Presentation on theme: "2 Chapter 2 The Financial Statements Business Activities Business activities are reflected in financial statements; business activities include: – Operating."— Presentation transcript:
Business Activities Business activities are reflected in financial statements; business activities include: – Operating activities – selling goods and services. – Investing activities – acquisition and sale of productive assets. – Financing activities – issue and retirement/repayment of liabilities and equity.
4 The Balance Sheet The balance sheet reports the financial position at a point in time (end of the quarter or year). The Balance Sheet is also called: Statement of Financial Position The components of the Balance Sheet are: Assets Liabilities Shareholders’ (Owners’) Equity
5 The Balance Sheet The balance sheet is represented by the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity A = L + SE The effects of all business transactions may be represented in this formula.
7 Liabilities Definition? Current liabilities – Accounts payable – Wages payable – Interest payable – Short-term notes payable – Current maturities of long-term debt – Deferred revenues – Other payables Long-term liabilities
8 Owners’ (Shareholders’) Equity Definition? Contributed capital – Shareholders’ equity (par or stated value) – Paid-in capital in excess of par value Earned capital - Earned Capital has 2 components: Retained Earnings and Other accumulated comprehensive income. We will cover other accumulated comprehensive income in Chapter 13. – Retained earnings represent the excess earnings retained in the company after dividends have been paid to shareholders. This represents the equity generated by the company for the shareholders.
9 The Statement of Shareholders’ Equity (SSE) The following formula represents the basic SSE: Beginning shareholders’ equity Plus: Issuance of stock Plus: Net income Less: Dividends Ending shareholders’ equity SE Begin + Issue + NI - D = SE End
10 The Statement of Retained Earnings The statement of retained earnings is a subset of the SSE, and calculates the changes in the retained earnings component. Beginning retained earnings Plus: Net income Less: Dividends Ending retained earnings RE Begin + NI - Div = RE End
International Perspective – Balance Sheet Many non-U.S. firms that publish IFRS-based balance sheets add shareholder’s equity to non-current liabilities, referring to the total as capital employed. Consequently, the balance sheet format looks like: Non-current assets + Current assets - Current liabilities = Non-current liabilities + Shareholders’ equity Under U.S. GAAP balance sheet accounts are listed in order of liquidity. Many non-U.S. firms that publish IFRS-based balance sheets list their assets in the opposite order, starting with non-current assets, followed by current assets. Many non-U.S. companies, especially in Europe, use the term “turnover” instead of revenue.
12 The Income Statement Operating revenues – Sales – Fees earned – Other revenues Operating expenses – Cost of goods sold – Wage expense – Rent expense – Selling expense – Depreciation expense – Amortization expense – Other expenses Operating revenues and expenses: usual and frequent Other revenues and expenses: unusual or infrequent Disposal of a business segment Extraordinary items: unusual and infrequent
13 The Statement of Cash Flows Cash flows from operating activities: – Cash flows associated with the acquisition and sale of a company’s products and services – Collections from sales, rent, interest, etc. – Cash paid to suppliers and employees, and for rent, selling activities, interest, and taxes etc. Cash flow from investing activities: – Cash flows associated with the purchase and sale of a company’s investments. – Proceeds from sale of investment securities, land, buildings, equipment, etc. – Purchase of investment securities, land, buildings, equipment, etc. Cash flow from financing activities: – Cash flows associated with a company’s two sources of outside capital: liabilities and contributed capital. – Proceeds from issuance of notes, debt, sale of equity, etc. – Payments on notes, debt, dividends, etc.
14 Classifying Financing, Investing, and Operating Transactions Financing and Investing Transactions Operating Transactions Balance Sheet Income Statement 1 1. Exchanges with shareholders 2 2. Exchanges of liabilities and shareholders’ equity 3 3. Issues and payments of debt 4 4. Purchases, sales, and exchanges of assets 5 5. Revenues and expenses
15 Classifying Operating Transactions TransitoryPersistent Group C Gains and losses due to change in accounting principles Group A Normal and recurring operating revenues and expenses Group B Revenues and expenses from activities not germane to a company’s primary activity Extraordinary items Disposals of segments Other revenues and expenses
Relationships Among the Financial Statements Statement of Cash Flows Income Statement Statement of Stockholders’ Equity Ending Balance Sheet Assets (Cash) = Liabilities + Equity Beginning Balance Sheet Assets (Cash) = Liabilities + Equity
18 Exercise 2-3 Balance Sheet (B) or Income Statement (I) a. Equipment b. Fees Earned c. Retained Earnings d. Wage Expense e. Patent f.Cost of Goods Sold g.Common Stock h.Dividend Payable i.Accumulated Depreciation B I B I B I B B B
19 Exercise 2-3 Balance Sheet (B) or Income Statement (I) j.Prepaid Expense k.Gain on Sale of Short-term Investment l.Rent Revenue m. Supplies Inventory n.Accounts Receivable o.Land p.Insurance Expense q.Interest Payable r.Deferred (Unearned) Revenue B I I B B B I B B
20 Exercise Given (in billions):2010 2009 2008 Beginning RE ? 1.3 1.2 Revenues 4.4 4.1 3.9 Expenses 3.9 ? 3.5 Div. declared.3.3 ? Ending RE 1.6 ? ? Now, using the following formulas and relationships, solve for the other missing items: (1) Rev - Exp = NI (2) RE(B) + NI - Div = RE(E) (3) RE(E) becomes RE(B) in the next year
21 Exercise, 2010 Solve for RE(B) using: RE(B) + NI - Div = RE(E) NI = 4.4 – 3.9 =.5 RE(B) +.5 -.3 = 1.6 RE(B) = 1.4