Notesale: Turn your study into money

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Balance Sheet: Investments and
Financing
15
...


2

Financial Statements – the
Annual Report
„
„
„
„
„

„
„

Management Discussion
Auditor’s Report
Consolidated Balance Sheet
Consolidated Net Income
Consolidated Statement of Stockholders
Equity
Consolidated Cash Flow Statements
Notes to Accounts
3

Balance Sheet: Assets
„

Assets
„

„

Probable future economic benefits
obtained or controlled by a particular entity
as a result of past transactions or events
...
g
...

merchandising (e
...
, K mart) vs
...
g
...
service (e
...
, H & R
Block) business
...

longer
„
„

„
„

„

Cash and cash equivalents
Short-term investments -- at market value -- We will
discuss this in detail later
...
Rec
...

Debt and equity securities such as stocks,
bonds, and long-term notes receivable
...
g
...


7

Balance Sheet: Assets
„

Property, Plant, and Equipment
„

Assets of a durable nature that are to be used
in the production or sale of goods, or
rendering of services, rather than being held
for sale
...


Carried at Cost (-) Accumulated Depreciation
Land on which the company conducts its
operations is carried on the balance sheet at
the original cost – no depreciation
...


8

Balance Sheet: Assets
„

Intangible Assets
„

Non-current, non-physical assets of a business, the
possession of which provides uncertain future benefits to
the owner
„

„

Is accounts receivable an intangible asset?
„

„

„
„

E
...
, goodwill, trademarks, patents, copyrights, etc
...

Cost = Whatever was paid to acquire them
...


Current Liabilities
„

Obligations that are expected to be paid (or
services expected to be performed) with the use of
assets that are listed in the current section of the
balance sheet
...


Current portion of long-term debts are
classified as current liabilities
...

„

What is the intuition here?
11

Balance Sheet: Liabilities
„

Long-Term Liabilities
„

„

„

Obligations usually expected to require
payment over a period of time beyond one
year
...
g
...

The maturity date, the rate of interest, and
any security pledged to support the
borrowing agreement should be clearly
shown
...

A measure of the capital contributed to the
company by its owners
...


Different classes of capital: Common
stock and Preferred stock
Retained earnings

13

Financial Statements: Retained
Earnings & Shareholders’ Equity
„

Retained earnings
„
„

„

„

A measure of undistributed profits of a business
Do not include capital contributed by owners

Retained earnings =
Cumulative sum of profits earned from the inception of
business –
Cumulative sum of all “dividends” distributed to the
owners from the inception of business
How does retained earnings change over a period of
time (e
...
, a year)
„
„
„
„

Beginning balance in retained earnings
Add Net income earned during the period
Subtract Dividends distributed during the period
Ending balance in retained earnings

14

The Mechanics of Financial Accounting

Fundamental Accounting Equation

Assets

=

Liabilities

+

Contributed
Capital

Owners’ Equity

Retained
Earnings
15

What type of account?
Identify assets, liabilities, or equity
z
z
z
z
z
z
z

Equipment
Retained Earnings
Patent
Common Stock
Dividend Payable
Accumulated depreciation
Prepaid Expense

16

What type of account?
Identify assets, liabilities, or equity
z
z
z
z
z
z
z
z

Supplies Inventory
Accounts Receivable
Land
Goodwill developed by firm
Unsettled damage suit
Factory
Increase in value of land
Employee payroll taxes payable
17

Should we recognize the
asset?
Assets arise from transactions and events
z

z
z
z

A firm issues a $12m check to an insurance
company for liability insurance over the next
year
...

A firm buys stock in another firm for $325K
A firm acquires chemicals to be used as raw
materials for $800K
...
Employment starts next month
...


z

The firm writes a check for $1M to obtain an option to
purchase a tract of land
...
The firm has title to the goods
while in transit
...
2M

19

Should we recognize the
liability?
Liabilities arise from transactions and events
z

The firm owes its attorneys $50K in legal expenses
...


z

The firm borrows $60K from the bank for a 90-day
period
...

Customer: I will pay when I receive the goods
Exchange of promises

How do transactions affect the accounting
equation?
z

The accounting identity is always maintained

21

Emily’s Bakery
(1)

Emily contributes $10,000 in cash

z

Assets = Liabilities + Owners’ Equity

z

Cash

z

+$10,000

Contributed Capital
+$10,000
22

Transactions and the Accounting Equation
Cash + A/R
+10,000

+ Equip
...
Cap
...
= L/P

+

+10,000
+ 3,000

C
...
+

R/E

+10,000
+ 3,000

25

(3) Company purchases equipment for $5,000
cash
z

Assets

z

Cash

z

-$5,000

= L + OE
Equipment
+$5,000

26

Transactions and the Accounting Equation

Cash + A/R

+

Equip
...
Cap
...
The
customer pays $8,000 in cash and promises to
pay the balance at a later date
...
= L/P

+

+10,000

R/E

+10,000

+ 3,000

+ 3,000

- 5,000
+ 8,000

C
...
+

+ 5,000
+ 4,000

+12,000

29

(5) Company pays $9,000 for expenses (wages,
interest, and maintenance)
z

Assets = Liabilities + Owners’ Equity

z

Cash

z

-$9,000

Retained Earnings
-$9,000

30

Transactions and the Accounting Equation
Cash + A/R

+

Equip
...
Cap
...
= L/P

R/E

+10,000

+ 3,000

+ 3,000

- 5,000
+ 8,000

+ C
...
+

+ 5,000
+ 4,000

+12,000

- 9,000

- 9,000

- 1,000

- 1,000

6,000

4,000

5,000

3,000

10,000 + 2,000
33

Balance Sheet as at December 31, 1997
Assets

Amount

Liabilities and
Owners’ Equity

Amount

Cash

6,000

Loans Payable

Receivables

4,000

Contributed
Capital

10,000

Equipment

5,000

Retained
Earnings

2,000

Total
Assests

$15,000

Total Liabilities
and Owners’
Equity

3,000

$15,000
34

Transactions and Accounting Equation
Cash + A/R

+ Equip
...
Cap
...
= L/P

C
...
+ R/E
+10,000

+ 3,000

+ 3,000
+ 5,000

- 5,000
+ 8,000

+

+ 4,000

+12,000

- 9,000

- 9,000

- 1,000

- 1,000

6,000

4,000

5,000

3,000

10,000

+ 2,000

37

Statement of Cash Flows
For the year ended December 31, 1997
[To be revisited later in the course]
Operating activities:
Sale of a service (4)
Payments for expenses (5)
Net cash from operating activities
Investing activities:
Purchase of equipment (3)
Net cash from investing activities
Financing activities:
Borrowings (2)
Owner contributions (1)
Payment of dividends (6)
Increase in cash balance
Cash balance at the beginning of the year
Cash balance at the end of the year

8,000
(9,000)
(1,000)
(5,000)
(5,000)
3,000
10,000
(1,000)

12,000
6,000
0
38
6,000

Statement of Retained Earnings
For the year ended December 31, 1997
Beginning retained earnings balance

0

Plus: Net income

3,000

Less: Dividend to stockholder

1,000

Ending retained earnings balance

$ 2,000

39

Summary
„

Balance sheet
„

Listing of
„

„

„

„

Resources owned by a firm (assets or
investments)
Financing of the assets through obligations to
external parties (liabilities)
Financing of the investments through residual
claimants (shareholders’ equity)

Preparing a balance sheet (and other
financial statements) using transaction
history

40

Home work problem:
Initial Balance Sheet
Starting a Company
„

„

„
„

(1) Issues 50,000 shares of $10 par value common
stock at par value for cash
...

(3) Purchases a used crane for $13,200 cash
(4) Acquires raw materials costing $8,600 on
account
...
The account has
not yet been paid
...
The
firm treats cash discount as a reduction in the
acquisition cost of raw materials
...
It pays the 1-year
premium of $4,950
...

(9) Purchases a patent on a machine process for
$90,000 cash
...

(11) Pays $825 to Express Trucking Company for
delivering the equipment purchased in (3)

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