StatementofChangesinStockholders’Equity.ppt

1,TheBalanceSheetandtheStatementofChangesinStockholdersEquity,C,hapter,3,2,1.Knowinterrelationshipoffinancialstatements.2.Masterpurposesofthebalancesheet.3.Masterelementsofthebalancesheet.4.Mastermeasurementoftheelementsofthebalancesheet.5.Understandreportingclassificationsonthebalancesheet.6.Knowstatementofchangesinstockholdersequity.,Objectives,3,FASBStatementofConceptsNo.5,FASBStatementofConceptsNo.5recommendsthatafullsetoffinancialstatementsforanaccountingperiodshouldshowacompanys.,4,(1)Financialpositionattheendoftheperiod.(2)Netincomefortheperiod.(3)Comprehensiveincomefortheperiod.(4)Cashflowsfortheperiod.(5)Investmentsbyanddistributionstoownersfortheperiod.,FASBStatementofConceptsNo.5,5,(1)Thebalancesheet.(2)Theincomestatement.(3)Thestatementofcashflows.(4)Thestatementofchangesinstockholderequity.(5)Explanatorynotes.,Financialstatements,6,InterrelationshipofFinancialStatements,BeginningBalanceSheetAssetsLiabilitiesStockholdersEquity,Continued,7,TransactionsandEvents,Continued,InterrelationshipofFinancialStatements,8,IncomeStatementRevenuesExpenses,StatementofCashFlowsOperatingActivitiesInvestingActivitiesFinancingActivities,InterrelationshipofFinancialStatements,9,BasicAccountingEquation,Assets,10,Acompanysbalancesheetisintendedtohelpexternalusers:(1)Assessthecompanysliquidity,financialflexibility,andoperatingcapability;(2)Evaluateinformationaboutitsincome-producingperformanceduringtheperiod(returnoninvestment).,Purposesofthebalancesheet,11,Liquidity,Thetermliquidityisusedtodescribehowquicklyanassetcanbeconvertedintocashoraliabilitypaid.,12,FinancialFlexibility,Financialflexibilityreferstotheabilityofacompanytouseitsfinancialresourcestoadapttochange.,13,OperatingCapability,Operatingcapabilityreferstotheabilityofacompanytomaintainagivenphysicallevelofoperations.,14,Thecapital(netassets)ofacompanyistheeconomicresources(assets)lesseconomicobligations(liabilities),orownersequity.Toprovideforareturnofinvestment,thestockholdersequity(capital)ofthecorporationmustbemaintained;thisisreferredtoascapitalmaintenance.Oncethiscapitalismaintained,anyincomeofthecorporationisanincreaseinstockholdersequityandisthebasisforprovidingareturnoninvestmenttostockholders.,Capitalandcapitalmaintenance,15,Recognitionistheprocessofformallyrecordingandreportinganelementinthefinancialstatements.Therearefourfundamentalrecognitioncriteria:(1)meetthedefinition;(2)bemeasurable;(3)berelevant;(4)bereliable.Thus,tomeettheobjectivesofacompanysbalancesheettoproviderelevantandreliableinformationtoassessitsliquidity,financialflexibility,andoperatingcapabilityandtoevaluateitsincome-producingperformanceduringtheperiod.,Recognitioninthebalancesheet,16,Three-StageProcessforDisclosingInformationontheBalanceSheet,1.Identificationofwhatitemsmeetthedefinitionoftheelements.2.Measurement(valuation)oftheelements.3.Reporting(classification)oftheelements.,17,ElementsoftheBalanceSheetAssets,Assetsareprobablefutureeconomicbenefitsobtainedorcontrolledbyacompanyasaresultofpasttransactionsorevents.,18,1.Theresourcemustbeabletocontributedirectlyorindirectlytothecompanysfuturenetcashinflows.2.Thecompanymustbeabletoobtainthefuturebenefitandcontrolothersaccesstoit.3.Thetransactionoreventgivingthecompanytherighttoorcontroloverthebenefitmusthaveoccurred.,ElementsoftheBalanceSheetAssets,19,Assetsmaybenaturalorman-made,tangibleorintangible,andexchangeableorusefulonlyinthecompanysactivities.,ElementsoftheBalanceSheetAssets,20,Assetsmaybeacquiredbypurchase,production,stockholderinvestment,discovery,orothernonreciprocal(one-way)transfer.,ElementsoftheBalanceSheetAssets,21,Liabilitiesareprobablefuturesacrificesofeconomicbenefitsarisingfrompresentobligations.L,ElementsoftheBalanceSheetLiabilities,ofacompanytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.,22,1.Itmustinvolvearesponsibilitytoanotherentityorentitiesthatwillbesettledbyasacrificeinvolvingthetransferofassets,provisionofservices,orotheruseofassetsatspecifiedordeterminabledate,onoccurrenceofaspecifiedevent,orondemand.2.Theresponsibilitymustobligatethecompanyinsuchawaythatithaslittleorondiscretiontoavoidthefuturesacrifice.3.Thetransactionorothereventobligatingthecompanymusthaveoccurred.,ElementsoftheBalanceSheetLiabilities,23,ElementsoftheBalanceSheetStockholdersEquity,Assets,=,Liabilities,Equityisresidualinterestintheassetsofacompanythatremainafterdeductingliabilities.,24,Sinceacompanygenerallyisnotobligatedtotransferassetstoitsowners,ownersequityranksafterliabilitiesasaclaimtoorinterestintheassetsandthusisaresidualinterest.Foracorporation,stockholdersbeartheultimaterisksanduncertaintiesinvolvedinthecompanysoperationsandactivities,andobtaintheresultingrewards.Equityiscreatedbystockholdersinvestmentsofeconomicresourcesandsubsequentlyismodifiedbyadditionalinvestments,netincome,distributionstoowners,andotherchangesinassetsandliabilities.,ElementsoftheBalanceSheetStockholdersEquity,25,MeasurementoftheElementsoftheBalanceSheet,HistoricalCost,CurrentCost,CurrentMarketValue,NetRealizableValue,PresentValue,26,MeasurementoftheElementsoftheBalanceSheet(Assets),Thehistoricalcostofanassetistheexchangepriceinthetransactioninwhichtheassetwasacquired.Afteracquisition,thehistoricalcostofanassetmaybereducedduetotherecognitionofdepreciation,amortization,impairment,orotheradjustments.,Thecurrentcostofanassetistheamountofcash(orequivalent)thatwouldberequiredonthedateofthebalancesheettoobtainthesameasset.Currentcostisaninputvalueandissometimesreferredtoascurrentreplacementcost.,Thecurrentmarketvalueofanassetistheamountofcash(orequivalent)thatcouldbeobtainedonthedateofthebalancesheetbysellingtheassetinanorderlyliquidation.Sometimescurrentmarketvalueisreferredtoascurrentexitvalue.,Thenetrealizablevalueofanassetistheamountofcash(orequivalent)intowhichtheassetisexpectedtobeconvertedintheordinaryoperationsofthecompany,lessanyexpectedconversioncosts(e.g.,completion,disposal,orcollectioncosts).Netrealizablevalueissometimesreferredtoasexpectedexitvalue.,Thepresentvalueofanassetisthenetamountofdiscountedfuturecashinflowslessthediscountedfuturecashoutflowsrelatingtotheasset.,27,MeasurementoftheElementsoftheBalanceSheet(Liabilities),Initially,theamountofcashreceivedwhenanobligationwasincurred(historicalproceeds);subsequenttoincurrence,thehistoricalamountmaybeadjustedforamortization.,Thecurrentproceedsistheamountofcashthatwouldbeobtainedifthesameobligationwereincurred.,Thecurrentmarketvalueofaliabilityistheamountofcashthatwouldberequiredcurrentlytoeliminatetheliability.,Thenetrealizablevalueofaliabilityistheamountofcashexpectedtobepaidtoeliminatetheliabilityinduecourseofbusiness.,Thepresentvalueoffuturecashoutflowstoeliminatetheliabilityinduecourseofbusiness.,28,LimitationsoftheBalanceSheet,Useofhistoricalcosttovalueassetsandliabilitiesdoesnothelpassessthelikelyamountsoffuturecashflows.“Humanresources”or“intellectualcapital,”suchashigh-qualitymanagementorhighlycreativeemployeesarenotincludedasassets.Manyoftheamountsthatacompanyreportsarebasedonestimates.Inperiodsofinflation,theamountslisteddonotshowthe“purchasingpower”ofitsassetsandliabilities.,29,Reportingclassificationsonthebalancesheet,Thearrangementofeachcompanysbalancesheetitemsandsubtotalsshouldbedesignedtobeusefultoitsvariousexternalusergroups.,30,CurrentAssets,Currentassetsarecashandotherassetsthatareexpectedtobeconvertedintocash,sold,orconsumedwithinoneyearorthenormaloperatingcycle,whicheverislonger.,31,OperatingCycle,Anoperatingcycleistheaveragetimetakenbyacompanytospendcashforinventory,.,processandselltheinventory,andcollectthereceivables,convertingthembackintocash.,32,OperatingCycleFlow,MakeCollectionsofAccountsReceivable1.Collectcash2.Incurbaddebts,MakeSales)Revenues1.Collectcash2.Increaseaccountsreceivable3.ReducedeferredrevenuesIncurCostofGoodsSold1.Reduceinventory,AcquireInventory1.Paycash2.Incuraccountspayable,33,CurrentAssets,Cashincludescashonhandandreadilyavailableincheckingandsavingsaccounts.,Cashequivalentsarerisk-freesecurities,suchasmoneymarketfundsandtreasurybillsthatwillmatureinthreemonthsorlessfromthedateacquiredbytheholder.,34,CurrentAssets,Temporaryinvestmentsinmarketablesecuritiesincludedebtandequitysecuritiesthatareclassifiedas“tradingsecurities”and“available-for-salesecurities.”Theyarelistedattheirmarket(fair)value(currentmarketvalue).,35,CurrentAssets,Receivablesincludeaccountsreceivableandnotesreceivablewithshort-termmaturitydates.Theyarelistedattheirestimatedcollectibleamounts(netrealizablevalues).,Inventoriesincludegoodsheldforresaleinthenormalcourseofbusinessplus,inthecaseofamanufacturingcompany,rawmaterialsandgoodsinprocessinventories.Theyarelistedattheirhistoricalcostormarketvalue(currentcost),whicheverislower.,Prepaiditemsincludeinsurance,rent,officesuppliesandtaxesthatwillnotbeconvertedintocashbutwillbeconsumed.Prepaiditemsarelistedatthehistoricalcostoftheremainingamounts.,36,CurrentLiabilities,Currentliabilitiesarethoseobligationswhoseliquidationisexpectedtorequiretheuseofexistingcurrentassets,orthecreationofothercurrentliabilities.Theseobligationsarelistedonthebalancesheetattheamountowed(historicalproceeds)orestimatedtobeowed.,37,CurrentLiabilities,Obligationsforitemsthathaveenteredintotheoperatingcycle(accountspayableandsalariespayable).Advancecollectionsforthefuturedeliveryofgoodsorperformancesofservice(unearnedrentandunearnedticketsales).3.Otherobligationsthatwillbepaidwithinoneyearortheoperatingcycle(short-termnotespayable).,38,WorkingCapital,CurrentAssetsCurrentLiabilities=WorkingCapital,39,Long-TermInvestments,Investmentitemsthatmanagementexpectstoholdformorethanoneyearortheoperatingcycle,whicheverislonger,areclassifiedaslong-term(noncurrent)investments.,40,Thecompanyexpectsthemarketvalueoftheinvestmenttoincrease.Thecompanywishestoreceiveincomefrominterestordividends.Thecompanymaydesiretoexercisecontroloveranothercompanyorasupplier.Thecompanymayacquireproperty,plant,orequipmentforfutureoperations.,Long-TermInvestments,Acompanymakesinvestmentsforavarietyofreasons.,41,Long-terminvestmentinclude:Holdingofavailable-for-saledebtandequitysecuritiesthatthemanagementdoesnottoconvertintocashwithinoneyearorthenormaloperatingcycle;Investmentsindebtsecurities(e.g.,bonds)expectedtobeheldtomaturity;Long-terminvestmentarelistedattheirmarket(fair)value,historicalcost,bookvalue,orpresentvalue,dependingonthetypeofinvestment.,Long-TermInvestments,42,Property,Plant,andEquipment,Property,plant,andequipmentincludesthetangibleassetsusedinthefirmsoperations.,Alsocalledfixedassets,43,Oftenthesetangibleassetsarecalledfixedassetsbecauseoftheirrelativepermanencyinthecompanysoperations.Exceptforland,allthefixedassetsaredepreciableordepletable(inthecaseofnaturalresources).So,landislistedatitshistoricalcost,whiletheremainingfixedassetsarelistedattheirbookvalues(historicalcostlessaccumulateddepreciationordepletion).,Property,Plant,andEquipment,44,IntangibleAssets,Intangibleassetsarethosenoncurrenteconomicresourcesthatareusedintheoperationsofthebusinessbuthavenophysicalexistence.,45,IntangibleAssets,Acompanymayhavethreecategoriesofintangibleassets:,1.Intangibleassetswithfiniteusefullives.2.Intangibleassetswithindefinitelives.3.Goodwill.,46,IntangibleAssets,Intangibleassetswithfiniteusefullivesareamortizedovertheirusefullivesandreportedonthebalancesheetattheirbookvalues(historicalcostlessaccumulatedamortization).,47,OtherAssets,TheOtherAssetssectionoccasionallyisusedtoreportmiscellaneousassetsthatmaynotbereadilyclassifiedwithinoneoftheprevioussections.,Sometimesreferredtoas“deferredcharges”,48,Long-TermLiabilities,Long-termliabilitiesarethoseobligationsthatarenotexpectedtorequiretheuseofcurrentassetsornotexpectedtocreatecurrentliabilitieswithinoneyearorthenormaloperatingcycle(whicheverislonger).,49,OtherLiabilities,Deferredtaxliabilitiesandobligationsofacomponentofthecompanythatisbeingdiscontinuedareexamplesofitemsthatmightbeincludedasotherliabilities.,50,ConceptualGuidelines,FASBsuggestedguidelinesfordevelopinghomogeneousclassesofassetsandliabilities.Reportingassetsaccordingtotheirtypeorexpectedfunctioninthecentraloperationsorotheractivitiesofthecompany.Reportingasseparateitemsassetsandliabilitiesthataffectthefinancialflexibilityofthecompanydifferently.Reportingassetsandliabilitiesaccordingtomeasurementmethodusedtovaluetheitems.,51,StockholdersEquity,Stockholdersequityistheresidualinterestofthestockholdersintheassetsofthecorporation.,Asoleproprietorshipisasingle-ownercompany.,Thecorporationisacomplexbusinessorganization.Usuallythereisabsenteeownership.,52,Inasoleproprietorship,normallythetotalownersequityissummarizedinasinglecapitalaccount.Butinapartnership,separatecapitalaccountsareusedforeachpartnertosummarizethepartnersequity.,StockholdersEquity,53,ContributedcapitalRetainedearningsAccumulatedothercomprehensiveincome,StockholdersEquity,Inthecorporation,thecomponentsofstockholdersequityinclude:,54,StockholdersEquity,Legalcapitalistheminimumamountofstockholdersequitythatthecorporationmaynotdistributeasdividends.,Preferredstockreceivespreferenceindeclareddividends.,Commonstockcarriestherighttovoteattheannualstockholdersmeetingandtoshareinresidualprofits.,ContributedCapital,55,StockholdersEquity,Acorporationsells100sharesofits$5parcommonstockfor$30pershare.,Cash3,000CommonStock,$5par500AdditionalPaid-inCapitalonCommonStock2,500,ContributedCapital,56,Acorporationsells20sharesofits$100parpreferredstockfor$110pershare.,Cash2,200PreferredStock,$100par2,000AdditionalPaid-inCapitalonPreferredStock200,StockholdersEquity,ContributedCapital,57,Acorporationsells100sharesofitsno-parcommonstockat$50pershare.,Cash5,000CommonStockNo-ParValue5,000,StockholdersEquity,ContributedCapital,58,Retainedearningsisthetotalamountofcorporatenetincomethathasnotbeendistributedtostockholdersasdividends.,Usesofnetincome,Touseindailyoperations,Tomaintainitsproductivefacilities,Forgrowth,StockholdersEquity,59,1.Unrealizedincreases(gains)ordecreases(losses)inthemarketvalueofinvestmentsinavailable-for-salesecurities.2.TransactionadjustmentsfromconvertingthefinancialstatementsofacompanysforeignoperationsintoU.S.dollars.3.Certaingainsandlosseson“derivative”financialinstruments.4.Certainpensionliabilityadjustments.,Comprehensiveincomeincludesbothnetincomeandothercomprehensiveincome.Accumulatedothercomprehensiveincomemightincludefouritems:,StockholdersEquity,60,Ifacorporationhasmorethanoneitemofothercomprehensiveincome,itmayreporttheamountofeachiteminstockholdersequity.,StockholdersEquity,61,Or,itmayreportthetotalamountofaccumulatedothercomprehensiveincomeforalltheitemsinstockholdersequity.Thisapproachrequiresanotetothestatements.,StockholdersEquity,62,Inrareinstancesacompanymayincreaseitsassetswithoutacorrespondingoutflowofassets,increaseinliabilities,recognitionofincome,orissuanceofcapitalstock.Forinstance,acompanymayreceivedonatedassetsfromagovernmentalunitoritmaydiscoverpreviouslyunrecordedassets.Theseitemsarelistedseparatelyinstockholdersequity.,StockholdersEquity,Miscellaneousitems,63,StatementofChangesinStockholdersEquity,Acorporationmustdisclosethechangesinitsstockholdersequityaccountwhenissuingfinancialstatements.,Thisstatementshouldshowinvestmentsbyanddistributionstoownersduringtheperiod,amongotheritems.,64,StatementofChangesinStockholdersEquity,FASBStatementofConceptsNo.6definedinvestmentsbyownersanddistributionstoowners,asfollows:,Investmentsbyownersareincreasesintheequityofacompanyresultingfromtransfersofsomethingvaluabletothecompanyfromotherentitiesinordertoobtainorincreaseownershipinterests.Distributionstoownersaredecreasesintheequityofacompanycausedbytransferringassets,renderingservices,orincurringliabilitiestoowners.,65,Balance,Jan.1,2004$65,000$143,400$64,900$10,000$283,300Unrealizedincreaseinvalueofavailable-for-salesecurities2,0002,000Netincome62,50062,500Cashdividendspaid(11,200)(11,200)Commonstockissued6,50030,50037,000Balance,Dec.31,2004$71,500$173,900$116,200$12,000$373,600,StatementofChangesinStockholdersEquity,SCHEDULEACARONMANUFACTURINGCOMPANY,AccumulatedCommonAdditionalOtherStockPaid-inRetainedComprehensive$5parCapitalEarningsIncomeTotal,StatementofChangesinStockholdersEquityForYearEndedDecember31,2004,Exhibit3-8,66,SummaryofAccountingPolicies,Aselectionfromexistingacceptablealternatives.Principlesandmethodspeculiartotheindustryinwhichthecompanyoperates.UnusualorinnovativeapplicationsofGAAP.,APBOpinionNo.22requiresthatacompanyincludeadescriptionofallsignificantaccountingpoliciesasanintegralpartofitsfinancialstatements.,Inparticular,whentheseprinciplesandmethodsinvolve-,67,DerivativeFinancialInstruments,FASBStatementNo.107requiresacompanytodisclosethefairvalueofallitsfinancialinstruments,whetherrecognizedornotonitsbalancesheet.TheStatementalsorequiresacompanytodiscloseallsignificantconcentrationsofcreditriskduetoitsfinancialinstruments.Acompanytypicallymakesthesedisclosuresinthenotestoitsfinancialstatements.,68,DerivativeFinancialInstruments,FASBStatementNo.133requiresacompanytorecognizeallderivativefinancialinstrumentsaseitherassetsorliabilitiesonthebalancesheet.,Theseinstrumentsshouldbemeasuredatfairvalue.,Fairvalueistheamountatwhichtheinstrumentcouldbepurchasedorsoldinacurrenttransactionbetweenwillingparties.,69,Thetypeofderivativeinstrumentsitholds.Itsobjectivesinholdingtheinstruments.Itsstrategiesforachievi