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The Balance Sheet-The Balance Sheet-Liabilities and Liabilities and Shareholders’ EquityShareholders’ Equity
“Old accountants never die; they just lose their balance”
--Anonymous
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The Balance SheetThe Balance Sheet
Also called the statement of condition or Also called the statement of condition or statement of financial positionstatement of financial position
Financial ConditionFinancial Condition
Liabilities + Stockholders’ equityLiabilities + Stockholders’ equityAssets =Assets =
Assets =Assets = What the firm What the firm ownsowns
Liabilities =Liabilities = What the firm What the firm owesowes to to outsidersoutsiders
Stockholders’ equity =Stockholders’ equity = What the firm What the firm owesowes to to
Internal ownersInternal owners
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Asset Measurement and Asset Measurement and ValuationValuation
Accounts Receivable Net Recoverable ValueInventories Lower of Cost or Net Realizable ValuePP&E/Intangibles Cost-Accumulated Depreciation
Revalued Cost-Accumulated DepreciationTrading Securities Fair Value-thru shareholders' EquityAvailable for Sale Fair Value-thru profit and lossHeld to Maturity Amortized Cost
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LiabilitiesLiabilities
obligations of an entity to make a future obligations of an entity to make a future payment or to deliver goods or services to payment or to deliver goods or services to the third parties in the future in return for the third parties in the future in return for cash borrowed or service used or goods cash borrowed or service used or goods acquiredacquired
Classified according to their due datesClassified according to their due dates due within one year or the operating cycle are due within one year or the operating cycle are
classified as current liabilitiesclassified as current liabilities loans or credits that mature in more than one loans or credits that mature in more than one
year are classified as long-term liabilitiesyear are classified as long-term liabilities
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Liabilities Liabilities (cont.) (cont.)
Short-term obligations that arise from Short-term obligations that arise from credit extended by suppliers for the credit extended by suppliers for the purchase of goods and servicespurchase of goods and services
Account is eliminated when the bill is Account is eliminated when the bill is satisfiedsatisfied
Significant changes from period to Significant changes from period to period often result from changes in period often result from changes in sales volume, economic conditions or sales volume, economic conditions or credit policies available to firm from credit policies available to firm from its suppliers its suppliers
Trade PayablesTrade Payables
Trade PayablesTrade PayablesAccounts PayableAccounts PayableNotes PayableNotes Payable
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Liabilities Liabilities (cont.) (cont.)
Short-term obligations in the Short-term obligations in the form of lines of credit financial form of lines of credit financial institutionsinstitutions
Financial Liabilities (Notes Payable)Financial Liabilities (Notes Payable)
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Liabilities Liabilities (cont.) (cont.)
When a firm has bonds, mortgages, When a firm has bonds, mortgages, or other forms of long-term or other forms of long-term debt outstanding, the portion of debt outstanding, the portion of the principal that will be repaid the principal that will be repaid during the upcoming year is during the upcoming year is classified as a current liabilityclassified as a current liability
Current Maturities of Long-Term DebtCurrent Maturities of Long-Term Debt
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Liabilities Liabilities (cont.)(cont.)
Result from recognition of expenses Result from recognition of expenses before they are actually paidbefore they are actually paid
Under accrual accounting, expenses Under accrual accounting, expenses are recognized when INCURRED and are recognized when INCURRED and thus ACCRUED, not when paid in thus ACCRUED, not when paid in cashcash
In this case, cash flow In this case, cash flow succeeds succeeds expense recognition expense recognition
Accrued LiabilitiesAccrued Liabilities
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Liabilities Liabilities (cont.)(cont.)
Result from prepayments received Result from prepayments received in advance for services or productsin advance for services or products
Under accrual accounting, revenue Under accrual accounting, revenue is recognized when EARNED, not is recognized when EARNED, not when cash is receivedwhen cash is received
In this case, cash flow In this case, cash flow precedesprecedes revenue recognition revenue recognition
Unearned Revenue or Deferred CreditsUnearned Revenue or Deferred Credits
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Liabilities Liabilities (cont.) (cont.)
Result of temporary differences in Result of temporary differences in the recognition of revenue and the recognition of revenue and expense for taxable income expense for taxable income relative to reported financial relative to reported financial income income
Deferred TaxesDeferred Taxes
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Deferred TaxationDeferred Taxation
Machinery IFRS Tax LegisCost 50.000 50.000 Life 10 5Rate 10% 20%EBD 50.000 50.000
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IFRS EBD Depr EBT taxyear 1 50.000 5.000 45.000 9.000 year 2 50.000 5.000 45.000 9.000 year 3 50.000 5.000 45.000 9.000 year 4 50.000 5.000 45.000 9.000 year 5 50.000 5.000 45.000 9.000 year 6 50.000 5.000 45.000 9.000 year 7 50.000 5.000 45.000 9.000 year 8 50.000 5.000 45.000 9.000 year 9 50.000 5.000 45.000 9.000 year 10 50.000 5.000 45.000 9.000 Total 50.000 90.000
Tax Leg. EBD Depr EBT taxyear 1 50.000 10.000 40.000 8.000 year 2 50.000 10.000 40.000 8.000 year 3 50.000 10.000 40.000 8.000 year 4 50.000 10.000 40.000 8.000 year 5 50.000 10.000 40.000 8.000 year 6 50.000 - 50.000 10.000 year 7 50.000 - 50.000 10.000 year 8 50.000 - 50.000 10.000 year 9 50.000 - 50.000 10.000 year 10 50.000 - 50.000 10.000 Total 50.000 90.000
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Noncurrent LiabilitiesNoncurrent Liabilities
Long-Term Debt (Financial Long-Term Debt (Financial Liabilities)Liabilities)
Post-retirement Benefits Other Post-retirement Benefits Other Than PensionsThan Pensions
ProvisionsProvisions Commitments and ContingenciesCommitments and Contingencies Hybrid SecuritiesHybrid Securities
Obligations with maturities beyond one yearObligations with maturities beyond one year
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Noncurrent Liabilities Noncurrent Liabilities (cont.)(cont.)
BondsBonds Long-Term Notes PayableLong-Term Notes Payable MortgagesMortgages Obligations under leasesObligations under leases
Long-Term Debt (Financial Liabilities)Long-Term Debt (Financial Liabilities)
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Noncurrent Liabilities Noncurrent Liabilities (cont.)(cont.)
Are, in substance, a “purchase” Are, in substance, a “purchase” rather than a “lease”rather than a “lease”
Affect both balance sheet and Affect both balance sheet and income statementincome statement
Capital Lease ObligationsCapital Lease Obligations
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Provisions and Contingent Provisions and Contingent LiabilitiesLiabilities a potential liability arising from a past a potential liability arising from a past
transaction and that depends on a transaction and that depends on a future eventfuture event
could be disclosed in the body of the could be disclosed in the body of the balance sheet with the liabilitiesbalance sheet with the liabilities
could be disclosed within notes to financial could be disclosed within notes to financial statementsstatements
certainty of the amount and the certainty of the amount and the payment date determines where they payment date determines where they will be disclosedwill be disclosed
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Is the amount of the liability known? YES
Recognize liabilityon the balance
sheet
NO
Can the amount of Liability be reasonablyEstimated?
YES Is the liability likely to occur? (Probable)
YES
Disclose in the notes To the financial
Statements(CONTINGENT LIABILITY)
NONO
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Product Warranty LiabilitiesProduct Warranty Liabilities When goods and services are sold under warranty When goods and services are sold under warranty
coveragecoverage A good example of provisionA good example of provision matching principle - warranty expenses of sales matching principle - warranty expenses of sales
in a period should be recorded in the same period in a period should be recorded in the same period Subsequent expenditures of warranties are Subsequent expenditures of warranties are
charged against warranty liabilitycharged against warranty liability
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On November 24, 2003, 26 passengers on Paris Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $5.000.000 were filed on January 11, 2004 against the airline by the 18 injured passengers. The airline carries no insurance. Legal counsel has studied each case and advised Paris that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended 31 December 2003 were issued February 27, 2004.
Agazzi Corporation, a dishwasher machine manufacturer, is the defendant in a patent infringement lawsuit. The attorney of the company claims that, if the suit goes against Agazzi, the loss may be as much as $4.000.000; however, the attorney believes the loss of this suit to be only possible.
Animaniacs company entered into a contract on 21 January 2008 which will probably result in a significant loss to the company. The financial statements as of 31 December 2007, that were issued to public on 1 February 2008 do not reflect any provision for the probable loss.
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Noncurrent Liabilities Noncurrent Liabilities (cont.)(cont.)
Can appear under the liability section Can appear under the liability section of the balance sheetof the balance sheet
Can have a significant impact on Can have a significant impact on corporate balance sheetscorporate balance sheets
Can also impact profitability by Can also impact profitability by substantially increasing the substantially increasing the recognition of annual postretirement recognition of annual postretirement benefit expense benefit expense
Post-retirement benefitsPost-retirement benefits
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Noncurrent Liabilities Noncurrent Liabilities (cont.)(cont.)
Refer to contractual agreements that will Refer to contractual agreements that will have a significant financial impact on have a significant financial impact on the company in the futurethe company in the future
For example:For example: An An operating leaseoperating lease is a is a common type of commitment and is a common type of commitment and is a form ofform of
off-balance-sheet financingoff-balance-sheet financing
CommitmentsCommitments
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Noncurrent Liabilities Noncurrent Liabilities (cont.)(cont.)
Have the characteristics of both Have the characteristics of both debt and equitydebt and equity
Some companies have Some companies have mandatorily redeemable mandatorily redeemable preferred stock preferred stock outstanding outstanding
Hybrid SecuritiesHybrid Securities
For example:For example:
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?
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Shareholders’ EquityShareholders’ Equity
Ownership equity is the residual Ownership equity is the residual interest in assets that remains interest in assets that remains after deducting liabilities after deducting liabilities
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Stockholders’ Equity Stockholders’ Equity (cont.)(cont.)
Shareholders:Shareholders:Do not ordinarily receive a fixed returnDo not ordinarily receive a fixed return
Have voting privileges in proportion to Have voting privileges in proportion to ownership interestownership interest
Dividends are declared at the discretion of Dividends are declared at the discretion of a company’s board of directorsa company’s board of directors
Common StockCommon Stock
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Stockholders’ Equity Stockholders’ Equity (cont.)(cont.)
Reflects the amount by which the Reflects the amount by which the original sales price of the stock original sales price of the stock shares exceeded par valueshares exceeded par value
Additional Paid-In CapitalAdditional Paid-In Capital
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Stockholders’ Equity Stockholders’ Equity (cont.)(cont.)
Is the sum of every dollar a company has Is the sum of every dollar a company has earned since its inception, less any earned since its inception, less any payments made to shareholders in payments made to shareholders in the form of cash or stock dividendsthe form of cash or stock dividends
Beginning retained earnings Beginning retained earnings ± Net income (loss) – Dividends ± Net income (loss) – Dividends
= Ending retained earnings = Ending retained earnings
Retained EarningsRetained Earnings
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Stockholders’ Equity Stockholders’ Equity (cont.)(cont.)
Other accounts that can appear in the Other accounts that can appear in the equity section include:equity section include:
Preferred stockPreferred stockAccumulated other comprehensive Accumulated other comprehensive
incomeincomeTreasury stockTreasury stock
Revaluation FundRevaluation Fund
Other Equity AccountsOther Equity Accounts
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Nonowner changes to equityNonowner changes to equityOther comprehensive income (GAAP)Other comprehensive income (GAAP)
Adjustments to fair value for available-for-Adjustments to fair value for available-for-sale securities sale securities
Foreign currency translation adjustmentForeign currency translation adjustment Gains/losses on cash flow hedge derivativesGains/losses on cash flow hedge derivatives Gains/losses on investment hedge Gains/losses on investment hedge
instrumentsinstruments Adjustments related to underfunding a Adjustments related to underfunding a
defined benefit pension plandefined benefit pension plan
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Cash and Cash Equivalents 103.416 Bank Loans (30 days maturity) 160.200Marketable Securities 42.280 Accounts Payable 109.333Accounts Receivable 592.667 Salaries Payable 73.931Notes Receivable (120 days maturity) 293.333 Taxes Payable 95.826Inventories 417.333 Total Current Liabilities 439.290Prepaid Expenses 1.312Total Current Assets 1.450.341 Bonds Issued (5 years maturity) 233.333
Land 1.503 Total Liabilities 672.623Buildings 66.560Machinery and Equipment 530.167 Share Capital 666.667Accumulated Depreciation -249.143 Retained Earnings 360.000Total Long-term Assets 349.087 Net Income for the year 100.138
Total Shareholders' Equity 1.126.805
Total Assets 1.799.428 Total Liab. & Shareh. Equity 1.799.428
Deli Pet FoodsBalance Sheet -31 December 2006
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Statement of Shareholders’ EquityStatement of Shareholders’ Equity
Provides details of changes in Provides details of changes in EquityEquity
StockStock Other comprehensive incomeOther comprehensive income Retained earningsRetained earnings Includes beginning and ending Includes beginning and ending
balances in accountsbalances in accounts
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