Understanding the Balance Sheet and Statement of Owners’ Equity Chapter 3 Robinson, Munter, Grant

Grant, Munter & Robinson Chapter 32 Learning Objectives Understand all components of the Balance sheet including –Assets –Liabilities –Owners’ Equity Current and long-term assets and liabilities Evaluate the balance sheet in a critical fashion

Grant, Munter & Robinson Chapter 33 Assets = Claims The Accounting Equation Assets are the cash, property or other resources controlled by the entity used to provide future economic benefits. Claims are the contractual and other obligations held against the firm’s assets. –Liabilities – creditors’ claims –Owners’ equity – residual claim

Grant, Munter & Robinson Chapter 34 Basic Financial Statements Balance sheet –Assets = Liabilities + Owners’ Equity –A snapshot at a particular moment in time Income statement –Revenue – Expenses –Covers a period of time Cash flow statement –Changes in cash during the period Equity statement –Changes in equity during the period

Grant, Munter & Robinson Chapter 35 Articulation of Financial Statements Income Statement Revenue -Expenses Net Income Balance Sheet Assets = Liabilities + Equity Cash Flows Beginning cash ± Operating ± Investing ± Financing Ending cash Equity Statement Beginning balance + Net Income - Dividends Ending balance

Grant, Munter & Robinson Chapter 36 Assets (GAAP) Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events List in order of liquidity –Begin with cash –IAS does not specify an order Differentiate between current and long-term –Longer of one year or the operating cycle –Current ratio = Current assets/Current liabilities

Grant, Munter & Robinson Chapter 37 Current Assets Cash and cash equivalents Accounts receivable (net of estimated bad debts) Inventory –Raw material, work in process, finished goods, merchandise –LIFO, FIFO, Weighted average, Specific identification –At lower of historical cost or current market value Prepaid expenses Marketable securities –At market value

Grant, Munter & Robinson Chapter 38

Grant, Munter & Robinson Chapter 39 Noncurrent Assets Property, plant and equipment –Net book value Historical cost less accumulated depreciation –Except for land which is not depreciated –Include all costs incurred in preparing the asset for use –Construction period (capitalized) interest for self- constructed assets Be aware of exceptions to historical cost (IAS 16)

Grant, Munter & Robinson Chapter 310 Noncurrent Assets Intangible assets Copyrights, trademarks –Historical cost less accumulated amortization Amortization is similar to straight-line depreciation Goodwill –Excess acquisition cost beyond current market value of net assets acquired –Tested for impairment annually (GAAP) –Amortized over no more than 20 years (IAS)

Grant, Munter & Robinson Chapter 311

Grant, Munter & Robinson Chapter 312

Grant, Munter & Robinson Chapter 313 Special assets Deferred tax asset –Results from a current tax payment that relates to a future financial statement expense –A prepayment (a deferred tax liability represents a deferred payment) Inventory reserves –Reflect a reduction of market value below historical cost

Grant, Munter & Robinson Chapter 314

Grant, Munter & Robinson Chapter 315 Claims Liabilities (GAAP) –Probable future economic sacrifices arising from present obligations as a result of past transactions –Claims that must be paid first are listed first (GAAP) –IAS does not specify an order Equity –Residual claims against assets

Grant, Munter & Robinson Chapter 316 Current Liabilities Accounts payable to suppliers –Purchase material without paying cash Accrued expenses –Interest, taxes, wages… Current portion of debt –Principal to be paid within the next year

Grant, Munter & Robinson Chapter 317

Grant, Munter & Robinson Chapter 318 Noncurrent Liabilities Principal associated with –Long-term portion of Loans, Notes, Mortgages, Bonds Interest is a component of Current liabilities Current portion of debt is a Current liability Net of discounts or premiums Details are discussed in the notes to the statements

Grant, Munter & Robinson Chapter 319

Grant, Munter & Robinson Chapter 320

Grant, Munter & Robinson Chapter 321 Owners’ Equity Stock Value listed –Par or stated value –Additional paid in capital –Reflects what was paid for stock at original issuance Number of shares –Authorized – Upper limit of number of shares that can be issued –Issued – Sold to investors –Outstanding – Held by investors (Issued less Treasury) –Treasury – Firm purchased its own shares on the market

Grant, Munter & Robinson Chapter 322 Owners’ Equity Retained earnings –Increased (decreased) by net income (loss) –Decreased by dividends paid Comprehensive income –Nonowner changes to equity

Grant, Munter & Robinson Chapter 323 Owners’ Equity Preferred Stock Listed after Liabilities and before Common stock Shares properties of debt and equity In the event of liquidation, receive funds before Common shareholders Dividend specified as dollar amount or percentage of par

Grant, Munter & Robinson Chapter 324

Grant, Munter & Robinson Chapter 325

Grant, Munter & Robinson Chapter 326 Nonowner changes to equity Other comprehensive income (GAAP) Adjustments to fair value for available-for-sale securities (Chapter 13) Foreign currency translation adjustment (Chapter 17) Gains/losses on cash flow hedge derivatives (Chapter 16) Gains/losses on investment hedge instruments (Chapter 16) Adjustments related to underfunding a defined benefit pension plan (Chapter 15)

Grant, Munter & Robinson Chapter 327 Statement of Shareholders’ Equity Provides details of changes in Equity Stock Other comprehensive income Retained earnings Includes beginning and ending balances in accounts

Grant, Munter & Robinson Chapter 328 Motorola, Inc. and Subsidiaries

Grant, Munter & Robinson Chapter 329 Nokia Statement of Changes in Shareholders’ Equity (partial, IAS, EURm)

Grant, Munter & Robinson Chapter 330 Summary The Balance sheet is a snapshot of a firm’s financial position at a point in time Assets = Liabilities + Equity Statement of Stockholders’ equity depicts changes in owners’ claims over time