Business Activities
Business activities are reflected in financial statements; business activities include:
– Operating activities – selling goods and services.
– Investing activities – acquisition and sale of productive assets.
– Financing activities – issue and retirement/repayment of liabilities and equity.
4
The Balance Sheet
The balance sheet reports the financial position at a point in time (end of the quarter or year).
The Balance Sheet is also called:
Statement of Financial Position
The components of the Balance Sheet are:
Assets
Liabilities
Shareholders’ (Owners’) Equity
5
The Balance Sheet
The balance sheet is represented by the
fundamental accounting equation:
Assets = Liabilities + Shareholders’ Equity
A = L + SE
The effects of all business transactions
may be represented in this formula.
6
Assets
Definition?
Current assets – Cash
– Short-term investments
– Accounts receivable
– Inventory
– Prepaid expenses
Long-term investments
Property, plant, and equipment
Intangible assets
7
Liabilities
Definition?
Current liabilities
– Accounts payable
– Wages payable
– Interest payable
– Short-term notes payable
– Current maturities of long-term debt
– Deferred revenues
– Other payables
Long-term liabilities
8
Owners’ (Shareholders’) Equity
Definition?
Contributed capital – Shareholders’ equity (par or stated value)
– Paid-in capital in excess of par value
Earned capital
- Earned Capital has 2 components: Retained Earnings and Other accumulated comprehensive income. We will cover other accumulated comprehensive income in Chapter 13.
– Retained earnings represent the excess earnings retained in the company after dividends have been paid to shareholders. This represents the equity generated by the company for the shareholders.
9
The Statement
of Shareholders’ Equity (SSE)
The following formula represents the
basic SSE:
Beginning shareholders’ equity
Plus: Issuance of stock
Plus: Net income
Less: Dividends
Ending shareholders’ equity
SEBegin + Issue + NI - D = SEEnd
10
The Statement
of Retained Earnings
The statement of retained earnings is a
subset of the SSE, and calculates the
changes in the retained earnings component.
Beginning retained earnings
Plus: Net income
Less: Dividends
Ending retained earnings
REBegin + NI - Div = REEnd
International Perspective – Balance
Sheet
Many non-U.S. firms that publish IFRS-based balance
sheets add shareholder’s equity to non-current liabilities,
referring to the total as capital employed. Consequently,
the balance sheet format looks like:
Non-current assets + Current assets - Current
liabilities = Non-current liabilities + Shareholders’
equity
Under U.S. GAAP balance sheet accounts are listed in order of liquidity. Many non-U.S. firms that publish IFRS-based balance sheets list their assets in the opposite order, starting with non-current assets, followed by current assets.
Many non-U.S. companies, especially in Europe, use the term “turnover” instead of revenue.
12
The Income Statement
Operating revenues – Sales
– Fees earned
– Other revenues
Operating expenses – Cost of goods sold
– Wage expense
– Rent expense
– Selling expense
– Depreciation expense
– Amortization expense
– Other expenses
Operating revenues
and expenses: usual
and frequent
Other revenues and
expenses: unusual
or infrequent
Disposal of a
business segment
Extraordinary items:
unusual and
infrequent
13
The Statement of Cash Flows
Cash flows from operating activities: – Cash flows associated with the acquisition and sale of a
company’s products and services – Collections from sales, rent, interest, etc. – Cash paid to suppliers and employees, and for rent, selling
activities, interest, and taxes etc. Cash flow from investing activities:
– Cash flows associated with the purchase and sale of a company’s investments.
– Proceeds from sale of investment securities, land, buildings, equipment, etc.
– Purchase of investment securities, land, buildings, equipment, etc.
Cash flow from financing activities: – Cash flows associated with a company’s two sources of outside
capital: liabilities and contributed capital. – Proceeds from issuance of notes, debt, sale of equity, etc. – Payments on notes, debt, dividends, etc.
14
Classifying Financing, Investing, and
Operating Transactions
Financing and Investing
Transactions
Operating
Transactions
Balance Sheet Income
Statement
1
1. Exchanges with shareholders
2
2. Exchanges of liabilities and shareholders’ equity
3
3. Issues and payments of debt
4
4. Purchases, sales, and exchanges of assets
5
5. Revenues and expenses
15
Classifying Operating Transactions
Transitory Persistent
Group C
Gains and losses due
to change in
accounting
principles
Group A
Normal and recurring
operating revenues
and expenses
Group B
Revenues and
expenses from
activities not
germane to a
company’s primary
activity
Extraordinary
items
Disposals of
segments
Other revenues
and expenses
Relationships Among the Financial Statements
Statement of
Cash Flows
Income
Statement
Statement of Stockholders’ Equity
Ending
Balance Sheet
Assets
(Cash)
=
Liabilities
+
Equity
Beginning
Balance
Sheet Assets
(Cash)
=
Liabilities
+
Equity
18
Exercise 2-3
Balance Sheet (B) or Income Statement (I)
a. Equipment
b. Fees Earned
c. Retained Earnings
d. Wage Expense
e. Patent
f. Cost of Goods Sold
g. Common Stock
h. Dividend Payable
i. Accumulated Depreciation
B
I
B
I
B
I
B
B
B
19
Exercise 2-3
Balance Sheet (B) or Income Statement (I)
j. Prepaid Expense
k. Gain on Sale of Short-term Investment
l. Rent Revenue
m. Supplies Inventory
n. Accounts Receivable
o. Land
p. Insurance Expense
q. Interest Payable
r. Deferred (Unearned) Revenue
B
I
I
B
B
B
I
B
B
20
Exercise Given (in billions): 2010 2009 2008
Beginning RE ? 1.3 1.2
Revenues 4.4 4.1 3.9
Expenses 3.9 ? 3.5
Div. declared .3 .3 ?
Ending RE 1.6 ? ? Now, using the following formulas and relationships, solve for the other missing items:
(1) Rev - Exp = NI
(2) RE(B) + NI - Div = RE(E)
(3) RE(E) becomes RE(B) in the next year
21
Exercise, 2010
Solve for RE(B) using:
RE(B) + NI - Div = RE(E)
NI = 4.4 – 3.9 = .5
RE(B) + .5 - .3 = 1.6
RE(B) = 1.4
22
Exercise, 2009
First, find RE(E):
RE(E) 2009 = RE(B) 2010 = 1.4
Now find Expenses:
RE(B) + Rev. – Exp. - Div = RE(E)
1.3 + 4.1 – Exp - .3 = 1.4
Exp. = 3.7
23
Exercise, 2008
First, find RE(E):
RE(E) 2008 = RE(B) 2009 = 1.3
Now find Div:
RE(B) + Rev – Exp. - Div = RE(E)
1.2 + 3.9 – 3.5 – Div. = 1.3
Div. = .3
24
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