1. Financial Accounting I William F. Bentz Sessions 9 and 10

2. Statement of Financial Position

thestatement of financial position ,a primary financial statement,

reporting standards and objectives forcontingencies ,and

the effect ofsubsequent eventson financial reporting.

3. Statements of Financial Position (SFP)

Amount and compositionof assets, liabilities & equities reported

• Classification of assets and liabilities as current or noncurrent

• Information about working capital

• Information about asset liquidity

• Information about the use of leverage

• Equity interests of stockholder groups

4. Current versus Noncurrent

Current assetsare those assets that will be converted into cash, used to reduce current liabilities, or consumed (as expenses) in the operation of the business over one year or the operating cycle, whichever islonger .

5. Current versus Noncurrent

Current liabilitiesare obligations that will come due or be satisfied within one year or the operating cycle, whichever islonger .

All other liabilities arelong-term liabilities .

6. Working capital (gross)

Working capital represents the liquid assets available to operate a business.Cash, accounts receivable, and marketable securities are short-term sources of purchasing power.Inventories are available for sale or use in the business.Prepaid expenses represents goods and services that have been paid for in advance.

7. Working capital

Current liabilitiesare those obligations that must be repaid with current assets or cash flows from operations.Thus, current liabilities represent a drain on the liquid assets available to operate a business.

8. Net working capital

Net working capitalis equal to total current assets minus total current liabilities.Net working capital is the preferred measure of the liquid resources available to operate a business, because it recognizes the obligations--current liabilities--that will require resources within the next operating cycle.

9. Net working capital

Net working capitalis thus an important measure of the solvency and financial flexibility of an enterprise.

10. Stockholders equity

Stockholders equityis the total residual interest of equity investors in the assets of the entity

• Contributed capital--Investment from the owners (par value + paid-in capital)

• Earned capital--Undistributed cumulative earnings of the entity (retained earnings)

11. Stockholders equity

Contributed capital

• Par value of common and any preferred stocks

• Paid-in capital in excess of par values

Earned capital --The cumulative undistributed earnings of the entity (retained earnings = cumulative income - cumulative dividends)

12. Stockholders equity

Treasury stockconsists of the historical cost of common or preferred shares that have been repurchased by the corporation directly from its investors or in the open market.

Reported as adeductionfrom stockholders equity because it represents a reduction in the investment in the firm

13. Contingencies

Acontingency is an issue that is unresolved as of the end of a reporting period, the resolution of which is subject to significant risk and uncertainty.

14. A contingency

Depends on an external party, event, or conditions for resolution

Is not controllable by the company, i.e. is contingent on conditions of nature or the actions of others

Results from a past transaction, condition, or event

15. Examples of contingencies

Outcome of a lawsuit regarding patent or copyright dispute

Outcome of a product liability suit

Provision for current income taxes

Outcome of an income tax negotiation or court case concerning prior years

16. More examples

Provision for uncollectible accounts and notes receivable

Provision for product warranty costs

Estimated useful lives of assets

Estimated value of an acquired company

17. Recognition - contingent gains

Contingentgainsarenot recognizedin the financial statements

Contingentgain amountsarerarelymentioned in footnote or parenthetical disclosures

There may be somementionby management of an expected contingent gain in the section called MD&A--Management Discussion & Analysis.

18. Recognition - contingent gains

Disclosure of prospective contingent gains is apt to be in the form of press releases and presentations to financial analysts.

Consequence: financial reports tend to understate the contingent gains that may be available to an entity.However, most such one-time events are ignored by investors anyway.

19. Recognition - contingent losses

There arethree issuesto consider when deciding how to report loss contingencies:

1. Issue one is theprobabilityof loss

2. Issue two is theabilityof thecompany to estimate the loss withacceptable accuracy

20. Recognition - contingent losses

3. Issue three is thematerialityofthe expected contingent loss.

21. Losses thatmustbe accrued in the accounts

1. A loss is more probable than not (Pr > 0.5).

2. The probable loss is material in amount.

3. The magnitude of the loss is reasonably estimable.

Note: In the case of estimates and forecasts, some loss (cost) will occur, so the only remaining issues are materiality and estimableness. 22. Losses that arenotaccrued, butarefootnoted

Losses that areless probable than not(Pr < 0.5)ORare not reasonably estimable

Losses that aremore probable than not(Pr > 0.5),BUTare not reasonably estimable

23. Lossesnotdisclosed in the financial statements

Losses that are onlyremotelypossible.

Losses that are not specific in nature or are part of the normal risk of being in business

24. Six possible combinations of estimability & probability. 25. Contingent losses

Current reporting practice is consistent with the full and prompt disclosure of information that is material to investor decisions.By reporting bad news as soon as it is known, companies hope to earn the confidence of investors and financial analysts.Conservatismargues for the early recognition of losses, while recognizing gains only when realized.

26. Subsequent events

Sub-se-quent(sub si kwant), adj.

1.Occurring or coming later or after: subsequent events.

The Random House Dictionary of the English Language (2 nded.)

27. Subsequent events

These are events that occur after the end of a fiscal year, but before the auditedfinancial statements for that year have been issued.

Type 1subsequent events have their origins in the fiscal year just ended and provide confirming or disconfirming information.

28. Subsequent Events-2

Type onesubsequent events may result in the revision of estimates or other adjustments in light of the information that becomes available after year-end, but before the related statements are issued.When appropriate, the accounts involved are adjusted to reflect the new information.

29. Subsequent Events-3

Type twosubsequent events do not relate to the year just ended, but they constitute important information that should be disclosed to investors.However, since the information is not based in a prior year, no adjustments are made to the financial statements.Instead, type 2 events are disclosed in the footnotes to the prior year statements.

30. Statements of Financial Position

Akabalance sheets