02 Balance Sheet Act
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7/31/2019 02 Balance Sheet Act
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 1
Lecture2BalanceSheet
JiriNovakIES,UK
Recap
PurposeofAccounting accountingislanguageofbusiness
captureskeyconsequencesofcomplexbusinessactivitiesinaparsimonious andstandardized way
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allowstobuildunderstandingofafirmsfinancialpositionandofitshistoricalandprospectivefinancialperformance
standardsettersmust:
prioritizebetweenusers(ownersandcreditors)
tradeoffvariouscriteriaofaccountingquality(relevancevs.reliability)
Recap
Account Structure
recordofallchangesinaparticularitemoveroneperiod(accountofevents)
Tshapeaccountsrecordincreasesononeside
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eachtransactionisrecorded
onthedebit (=left)sideand onthecredit (=right)sideofanotheraccount
accountingbooksmustalwaysbeinbalance
debits = creditst
2.1 FinancialStatements
FinancialStatements
BalanceSheet capturesthefinancialpositionofacompanyat
onepointintime
IncomeStatement(P&L)
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summar zes eeconom cper ormanceo ecompanyoveranaccountingperiod
StatementofCashFlow showshowmuchcashthecompanycollected
andpaidoutoveranaccountingperiod
StatementofShareholdersEquity detailsoutchangesinshareholdersequityover
anaccountingperiod
BalanceSheet
BalanceSheetComponents assets(As) whatthecompanyowns
liabilities(Li) whatthecompanyowestoitscreditorsandbusinesspartners
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equity(Eq) whatthecompanyowestoitsowners(i.e.shareholders)
BalanceSheet
assetsliabilities
equity
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 2
IncomeStatement IncomeStatement showswhatrevenuesacompanygeneratedand
whatexpenseswereincurredinafiscalyear
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IncomeStatementexpenses revenues
lossesgains
earningsor netincome
or profit
StatementofCashFlow StatementofCashFlow
SCFreportsthecashreceiptsandoutlaysintheperiodoftheiroccurrence,classifiedintooperating,investingandfinancingactivities
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StatementofCashFlowcashflowfromoperating activities
+/ cashflowfrominvesting activities
+/ cashflowfromfinancing activities
totalcashflow
FinancialStatements Creditvs.Debit assets,expenses foundonthedebitsideofBSof
ISandsoincreasesarerecordedasdebits(Dr)anddecreasesascredits(Cr)
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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
noncashassets equity
December31,2000 December31,2001
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IncomeStatement 2001revenues
expenses
netincome
StatementofCashFlow2001operatingcashflow
+/ investingcash flow
+/ financingcashflow
cash
2.2 BalanceSheet
BalanceSheet
BalanceSheetComponents assets(As) whatthecompanyowns
liabilities(Li) whatthecompanyowestoitscreditorsandbusinesspartners
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equity(Eq) whatthecompanyowestoitsowners(i.e.shareholders)
BalanceSheet
assetsliabilities
equity
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 3
BalanceSheet BalanceSheetEquation asaconsequenceofdoubleentryaccounting
balancesheet(BS)mustalwaysbeinbalance
atanypointintimetotalassets(As)mustbe
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equaltothesumofliabilities(Li)&equity(Eq)
Ast=Lit+Eqt t
assets equityliabilities
BalanceSheetbalancesheetmustalwaysbeinbalance
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currentliabilities
BalanceSheetcash
marketablesecurities
notespayable
currentmaturitiesofltdebt
accountspayable
BalanceSheet
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equityfixedassets
currentassets
longtermliabilities
accountsreceivable
inventories
prepaidexpenses
property,plant&equipment
intangibleassets
accruedliabilities
unearnedrevenue
longtermdebt
deferredtaxes
contributedcapital
retainedearnings
Classification
Assets
assetsareclassifiedbasedonliquidity,easewithwhichtheycanbeconvertedintocash(distinctionbetweencurrentorfixed)
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Liabilities
liabilitiesareclassifiedbasedon:
maturity timeuntiltheyarepayable(~liquidity:current or longterm)
nature eitheroperating orfinancial
Classification CurrentAssets shorttermassetsthatarecontinuallyturned
overinthecourseofabusinessduringnormalbusinessactivity,thatswhy current
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tocash,sold,orconsumedeitherinayearorintheoperatingcycle,whicheverislonger
FixedAssets longtermassetsthatareusedformorethanone
yearorbusinesscycle
thecostoftheseassetsisdistributedovertheirusefullifethroughdepreciation
Assets
BalanceSheet IncomeStatement
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expenses
revenues
earnings
equity
assets
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 4
Assets
IntuitiveDefinition(broad) Athingorpersonofuseorvalue., i.e.anything
thatisofvalueorfuturebenefit(OxfordEnglishDictionary)
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AccountingDefinition(narrower) everythingthatacompanyownsasa
consequenceofpastbusinessactivitiesandcanbenefitfrominthefuture
e.g.land,buildings,machinery,equipment,motorvehicles,rawmaterials,finishedproducts,receivables,cash,securities
Assets
Aresourcecontrolledbytheenterpriseasaresult
AccountingDefinition
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ofpasteventsandfromwhichfutureeconomic
benefitsareexpectedtoflowtotheenterprise.
InternationalFinancialReportingStandards(IFRS)
Assets
Control
abilityofanentitytobenefitfromtheassetandtodenyorregulatetheaccessofotherstothebenefit
mostly(butnotalways)ownershipofanobjector
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rightimpliescontroloverit
Examples
intellectualcapital mostlycannotberecognizedasanassetduetolackofcontrolofthecompanyofitspersonnel
leasing controlovertheleasedpropertyownedbythelessoristransferredtothelessee
Assets
ResultofPastEvents specificationofapasteventdifferentiatesassets
fromintentionstoacquireassets(notrecognized)
existenceofapasttransactionimpliesacostor
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valueofanassetthatcanbemeasuredreliably
Examples
orders/agreements notrecognizedasassetsuntiltheagreeduponexchangetakesplace
Assets ExpectedEconomicBenefits reasonablycertainpotentialtocontributetothe
objectivesoftheentity
Exam le
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researchanddevelopment(R&D)expendituresfailtomeetthecriteriabecauseitistoouncertainthatfutureeconomicbenefitswillarise
intangibleassets recognizedonlyiftheyresultfromamergeroranacquisition(M&A)
Liabilities
Aliabilityisapresentobligationoftheenterprise
AccountingDefinition
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ar s ng rompastevents,t esett emento w c s
expectedtoresultinanoutflowfromtheenterprise
ofresourcesembodyingeconomicbenefits
InternationalFinancialReportingStandards(IFRS)
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 5
Liabilities
RecognitionCriteria presentobligations companyisliable totransfer
benefitstootherparties(liability)
probablefuturesacrificesofeconomicbenefit
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liabilitiescanbeseenasnegativeassetsnetassets=assets liabilities
Examples
loanfromabank,bondsheldbycreditorsaccountspayabletosuppliers,salariespayable,taxespayable
Equity
BalanceSheet IncomeStatement
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expenses
liabilities
revenues
earnings
assets
equity
Equity
ResidualStake residual stakeofownersinfirmconsistingof:
contributedcapital accumulatedownersinvestmentinthecompanyovertime
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retainedearnings accumulatedpastprofitsnotpaidoutasdividends(i.e.retained)
LiquidationPerspective iffirmisliquidated,allassetsaresoldandcash
proceedsusedtosettleall(ifpossible)liabilities;whateverleftbelongstoowners
equity=differencebetweenassetsandliabilities
Equity
Equityistheresidualinterestinthenetassetsof
AccountingDefinition
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anentitythatremainsafterdeductingits
liabilities
FinancialAccountingStandardsBoard(FASB)
Equity StatementofShareholdersEquity detailsoutchangesinequitycomponents:
contributedcapital capitalinvestedbytheowners(+)incommonandpreferredstock
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retainedearnings netincomeoftheyear(+),dividendspaidouttotheowners()
treasurystock repurchaseofacompanysownstock()
othercomprehensiveincome unrealizedgainsorlossesonavailableforsalesecurities(+/),foreigncurrencytranslationadjustments(+/)
FinancialStatements
IncomeStatement 2001revenues
expenses
netincome
StatementofEquity2001 contributedcapital
+/ retainedearnings
/+ treasury stock
StatementofCashFlow2001operatingcashflow
+/ investingcash flow
+/ financingcashflow
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BalanceSheet2000cash liabilities
noncashassets equity
comprehensive income
BalanceSheet2001cash liabilities
noncashassets equity
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 6
ExcitingAccounting goodluckinthedeepwatersofaccounting!
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2.3 DoYouRecognizeThem?
Equity
ContributedCapital commonstock regulartypeofstock;claimsof
commonstockholderstothefirmsassets,metthrougheitherdividendsorliquidation,are
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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
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dividends
owners
can
retrieve
some
of
the
accumulated
profitsbypayingoutdividends
whendividendsarepaidoutownerswealthinvestedinthecompanyisreduced
Equity TreasuryStock insteadofpayingdividendsafirmmaydecide
todistributewealthtoownersbyrepurchasingsomeofitsownshares
cash aid to owners who decide to sell their
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sharesrepresentsareductionininvestedwealth
wealthdistributionthroughstockrepurchases(unlikedividends)isselective,whichispreferableduetotaxreasons
Equity OtherComprehensiveIncome someeventsthataffectthecompanyvalue(i.e.
equity),butarebeyondmanagerialcontroldonotaffectprofitandarerecordeddirectlytoEq
forei n currenc translation ad ustments
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whentranslatingvalueofforeignsubsidiariesthatuseadifferentaccountingcurrency
unrealizedgainsorlossesonavailableforsalesecurities whenusingfairvalue(markedtomarket)accountingvaluefluctuationsare
bookeddirectlyagainstequity
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FinancialAccounting(JEB044) CharlesUniversity,Prague
JiriNovak,IESUK 7
2.4 DoYouRecognizeThem?
Exercise2 Task
classifyfollowingitemsasassets(As),liabilities(Li),equity(Eq)ornone()
ifnecessaryassumethediscountrateof10%
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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
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depreciatedlinearlyover3years
amachinepurchased12yearsagofor800depreciatedlinearlyover10years
rawmaterialinwarehousepurchasedfor200thathaslostinvalueandiscurrentlyworthonly180
salariesforlastmonthnotyetpaidoutworth650infixedsalariesand150inbonuses
preferredstockatparvalueof100issuedfor800
lastyearsprofitof500(nodividendspaidthisyear)
stocksinanothercompanypurchasednowfor70
Exercise2 Classifyfollowingitemsintoassets(As),
liabilities (Li),equity(Eq),ornone( ) bondsissuedbythecompanywithfacevalueof120
soldtodayatadiscountfor115
abankloanof1000obtainedayearagoafterpayinganinterestof80thisyear
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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
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orsupp y ng e ec vesparepar s ecompanyexpectstowinthetrialwithPr=80%)
auniqueoptiontopurchase$2000for1000inoneyearstimewhentodaysexchangerateis1.5
patentwithestimatedvalueof160obtainedduringanacquisition(i.e.M&A)ofasmallercompetitor
technicalexpertiseusedinproductionthatcosted300todevelopinternallyinthecompany
askillfulmanagerafteracompanyinvested20lastyearand30thisyearinhertraining