3 The Balance Sheet and
Statement of Changes in
Stockholders’ Equity
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
Balance Sheet 12/31/X0
Cash $ 80,000
Other 4,550,000
Total $4,630,000
Liabilities $2,970,000
Stock 900,000
R/E 760,000
Total $4,630,000
Statement of Cash Flows
Cash From Op $ 973,000
Cash From Inv (1,188,000)
Cash From Fin 245,000
Net Increase $ 30,000
Beg,Cash 80,000
End,Cash $ 110,000
Statement of
Retained Earnings
R/E 12/31/X0 $ 760,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/X1 $1,224,600
Revenues $12,443,000
Expenses 11,578,400
Net Income $ 864,600
Income Statement
Cash $ 110,000
Other 4,975,000
Total $5,085,000
Liabilities $2,860,400
Stock 1,000,000
R/E 1,224,600
Total $5,085,000
Balance Sheet 12/31/X1
1,Interrelationship of financial
statements
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
2,Elements of the Balance Sheet
? An item of information to be recognized as an
element (i.e,formally recorded and reported in
the body of the financial statements),an item
must
? (a) meet the definition of an element as specified in
FASB Statement of Concepts No,6
? (b) be measurable
? (c) be relevant,and
? (d) be reliable,
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
The inclusion of
“probable”
acknowledges
that accounting
is not an exact
science.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
The primary
purpose of the
balance sheet is
to help forecast
the future.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
Substance
over form.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets may be natural or man-made,
tangible or intangible,and exchangeable
or useful only in the company’s
activities.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Liabilities
Liability
Probable future sacrifice of
economical benefit arising
from a present obligation
of a particular entity to
transfer assets or provide
services to other entities in
the future as a result of past
transactions or events.
“Obligation”
includes legal,
moral,social,
and implied
commitments.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Liabilities
Liability
Probable future sacrifice
of economical benefit
arising from a present
obligation of a particular
entity to transfer assets or
provide services to other
entities in the future as a
result of past transactions
or events.
An obligation
to provide
services is a
liability.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Stockholders’ Equity
Equity is residual interest
in the assets of a company
that remain after
deducting liabilities.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
3,Measurement of the elements of the
balance sheet
The FASB has identified five alternative valuation
methods,
? Historical cost
? Current cost (or current replacement cost)
? Current market value (or current exit value)
? Net realizable value (or expected exit value)
? Present value
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
The historical cost of an
asset is the exchange price
in the transaction in which
the asset was acquired.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
The present value of an
asset is the net amount of
future cash inflows into
which the asset is expected to
be converted less the present
value of future cash outflows
necessary to obtain those
inflows.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
4,Reporting classifications on the
balance sheet
How to Classify Items on the
Balance Sheet?
?Current (one year
or less)
?Noncurrent (more
than 1 year or 1
operating cycle,
whichever is longer)
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Receivables
Cash
Inventories
PurchasesCollections
Sale
s
Operating Cycle
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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
? Cash and cash equivalent
? Temporary investments in marketable
securities
? Accounts and notes receivable
? Inventories
? Prepaid items
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
Current Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Temporary investments in
marketable securities include
debt and equity securities that are
classified as,trading securities”
and,available-for-sale
securities.”
Current Assets
Receivables include accounts
receivable and notes receivable
with short-term maturity dates,
They are listed at their estimated
collectible amounts (net realizable
values).
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
Current Assets
Prepaid items include insurance,
rent,office supplies and taxes that
will not be converted into cash but
will be consumed.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Cash and receivables— net realizable value
? Investments in debt and equity securities— in most
cases,current market value
? Inventories— cost (FIFO,LIFO,etc.) or lower-of-cost-or-
market
? Prepaid expenses— historical cost
Measurement of Current Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
? Accounts and notes payable
? Accrued expenses
? Current portion of long-term obligations
? Unearned revenues
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Long-term
Investments
? Property,plant,
and equipment
? Intangible
Assets
? Deferred
income taxes
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Noncurrent Assets
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.
Long-Term Investments
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Property,Plant,and Equipment
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Property,plant,and
equipment are properties
of a tangible and
relatively permanent
nature that are used in the
normal business
operations.
Intangible Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Intangible assets are
long-term rights and
privileges of a
nonphysical nature
acquired for use in
business operations.
Other Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
The Other Assets section
occasionally is used to report
miscellaneous assets that may not
be readily classified within one of
the previous sections.
Noncurrent Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Long-term
liabilities
? Deferred income
tax liability
? Pension
obligations
Long-Term Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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 (whichever
is longer).
Other Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Deferred tax liabilities and
obligations of a component of the
company that is being discontinued
are examples of items that might
be included as other liabilities.
Conceptual Guidelines
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
FASB suggested guidelines for developing
homogeneous classes of assets and liabilities.
? 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.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Components of Stockholders’ Equity
? Contributed capital
? Retained earnings
? Accumulated other
comprehensive income
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Contributed Capital:
? Capital stock
? Additional paid-in capital
The two types of
capital stock are
preferred and
common.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Additional paid-in
capital is the excess
invested above par
or stated value of the
capital stock.
Contributed Capital:
? Capital stock
? Additional paid-in capital
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Retained earnings is the amount of
undistributed earnings of past
periods.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Comprehensive income includes both net income and other
comprehensive income,Accumulated other comprehensive
income might include four items:
1,Unrealized increases (gains) or decreases (losses) in the
market value of investments in available-for-sale securities.
2,Transaction adjustments from converting the financial
statements of a company’s foreign operations into U,S,dollars.
3,Certain gains and losses on,derivative” financial instruments.
4,Certain pension liability adjustments.
5,Limitations of the balance sheet
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Use of historical cost to value assets and liabilities
does not help assess the likely amounts of future
cash flows.
?,Human resources” or,intellectual capital,” such as
high-quality management or highly creative
employees 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 its assets and liabilities.
6,Statement of changes in stockholders'
equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
This statement should show
investments by and distributions
to owners during the period,
among other items.
Balance,Jan,1,2004 $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,31,2004 $71,500 $173,900 $116,200 $12,000 $373,600
Statement of Changes in Stockholders’
Equity
SCHEDULE A
CARON MANUFACTURING COMPANY
Accumulated
Common Additional Other
Stock Paid-in Retained Comprehensive
$5 par Capital Earnings Income Total
Statement of Changes in Stockholders’ Equity
For Year Ended December 31,2004
Exhibit 3-8
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Summary of accounting
policies
? Fair value and risk of
financial instruments
? Contingent liabilities and
assets
? Subsequent events
? Related party transactions
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
7,Other disclosure issues
Summary 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.
In particular,when these principles and methods involve--
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Derivative Financial Instruments
FASB Statement No,107 requires a company to
disclose the fair value of all its financial
instruments,whether recognized or not on its
balance sheet,The Statement also requires a
company to disclose all significant concentrations
of credit risk due to its financial instruments,A
company typically makes these disclosures in the
notes to its financial statements.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Derivative Financial Instruments
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
measured at fair value.
Fair value is the
amount at which
the instrument
could be
purchased or sold
in a current
transaction
between willing
parties.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? The type of derivative instruments it holds.
? Its objectives in holding the instruments.
? Its strategies for achieving these objectives.
Derivative Financial Instruments
FASB Statement No,133 also requires the following
information:
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Contingent Liabilities and Assets
Loss
Probable (?)
Reasonably
estimated (?)
No
No
or
Disclosure
and
Yes
Yes
Report amount in
financial
statements
Reasonably possible
Disclose in notes
to the financial
statements
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Financial Statement
Period
Subsequent
Period
Balance
Sheet Date
Date Statements
Issued
Events in this period
may affect the reporting
of amounts in the
subsequent periods
Subsequent Events
A subsequent event is
one that occurs between
the balance sheet date
and the date of issuance
of the annual report.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Subsequent Events
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
?Types of Events
?Those that materially affect one or more financial
? statements.
?Those that create a need for a footnote.
A subsequent event is one that occurs between the
balance sheet date and the date of issuance of the
annual report.
SEC Integrated Disclosures
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
The SEC requires comparative balance sheets for at least
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.
SEC Integrated Disclosures
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
SEC Integrated Disclosures
Management must include a
discussion and analysis of the
company’s financial condition,
changes in financial condition,
and results of operations.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
8,Reporting Techniques
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Statement Format
? Combined Amounts
? Rounding
? Notes,Supporting
Schedules,and
Parenthetical
Notations
Balance Sheet Formats
Most companies use the
report form or the account
form format in presenting
their balance sheets.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Balance Sheet Formats
Report Form
Assets
xxxx $xxx
xxxx xxx
Total assets $xxx
Liabilities and Stockholders’ Equity
xxxx $xxx
xxxx xxx
Total liabilities and stockholders eq,$xxx
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liabilities and
Stockholders’ Equity
xxxx $xxx
xxxx xxx
Total liab,& stock,eq,$xxx
Balance Sheet Formats
Account Form
Assets
xxxx $xxx
xxxx xxx
Total assets $xxx
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
9,Balance Sheet analysis
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Evaluating Liquidity
? Current Ratio,current assets divided by current
liabilities.
? Quick Ratio,quick assets divided by current
liabilities (Acid-Test Ratio).
Cash $ 30
Net Accounts Receivable 70
Inventory 100
Current Assets $200
Current Liabilities $100
$200
$100 = 2:1
Current Ratio
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liquidity Ratios Example
$100
$100 = 1:1
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liquidity Ratios Example
Cash $ 30
Net Accounts Receivable 70
Inventory 100
Current Assets $200
Current Liabilities $100
Quick Ratio
McDonald’s 0.5
Microsoft 2.8
Disney 1.2
Coca-Cola 0.7
Yahoo! 5.8
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Current Ratio
Debt Ratio,total liabilities divided by total
assets.
Total Assets $400
Total Liabilities 300
Total Liabilities
Total Assets
$300
$400 = 75%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Overall leverage
McDonald’s 52.2%
Microsoft 25.6%
Disney 53.1%
Coca-Cola 56.1%
Yahoo! 13.8%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Debt Ratio
The proportion of total assets in each asset
category.
Property,Plant,and Equipment $ 50
Total Assets 400
Asset Group
Total Assets
$50
$400 = 12.5%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Assets mix
“Asset Turnover” is a financial ratio
measuring how efficiently a company uses its
assets to generate sales.
Sales $200
Total Assets 400
$200
$400
= 0.50
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Efficiency
The End
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Statement of Changes in
Stockholders’ Equity
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
Balance Sheet 12/31/X0
Cash $ 80,000
Other 4,550,000
Total $4,630,000
Liabilities $2,970,000
Stock 900,000
R/E 760,000
Total $4,630,000
Statement of Cash Flows
Cash From Op $ 973,000
Cash From Inv (1,188,000)
Cash From Fin 245,000
Net Increase $ 30,000
Beg,Cash 80,000
End,Cash $ 110,000
Statement of
Retained Earnings
R/E 12/31/X0 $ 760,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/X1 $1,224,600
Revenues $12,443,000
Expenses 11,578,400
Net Income $ 864,600
Income Statement
Cash $ 110,000
Other 4,975,000
Total $5,085,000
Liabilities $2,860,400
Stock 1,000,000
R/E 1,224,600
Total $5,085,000
Balance Sheet 12/31/X1
1,Interrelationship of financial
statements
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
2,Elements of the Balance Sheet
? An item of information to be recognized as an
element (i.e,formally recorded and reported in
the body of the financial statements),an item
must
? (a) meet the definition of an element as specified in
FASB Statement of Concepts No,6
? (b) be measurable
? (c) be relevant,and
? (d) be reliable,
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
The inclusion of
“probable”
acknowledges
that accounting
is not an exact
science.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
The primary
purpose of the
balance sheet is
to help forecast
the future.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets
Probable future
economic benefit
obtained or controlled
by a particular entity as
a result of past
transactions or events
Substance
over form.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet — Assets
Assets may be natural or man-made,
tangible or intangible,and exchangeable
or useful only in the company’s
activities.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Liabilities
Liability
Probable future sacrifice of
economical benefit arising
from a present obligation
of a particular entity to
transfer assets or provide
services to other entities in
the future as a result of past
transactions or events.
“Obligation”
includes legal,
moral,social,
and implied
commitments.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Liabilities
Liability
Probable future sacrifice
of economical benefit
arising from a present
obligation of a particular
entity to transfer assets or
provide services to other
entities in the future as a
result of past transactions
or events.
An obligation
to provide
services is a
liability.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Elements of the Balance Sheet —
Stockholders’ Equity
Equity is residual interest
in the assets of a company
that remain after
deducting liabilities.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
3,Measurement of the elements of the
balance sheet
The FASB has identified five alternative valuation
methods,
? Historical cost
? Current cost (or current replacement cost)
? Current market value (or current exit value)
? Net realizable value (or expected exit value)
? Present value
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
The historical cost of an
asset is the exchange price
in the transaction in which
the asset was acquired.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
valuation methods
The present value of an
asset is the net amount of
future cash inflows into
which the asset is expected to
be converted less the present
value of future cash outflows
necessary to obtain those
inflows.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
4,Reporting classifications on the
balance sheet
How to Classify Items on the
Balance Sheet?
?Current (one year
or less)
?Noncurrent (more
than 1 year or 1
operating cycle,
whichever is longer)
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Receivables
Cash
Inventories
PurchasesCollections
Sale
s
Operating Cycle
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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
? Cash and cash equivalent
? Temporary investments in marketable
securities
? Accounts and notes receivable
? Inventories
? Prepaid items
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
Current Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Temporary investments in
marketable securities include
debt and equity securities that are
classified as,trading securities”
and,available-for-sale
securities.”
Current Assets
Receivables include accounts
receivable and notes receivable
with short-term maturity dates,
They are listed at their estimated
collectible amounts (net realizable
values).
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
Current Assets
Prepaid items include insurance,
rent,office supplies and taxes that
will not be converted into cash but
will be consumed.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Cash and receivables— net realizable value
? Investments in debt and equity securities— in most
cases,current market value
? Inventories— cost (FIFO,LIFO,etc.) or lower-of-cost-or-
market
? Prepaid expenses— historical cost
Measurement of Current Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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.
? Accounts and notes payable
? Accrued expenses
? Current portion of long-term obligations
? Unearned revenues
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Long-term
Investments
? Property,plant,
and equipment
? Intangible
Assets
? Deferred
income taxes
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Noncurrent Assets
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.
Long-Term Investments
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Property,Plant,and Equipment
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Property,plant,and
equipment are properties
of a tangible and
relatively permanent
nature that are used in the
normal business
operations.
Intangible Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Intangible assets are
long-term rights and
privileges of a
nonphysical nature
acquired for use in
business operations.
Other Assets
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
The Other Assets section
occasionally is used to report
miscellaneous assets that may not
be readily classified within one of
the previous sections.
Noncurrent Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Long-term
liabilities
? Deferred income
tax liability
? Pension
obligations
Long-Term Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
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 (whichever
is longer).
Other Liabilities
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Deferred tax liabilities and
obligations of a component of the
company that is being discontinued
are examples of items that might
be included as other liabilities.
Conceptual Guidelines
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
FASB suggested guidelines for developing
homogeneous classes of assets and liabilities.
? 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.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Components of Stockholders’ Equity
? Contributed capital
? Retained earnings
? Accumulated other
comprehensive income
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Contributed Capital:
? Capital stock
? Additional paid-in capital
The two types of
capital stock are
preferred and
common.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Additional paid-in
capital is the excess
invested above par
or stated value of the
capital stock.
Contributed Capital:
? Capital stock
? Additional paid-in capital
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Retained earnings is the amount of
undistributed earnings of past
periods.
Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Comprehensive income includes both net income and other
comprehensive income,Accumulated other comprehensive
income might include four items:
1,Unrealized increases (gains) or decreases (losses) in the
market value of investments in available-for-sale securities.
2,Transaction adjustments from converting the financial
statements of a company’s foreign operations into U,S,dollars.
3,Certain gains and losses on,derivative” financial instruments.
4,Certain pension liability adjustments.
5,Limitations of the balance sheet
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Use of historical cost to value assets and liabilities
does not help assess the likely amounts of future
cash flows.
?,Human resources” or,intellectual capital,” such as
high-quality management or highly creative
employees 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 its assets and liabilities.
6,Statement of changes in stockholders'
equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
This statement should show
investments by and distributions
to owners during the period,
among other items.
Balance,Jan,1,2004 $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,31,2004 $71,500 $173,900 $116,200 $12,000 $373,600
Statement of Changes in Stockholders’
Equity
SCHEDULE A
CARON MANUFACTURING COMPANY
Accumulated
Common Additional Other
Stock Paid-in Retained Comprehensive
$5 par Capital Earnings Income Total
Statement of Changes in Stockholders’ Equity
For Year Ended December 31,2004
Exhibit 3-8
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Summary of accounting
policies
? Fair value and risk of
financial instruments
? Contingent liabilities and
assets
? Subsequent events
? Related party transactions
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
7,Other disclosure issues
Summary 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.
In particular,when these principles and methods involve--
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Derivative Financial Instruments
FASB Statement No,107 requires a company to
disclose the fair value of all its financial
instruments,whether recognized or not on its
balance sheet,The Statement also requires a
company to disclose all significant concentrations
of credit risk due to its financial instruments,A
company typically makes these disclosures in the
notes to its financial statements.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Derivative Financial Instruments
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
measured at fair value.
Fair value is the
amount at which
the instrument
could be
purchased or sold
in a current
transaction
between willing
parties.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? The type of derivative instruments it holds.
? Its objectives in holding the instruments.
? Its strategies for achieving these objectives.
Derivative Financial Instruments
FASB Statement No,133 also requires the following
information:
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Contingent Liabilities and Assets
Loss
Probable (?)
Reasonably
estimated (?)
No
No
or
Disclosure
and
Yes
Yes
Report amount in
financial
statements
Reasonably possible
Disclose in notes
to the financial
statements
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Financial Statement
Period
Subsequent
Period
Balance
Sheet Date
Date Statements
Issued
Events in this period
may affect the reporting
of amounts in the
subsequent periods
Subsequent Events
A subsequent event is
one that occurs between
the balance sheet date
and the date of issuance
of the annual report.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Subsequent Events
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
?Types of Events
?Those that materially affect one or more financial
? statements.
?Those that create a need for a footnote.
A subsequent event is one that occurs between the
balance sheet date and the date of issuance of the
annual report.
SEC Integrated Disclosures
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.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
The SEC requires comparative balance sheets for at least
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.
SEC Integrated Disclosures
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
SEC Integrated Disclosures
Management must include a
discussion and analysis of the
company’s financial condition,
changes in financial condition,
and results of operations.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
8,Reporting Techniques
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
? Statement Format
? Combined Amounts
? Rounding
? Notes,Supporting
Schedules,and
Parenthetical
Notations
Balance Sheet Formats
Most companies use the
report form or the account
form format in presenting
their balance sheets.
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Balance Sheet Formats
Report Form
Assets
xxxx $xxx
xxxx xxx
Total assets $xxx
Liabilities and Stockholders’ Equity
xxxx $xxx
xxxx xxx
Total liabilities and stockholders eq,$xxx
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liabilities and
Stockholders’ Equity
xxxx $xxx
xxxx xxx
Total liab,& stock,eq,$xxx
Balance Sheet Formats
Account Form
Assets
xxxx $xxx
xxxx xxx
Total assets $xxx
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
9,Balance Sheet analysis
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Evaluating Liquidity
? Current Ratio,current assets divided by current
liabilities.
? Quick Ratio,quick assets divided by current
liabilities (Acid-Test Ratio).
Cash $ 30
Net Accounts Receivable 70
Inventory 100
Current Assets $200
Current Liabilities $100
$200
$100 = 2:1
Current Ratio
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liquidity Ratios Example
$100
$100 = 1:1
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Liquidity Ratios Example
Cash $ 30
Net Accounts Receivable 70
Inventory 100
Current Assets $200
Current Liabilities $100
Quick Ratio
McDonald’s 0.5
Microsoft 2.8
Disney 1.2
Coca-Cola 0.7
Yahoo! 5.8
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Current Ratio
Debt Ratio,total liabilities divided by total
assets.
Total Assets $400
Total Liabilities 300
Total Liabilities
Total Assets
$300
$400 = 75%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Overall leverage
McDonald’s 52.2%
Microsoft 25.6%
Disney 53.1%
Coca-Cola 56.1%
Yahoo! 13.8%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Debt Ratio
The proportion of total assets in each asset
category.
Property,Plant,and Equipment $ 50
Total Assets 400
Asset Group
Total Assets
$50
$400 = 12.5%
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Assets mix
“Asset Turnover” is a financial ratio
measuring how efficiently a company uses its
assets to generate sales.
Sales $200
Total Assets 400
$200
$400
= 0.50
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
Efficiency
The End
Intermediate Accounting 3 The Balance Sheet and Statement of Changes in Stockholders’ Equity
