ Equity
Assets = Liabilities + Stockholders’ Equity
Equity is residual interest in the assets of a company that remain
after deducting liabilities.
Equity is residual interest in the assets of a company that remain
after deducting liabilities.
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Measurement of the Elements of the Balance Sheet
Measurement of the Elements of the Balance Sheet
Historical CostHistorical Cost
Current CostCurrent Cost
Current Market Current Market ValueValue
Net Realizable Net Realizable ValueValue
Present ValuePresent Value
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Measurement of the Elements of the Balance Sheet
Measurement of the Elements of the Balance Sheet
The historical cost of an asset is the exchange price in the transaction in which
the asset was acquired.
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
the same asset.
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
the 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 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
to be converted in the ordinary operations of the
company, less any expected conversion costs.
The net realizable value of an asset is the amount
of cash (or equivalent) into which the asset is expected
to 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 discounted expected cash
inflows less the discounted expected cash outflows
related to the asset.
The present value of an asset is the net amount of discounted expected cash
inflows less the discounted expected cash outflows
related to the asset.
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Limitations of the Balance SheetLimitations of the Balance Sheet
• Use of historical cost to value assets and liabilities does not help assess the likely amounts of future cash flows.
• “Human resources” such as high-quality management or highly motivated workers 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 assets and liabilities.
• Use of historical cost to value assets and liabilities does not help assess the likely amounts of future cash flows.
• “Human resources” such as high-quality management or highly motivated workers 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 assets and liabilities.
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Current AssetsCurrent Assets
Current assets are cash and other assets that are expected
to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.
Current assets are cash and other assets that are expected
to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.
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Operating CycleOperating Cycle
An operating cycle is the average time taken by a
company to spend cash for inventory,...
An operating cycle is the average time taken by a
company to spend cash for inventory,...
…process and sell the inventory, and collect the receivables,
converting them back into cash.
…process and sell the inventory, and collect the receivables,
converting them back into cash.
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Current AssetsCurrent Assets
Cash includes cash on hand and readily
available in checking and savings accounts.
Cash 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.
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.
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Current AssetsCurrent Assets
Temporary investments in marketable securities
include debt and equity securities that are
classified as “trading securities” and “available-
for-sale securities.”
Temporary investments in marketable securities
include debt and equity securities that are
classified as “trading securities” and “available-
for-sale securities.”
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Current AssetsCurrent Assets
Receivables include accounts receivable and notes receivable with short-term maturity dates.
They are listed at their estimated collectible amounts
(net realizable values).
Receivables include accounts receivable and notes receivable with short-term maturity dates.
They are listed at their estimated 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 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.Prepaid items include insurance, rent, office
supplies and taxes that will not be converted into cash
but will be consumed.
Prepaid items include insurance, rent, office
supplies and taxes that will not be converted into cash
but will be consumed.
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Current LiabilitiesCurrent Liabilities
Current liabilities are those obligations whose liquidation is expected to require the use of
existing current assets, or the creation of other current liabilities.
Current liabilities are those obligations whose liquidation is expected to require the use of
existing current assets, or the creation of other current liabilities.
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Long-Term InvestmentsLong-Term Investments
Investment 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.
Investment 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.
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The company expects the 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 expansion.
Long-Term InvestmentsLong-Term Investments
A company makes investments for a variety of reasons.
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Property, Plant, and EquipmentProperty, Plant, and Equipment
Property, plant, and equipment includes the tangible assets used in the firm’s operations.
Also called fixed Also called fixed assetsassets
Also called fixed Also called fixed assetsassets
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Intangible AssetsIntangible Assets
Intangible assets are those noncurrent
economic resources that are used in the operations of the
business but have no physical existence.
Intangible assets are those noncurrent
economic resources that are used in the operations of the
business but have no physical existence. PatentsCopyrightsFranchises
Trademarks® a registered trademark
Computer software costsGoodwill
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Long-Term LiabilitiesLong-Term Liabilities
Long-term liabilities are those obligations that are not expected
to require the use of current assets or not expected to create
current liabilities within one year or the normal operating cycle (if
longer than a year).
Long-term liabilities are those obligations that are not expected
to require the use of current assets or not expected to create
current liabilities within one year or the normal operating cycle (if
longer than a year).
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Other LiabilitiesOther Liabilities
Deferred tax liabilities and obligations of a segment of the company that is being discontinued are examples
of items that might be included in this section.
Deferred tax liabilities and obligations of a segment of the company that is being discontinued are examples
of items that might be included in this section.
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Conceptual GuidelinesConceptual Guidelines
Reporting 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.
Reporting assets and liabilities according to measurement method used to value the items.
FASB suggested guidelines for developing homogeneous classes of assets and liabilities.
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Stockholders’ EquityStockholders’ Equity
Stockholders’ equity is the residual interest of the stockholders in
the assets of the corporation.
Stockholders’ equity is the residual interest of the stockholders in
the assets of the corporation.
A partnership 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.
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Contributed capital Retained earnings Accumulated other
comprehensive income
Stockholders’ EquityStockholders’ Equity
Components of Stockholders’ EquityComponents of Stockholders’ Equity
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Stockholders’ EquityStockholders’ Equity
Legal capital is the minimum amount of
stockholders’ equity that the corporation may not
distribute as dividends.
Legal capital is the minimum amount of
stockholders’ equity that the corporation may not
distribute as dividends.P
Preferred stock receives preference
in declared dividends.
Preferred stock receives preference
in declared dividends.
Common stock carries the right to vote at the annual stockholders’ meeting and to share in residual profits.
Common stock carries the right to vote at the annual stockholders’ meeting and to share in residual profits.
Contributed CapitalContributed CapitalContributed CapitalContributed Capital
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Stockholders’ EquityStockholders’ Equity
A corporation sells 100 shares of its $5 par common stock for $30 per share.
A corporation sells 100 shares of its $5 par common stock for $30 per share.
Cash 3,000Common Stock, $5 par 500Additional Paid-in Capital on Common Stock 2,500
Contributed CapitalContributed CapitalContributed CapitalContributed Capital
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Stockholders’ EquityStockholders’ Equity
A corporation sells 20 shares of its $100 par preferred stock for $110 per share.
A corporation sells 20 shares of its $100 par preferred stock for $110 per share.
Cash 2,200Preferred Stock, $100 par 2,000Additional Paid-in Capital on Preferred Stock 200
Contributed CapitalContributed CapitalContributed CapitalContributed Capital
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Stockholders’ EquityStockholders’ Equity
A corporation sells 100 shares of its no-par common stock at $50 per share.
A corporation sells 100 shares of its no-par common stock at $50 per share.
Cash 5,000Common Stock--No-Par Value 5,000
Contributed CapitalContributed CapitalContributed CapitalContributed Capital
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Stockholders’ EquityStockholders’ Equity
Retained earnings is the total amount of corporate net income that has not been
distributed to stockholders as dividends.
Retained earnings is the total amount of corporate net income that has not been
distributed to stockholders as dividends.
Uses of net incomeUses of net incomeTo use in daily operations
To maintain its productive facilities
For growth
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Stockholders’ EquityStockholders’ Equity
Retained earnings is the total amount of corporate net income that has not been
distributed to stockholders as dividends.
Retained earnings is the total amount of corporate net income that has not been
distributed to stockholders as dividends.
Uses of net incomeUses of net incomeTo use in daily operations
To maintain its productive facilities
For growth
Click to review the balance sheet.
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Unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-sale securities.
Transaction adjustments from converting the financial statements of a company’s foreign operations into U. S. dollars.
Certain gains and losses on “derivative” financial instruments. Certain pension liability adjustments.
Stockholders’ EquityStockholders’ Equity
Comprehensive income includes both net income and other comprehensive income. Accumulated other comprehensive income might include four items:
Comprehensive income includes both net income and other comprehensive income. Accumulated other comprehensive income might include four items:
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Stockholders’ EquityStockholders’ Equity
A company is required to report its total
comprehensive income for the accounting period.
A company is required to report its total
comprehensive income for the accounting period.
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Statement of Changes in Stockholders’ Equity
Statement of Changes in Stockholders’ Equity
A corporation must disclose the changes in its stockholders’
equity account when issuing financial statements.
A corporation 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.
This statement should show investments by and
distributions to owners during the period, among other items.
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Balance, Jan. 1, 2000 $65,000 $143,400 $ 64,900 $10,000$283,300
Unrealized increase in value of available- for-sale securities 2,000
2,000 Net income 62,500
62,500 Cash dividends paid (11,200)
(11,200)Common stock issued 6,500 30,500
37,000 Balance, Dec. 31, 2000 $71,500 $173,900 $116,200 $12,000
$373,600
Statement of Changes in Stockholders’ Equity
Statement of Changes in Stockholders’ Equity
SCHEDULE ACARON MANUFACTURING COMPANY
Accumulated Common Additional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income Total
Statement of Changes in Stockholders’ EquityFor Year Ended December 31, 2000
Exhibit 3-8Exhibit 3-8Exhibit 3-8Exhibit 3-8
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Summary of Accounting PoliciesSummary of Accounting Policies
A 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. 22 requires that a company include a description of all significant accounting policies as
an integral part of its financial statements.
APB Opinion No. 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--
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Derivative Financial InstrumentsDerivative Financial Instruments
FASB Statement No. 133 requires a company to
recognize all derivative financial instruments as either
assets or liabilities on the balance sheet.
FASB 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 These instruments should be measured at fair value.measured at fair value.
These instruments should be These instruments should be measured at fair value.measured at fair value.
Fair value is the Fair value is the amount at which amount at which the instrument the instrument
could be could be purchased or sold purchased or sold
in a current in a current transaction transaction
between willing between willing parties.parties.
Fair value is the Fair value is the amount at which amount at which the instrument the instrument
could be could be purchased or sold purchased or sold
in a current in a current transaction transaction
between willing between willing parties.parties.
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The type of derivative instruments it holds.Its objectives in holding the instruments.Its strategies for achieving these
objectives.
The type of derivative instruments it holds.Its objectives in holding the instruments.Its strategies for achieving these
objectives.
Derivative Financial InstrumentsDerivative Financial Instruments
FASB Statement No. 133 also requires the following information:
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Contingent Liabilities and AssetsContingent Liabilities and Assets
Loss
Probable (?)
Reasonably estimated (?)
No
No
or
Disclosure
and
Yes
YesReport amount in
financial statements
Reasonably possibleDisclose in notes to the financial
statements
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Subsequent EventsSubsequent Events
A subsequent event is one that occurs between the balance sheet date and the date
of issuance of the annual report.
A subsequent event is one that occurs between the balance sheet date and the date
of issuance of the annual report.
End of Accounting Period
Annual Report Publication Date
Subsequent Events
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SEC DisclosuresSEC Disclosures
The Securities and Exchange Commission has the legal authority to prescribe accounting principles
and reporting practices for all regulated companies.
The Securities and Exchange Commission has the legal authority to prescribe accounting principles
and reporting practices for all regulated companies.
A regulated company must file a Form 10-K annual report with the SEC within 90 days of its fiscal
year-end. This report must be filed electronically according to the EDGAR requirements.
A regulated company must file a Form 10-K annual report with the SEC within 90 days of its fiscal
year-end. This report must be filed electronically according to the EDGAR requirements.
ContinuedContinuedContinuedContinued
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SEC DisclosuresSEC Disclosures
The SEC requires comparative balance sheets for two years and comparative income statements and
statements of cash flows for three years.
The SEC requires comparative balance sheets for two years and comparative income statements and
statements of cash flows for three years.
The SEC requires specific disclosures of important accounting information for a five-year period. These include net sales or operating revenues, income (loss) from continuing operations, and
related earnings per share, total assets, long-term obligations and redeemable stock, and cash
dividends declared per share.
The SEC requires specific disclosures of important accounting information for a five-year period. These include net sales or operating revenues, income (loss) from continuing operations, and
related earnings per share, total assets, long-term obligations and redeemable stock, and cash
dividends declared per share.
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Balance Sheet FormatsBalance Sheet Formats
Most companies use the report form or the account form format in presenting
their balance sheets.
Most companies use the report form or the account form format in presenting
their balance sheets.
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Balance Sheet FormatsBalance Sheet Formats
Report FormReport FormReport FormReport Form
Assetsxxxx $xxxxxxx xxxTotal assets $xxx
Liabilities and Stockholders’ Equityxxxx $xxxxxxx xxxTotal liabilities and stockholders eq. $xxx
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Liabilities and Stockholders’ Equityxxxx $xxxxxxx xxxTotal liab. & stock. eq. $xxx
Balance Sheet FormatsBalance Sheet Formats
Account FormAccount FormAccount FormAccount Form
Assetsxxxx $xxxxxxx xxxTotal assets $xxx
In the seldom-used financial position format, current
assets and current liabilities are listed first to emphasize
working capital.
In the seldom-used financial position format, current
assets and current liabilities are listed first to emphasize
working capital.
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Chapter3
