02 Balance Sheet Act

7/31/2019 02 Balance Sheet Act

1/7

FinancialAccounting(JEB044) CharlesUniversity,Prague

JiriNovak,IESUK 1

Lecture2BalanceSheet

JiriNovakIES,UK

Recap

PurposeofAccounting accountingislanguageofbusiness

captureskeyconsequencesofcomplexbusinessactivitiesinaparsimonious andstandardized way

2

allowstobuildunderstandingofafirmsfinancialpositionandofitshistoricalandprospectivefinancialperformance

standardsettersmust:

prioritizebetweenusers(ownersandcreditors)

tradeoffvariouscriteriaofaccountingquality(relevancevs.reliability)

Recap

Account Structure

recordofallchangesinaparticularitemoveroneperiod(accountofevents)

Tshapeaccountsrecordincreasesononeside

3

eachtransactionisrecorded

onthedebit (=left)sideand onthecredit (=right)sideofanotheraccount

accountingbooksmustalwaysbeinbalance

debits = creditst

2.1 FinancialStatements

FinancialStatements

BalanceSheet capturesthefinancialpositionofacompanyat

onepointintime

IncomeStatement(P&L)

5

summar zes eeconom cper ormanceo ecompanyoveranaccountingperiod

StatementofCashFlow showshowmuchcashthecompanycollected

andpaidoutoveranaccountingperiod

StatementofShareholdersEquity detailsoutchangesinshareholdersequityover

anaccountingperiod

BalanceSheet

BalanceSheetComponents assets(As) whatthecompanyowns

liabilities(Li) whatthecompanyowestoitscreditorsandbusinesspartners

6

equity(Eq) whatthecompanyowestoitsowners(i.e.shareholders)

BalanceSheet

assetsliabilities

equity


2/7


JiriNovak,IESUK 2

IncomeStatement IncomeStatement showswhatrevenuesacompanygeneratedand

whatexpenseswereincurredinafiscalyear

7

IncomeStatementexpenses revenues

lossesgains

earningsor netincome

or profit

StatementofCashFlow StatementofCashFlow

SCFreportsthecashreceiptsandoutlaysintheperiodoftheiroccurrence,classifiedintooperating,investingandfinancingactivities

8

StatementofCashFlowcashflowfromoperating activities

+/ cashflowfrominvesting activities

+/ cashflowfromfinancing activities

totalcashflow

FinancialStatements Creditvs.Debit assets,expenses foundonthedebitsideofBSof

ISandsoincreasesarerecordedasdebits(Dr)anddecreasesascredits(Cr)

9

liabilities,equity,revenues foundonthecreditsideofBSofISandsoincreasesarerecordedas

credits(Cr)

and

decreases

as

debits

(Dr)

Assets Liabilities

Inventories BankLoan

Equity

ContributedCapital

Expenses Revenues

CostofGoodsSold NetSales

FinancialStatementsBalanceSheet2000

cash liabilities

noncashassets equity

BalanceSheet2001cash liabilities


December31,2000 December31,2001

10

IncomeStatement 2001revenues

expenses

netincome

StatementofCashFlow2001operatingcashflow

+/ investingcash flow

+/ financingcashflow

cash

2.2 BalanceSheet

BalanceSheet

BalanceSheetComponents assets(As) whatthecompanyowns

liabilities(Li) whatthecompanyowestoitscreditorsandbusinesspartners

12

equity(Eq) whatthecompanyowestoitsowners(i.e.shareholders)

BalanceSheet

assetsliabilities

equity


3/7


JiriNovak,IESUK 3

BalanceSheet BalanceSheetEquation asaconsequenceofdoubleentryaccounting

balancesheet(BS)mustalwaysbeinbalance

atanypointintimetotalassets(As)mustbe

13

equaltothesumofliabilities(Li)&equity(Eq)

Ast=Lit+Eqt t

assets equityliabilities

BalanceSheetbalancesheetmustalwaysbeinbalance

14

currentliabilities

BalanceSheetcash

marketablesecurities

notespayable

currentmaturitiesofltdebt

accountspayable

BalanceSheet

15

equityfixedassets

currentassets

longtermliabilities

accountsreceivable

inventories

prepaidexpenses

property,plant&equipment

intangibleassets

accruedliabilities

unearnedrevenue

longtermdebt

deferredtaxes

contributedcapital

retainedearnings

Classification

Assets

assetsareclassifiedbasedonliquidity,easewithwhichtheycanbeconvertedintocash(distinctionbetweencurrentorfixed)

16

Liabilities

liabilitiesareclassifiedbasedon:

maturity timeuntiltheyarepayable(~liquidity:current or longterm)

nature eitheroperating orfinancial

Classification CurrentAssets shorttermassetsthatarecontinuallyturned

overinthecourseofabusinessduringnormalbusinessactivity,thatswhy current

17

tocash,sold,orconsumedeitherinayearorintheoperatingcycle,whicheverislonger

FixedAssets longtermassetsthatareusedformorethanone

yearorbusinesscycle

thecostoftheseassetsisdistributedovertheirusefullifethroughdepreciation

Assets

BalanceSheet IncomeStatement

18

expenses

revenues

earnings

equity

assets


4/7


JiriNovak,IESUK 4

Assets

IntuitiveDefinition(broad) Athingorpersonofuseorvalue., i.e.anything

thatisofvalueorfuturebenefit(OxfordEnglishDictionary)

19

AccountingDefinition(narrower) everythingthatacompanyownsasa

consequenceofpastbusinessactivitiesandcanbenefitfrominthefuture

e.g.land,buildings,machinery,equipment,motorvehicles,rawmaterials,finishedproducts,receivables,cash,securities

Assets

Aresourcecontrolledbytheenterpriseasaresult

AccountingDefinition

20

ofpasteventsandfromwhichfutureeconomic

benefitsareexpectedtoflowtotheenterprise.

InternationalFinancialReportingStandards(IFRS)

Assets

Control

abilityofanentitytobenefitfromtheassetandtodenyorregulatetheaccessofotherstothebenefit

mostly(butnotalways)ownershipofanobjector

21

rightimpliescontroloverit

Examples

intellectualcapital mostlycannotberecognizedasanassetduetolackofcontrolofthecompanyofitspersonnel

leasing controlovertheleasedpropertyownedbythelessoristransferredtothelessee

Assets

ResultofPastEvents specificationofapasteventdifferentiatesassets

fromintentionstoacquireassets(notrecognized)

existenceofapasttransactionimpliesacostor

22

valueofanassetthatcanbemeasuredreliably

Examples

orders/agreements notrecognizedasassetsuntiltheagreeduponexchangetakesplace

Assets ExpectedEconomicBenefits reasonablycertainpotentialtocontributetothe

objectivesoftheentity

Exam le

23

researchanddevelopment(R&D)expendituresfailtomeetthecriteriabecauseitistoouncertainthatfutureeconomicbenefitswillarise

intangibleassets recognizedonlyiftheyresultfromamergeroranacquisition(M&A)

Liabilities

Aliabilityisapresentobligationoftheenterprise


24

ar s ng rompastevents,t esett emento w c s

expectedtoresultinanoutflowfromtheenterprise

ofresourcesembodyingeconomicbenefits

InternationalFinancialReportingStandards(IFRS)


5/7


JiriNovak,IESUK 5

Liabilities

RecognitionCriteria presentobligations companyisliable totransfer

benefitstootherparties(liability)

probablefuturesacrificesofeconomicbenefit

25

liabilitiescanbeseenasnegativeassetsnetassets=assets liabilities

Examples

loanfromabank,bondsheldbycreditorsaccountspayabletosuppliers,salariespayable,taxespayable

Equity

BalanceSheet IncomeStatement

26

expenses

liabilities

revenues

earnings

assets

equity

Equity

ResidualStake residual stakeofownersinfirmconsistingof:

contributedcapital accumulatedownersinvestmentinthecompanyovertime

27

retainedearnings accumulatedpastprofitsnotpaidoutasdividends(i.e.retained)

LiquidationPerspective iffirmisliquidated,allassetsaresoldandcash

proceedsusedtosettleall(ifpossible)liabilities;whateverleftbelongstoowners

equity=differencebetweenassetsandliabilities

Equity

Equityistheresidualinterestinthenetassetsof


28

anentitythatremainsafterdeductingits

liabilities

FinancialAccountingStandardsBoard(FASB)

Equity StatementofShareholdersEquity detailsoutchangesinequitycomponents:

contributedcapital capitalinvestedbytheowners(+)incommonandpreferredstock

29

retainedearnings netincomeoftheyear(+),dividendspaidouttotheowners()

treasurystock repurchaseofacompanysownstock()

othercomprehensiveincome unrealizedgainsorlossesonavailableforsalesecurities(+/),foreigncurrencytranslationadjustments(+/)

FinancialStatements

IncomeStatement 2001revenues

expenses

netincome

StatementofEquity2001 contributedcapital

+/ retainedearnings

/+ treasury stock

StatementofCashFlow2001operatingcashflow

+/ investingcash flow

+/ financingcashflow

30



comprehensive income




6/7


JiriNovak,IESUK 6

ExcitingAccounting goodluckinthedeepwatersofaccounting!

31

2.3 DoYouRecognizeThem?

Equity

ContributedCapital commonstock regulartypeofstock;claimsof

commonstockholderstothefirmsassets,metthrougheitherdividendsorliquidation,are

33

su o r na e o ec a mso cre orsan preferredstockholders

preferred

stock

numberof

forms;

they

have

liquidationanddividendpreferencerelativetocommonstock,butusuallyhavenovotingpower

Equity

AccumulatedRetainedEarnings netincome

recordsallprofitsthefirmearnedinthepast

equity~ownerswealth;thereforeifafirm

34

dividends

owners

can

retrieve

some

of

the

accumulated

profitsbypayingoutdividends

whendividendsarepaidoutownerswealthinvestedinthecompanyisreduced

Equity TreasuryStock insteadofpayingdividendsafirmmaydecide

todistributewealthtoownersbyrepurchasingsomeofitsownshares

cash aid to owners who decide to sell their

35

sharesrepresentsareductionininvestedwealth

wealthdistributionthroughstockrepurchases(unlikedividends)isselective,whichispreferableduetotaxreasons

Equity OtherComprehensiveIncome someeventsthataffectthecompanyvalue(i.e.

equity),butarebeyondmanagerialcontroldonotaffectprofitandarerecordeddirectlytoEq

forei n currenc translation ad ustments

36

whentranslatingvalueofforeignsubsidiariesthatuseadifferentaccountingcurrency

unrealizedgainsorlossesonavailableforsalesecurities whenusingfairvalue(markedtomarket)accountingvaluefluctuationsare

bookeddirectlyagainstequity


7/7


JiriNovak,IESUK 7

2.4 DoYouRecognizeThem?

Exercise2 Task

classifyfollowingitemsasassets(As),liabilities(Li),equity(Eq)ornone()

ifnecessaryassumethediscountrateof10%

38

Purpose

tryyourgutfeelingsconcerningtherecognitionofassetsandliabilities

itsfineifyouarenotsure;justmakeaguessafterconsideringtheprincipleswehavediscussedinthislecture

Exercise2 Classifyfollowingitemsintoassets(As),

liabilities (Li),equity(Eq),ornone( ) cashonthecompanysbankaccountof100

lineofcreditopenforthefirmintheirbankwithmaximumoverdraftof500;firmcurrentlyuses380

a com uter urchased a ear a o for 600

39

depreciatedlinearlyover3years

amachinepurchased12yearsagofor800depreciatedlinearlyover10years

rawmaterialinwarehousepurchasedfor200thathaslostinvalueandiscurrentlyworthonly180

salariesforlastmonthnotyetpaidoutworth650infixedsalariesand150inbonuses

preferredstockatparvalueof100issuedfor800

lastyearsprofitof500(nodividendspaidthisyear)

stocksinanothercompanypurchasednowfor70

Exercise2 Classifyfollowingitemsintoassets(As),

liabilities (Li),equity(Eq),ornone( ) bondsissuedbythecompanywithfacevalueof120

soldtodayatadiscountfor115

abankloanof1000obtainedayearagoafterpayinganinterestof80thisyear

40

commonstocksissuedfor2000afterprofitof500wasearnedandadividendof300hasbeenpaidout

aninvoicefor100fromasupplier(payable)forraw

materialitsuppliedtothecompanyonemonthago aninvoicefor130tothecustomer(receivable)for

productsdeliveredtohim2monthago

insurancefornextyear;theinsurancefeeof35waspaidthisyear

240paidtothecompanythisyearforconsultationservicesthatitwillperformednextyear

Exercise2

Classifyfollowingitemsintoassets(As),liabilities (Li),equity(Eq),ornone( ) aclaimafterthecompanymadebyitscustomers

worth50fordamagecausedbyitsproducts(thecompanyexpectstolosethetrialwithPr=80%)

aclaimthecompanyhasafteritssuppliersworth40

41

orsupp y ng e ec vesparepar s ecompanyexpectstowinthetrialwithPr=80%)

auniqueoptiontopurchase$2000for1000inoneyearstimewhentodaysexchangerateis1.5

patentwithestimatedvalueof160obtainedduringanacquisition(i.e.M&A)ofasmallercompetitor

technicalexpertiseusedinproductionthatcosted300todevelopinternallyinthecompany

askillfulmanagerafteracompanyinvested20lastyearand30thisyearinhertraining

Documents

02 Balance Sheet Act