Download - Understanding the Balance Sheet and Statement of Owners’ Equity Chapter 3 Robinson, Munter, Grant
Understanding the Balance Sheet and Statement of Owners’ Equity
Chapter 3
Robinson, Munter, Grant
Grant, Munter & Robinson
Chapter 3 2
Learning Objectives
• Understand all components of the Balance sheet including– Assets– Liabilities– Owners’ Equity
• Current and long-term assets and liabilities• Evaluate the balance sheet in a critical
fashion
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Assets = ClaimsThe Accounting Equation
• Assets are the cash, property or other resources controlled by the entity used to provide future economic benefits.
• Claims are the contractual and other obligations held against the firm’s assets.– Liabilities – creditors’ claims– Owners’ equity – residual claim
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Basic Financial Statements
• Balance sheet– Assets = Liabilities + Owners’ Equity– A snapshot at a particular moment in time
• Income statement– Revenue – Expenses– Covers a period of time
• Cash flow statement– Changes in cash during the period
• Equity statement– Changes in equity during the period
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Articulation of Financial Statements
Income StatementRevenue-ExpensesNet Income
Balance SheetAssets
=Liabilities
+Equity
Cash Flows Beginning cash ± Operating ± Investing ± Financing Ending cash
Equity StatementBeginning balance+ Net Income- DividendsEnding balance
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Assets(GAAP)
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
• List in order of liquidity– Begin with cash– IAS does not specify an order
• Differentiate between current and long-term– Longer of one year or the operating cycle– Current ratio = Current assets/Current liabilities
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Current Assets • Cash and cash equivalents• Accounts receivable (net of estimated bad debts)• Inventory
– Raw material, work in process, finished goods, merchandise
– LIFO, FIFO, Weighted average, Specific identification– At lower of historical cost or current market value
• Prepaid expenses• Marketable securities
– At market value
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Motorola, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31 (In millions, except per share amounts) 2001 2000ASSETSCurrent Assets
Cash and cash equivalents 6,082 3,301 Short-term investments 80 354 Accounts receivable, net 4,583 7,092 Inventories 2,756 5,242 Deferred income taxes 2,633 2,294 Other current assets 1,015 1,602
Total current assets 17,149 19,885
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Noncurrent Assets
• Property, plant and equipment– Net book value
• Historical cost less accumulated depreciation– Except for land which is not depreciated
– Include all costs incurred in preparing the asset for use
– Construction period (capitalized) interest for self-constructed assets
• Be aware of exceptions to historical cost (IAS 16)
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Noncurrent Assets Intangible assets
• Copyrights, trademarks– Historical cost less accumulated amortization
• Amortization is similar to straight-line depreciation
• Goodwill– Excess acquisition cost beyond current market value of
net assets acquired
– Tested for impairment annually (GAAP)
– Amortized over no more than 20 years (IAS)
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Motorola, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31 (In millions, except per share amounts) 2001 2000
Property, plant and equipment, net 8,913 11,157 Investments 2,995 5,926 Long-term deferred income taxes 1,152 - Other assets 3,189 5,375
TOTAL ASSETS 35,399 44,343
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December 31, 2001 2000ASSETSFixed assets and other non-current assetsCapitalized development costs 893 640 Goodwill 854 1,112 Other intangible assets 237 242 Property, plant and equipment 2,514 2,732 Investments in associated companies 49 61 Available-for-sale investments 399 337 Deferred tax assets 832 401 Long-term notes receivable 1,128 808 Other non-current assets 6 55
6,912 6,388 Current assetsInventories 1,788 2,263 Accounts receivable, less allowances for doubtful accounts (2001:217, 2000: 236) 5,719 5,594 Prepaid expenses and accrued income 1,480 1,418 Short-term loan receivable 403 44 Available-for-sale investments 4,271 2,774 Bank and cash 1,854 1,409
15,515 13,502 Total assets 22,427 19,890
Nokia Consolidated balance sheet, IAS (EURm)
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Special assets
• Deferred tax asset– Results from a current tax payment that relates
to a future financial statement expense– A prepayment (a deferred tax liability
represents a deferred payment)
• Inventory reserves– Reflect a reduction of market value below
historical cost
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Motorola, Inc. Inventories (Note 2)Inventories, net, consist of the following:
Finished goods 1,140 2,005
Work-in-process and production materials 2,782 4,2813,922 6,286
Less inventory reserves (1,166) (1,044)2,756 5,242
200031-Dec 2001
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Claims• Liabilities (GAAP)
– Probable future economic sacrifices arising from present obligations as a result of past transactions
– Claims that must be paid first are listed first (GAAP)
– IAS does not specify an order
• Equity– Residual claims against assets
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Current Liabilities
• Accounts payable to suppliers– Purchase material without paying cash
• Accrued expenses– Interest, taxes, wages…
• Current portion of debt– Principal to be paid within the next year
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Motorola, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31 (In millions, except per share amounts) 2001 2000
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesNotes payable and current portion of long-term debt 870 6,391 Accounts payable 2,434 3,492 Accrued liabilities 6,394 6,374
Total current liabilities 9,698 16,257
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Noncurrent Liabilities
• Principal associated with– Long-term portion of Loans, Notes, Mortgages,
Bonds
• Interest is a component of Current liabilities• Current portion of debt is a Current liability• Net of discounts or premiums• Details are discussed in the notes to the
statements
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Motorola, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31 (In millions, except per share amounts) 2001 2000
LIABILITIES AND STOCKHOLDERS' EQUITYOther Liabilities 1,152 1,192
Company-obligated... preferred securities… 485 485
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December 31, 2001 2000Minority interests 196 177 Long-term liabilitiesLong-term interest-bearing liabilities 207 173 Deferred tax liabilities 177 69 Other long-term liabilities 76 69
460 311 Current liabilitiesShort-term borrowings 831 1,069 Current portion of long-term debt - 47 Accounts payable 3,074 2,814 Accrued expenses 3,477 2,860 Provisions 2,184 1,804
9,566 8,594 Total shareholders' equity and liabilities 22,427 19,890
Nokia Consolidated balance sheet, IAS (EURm)
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Owners’ EquityStock
• Value listed– Par or stated value
– Additional paid in capital
– Reflects what was paid for stock at original issuance
• Number of shares– Authorized – Upper limit of number of shares that can be
issued
– Issued – Sold to investors
– Outstanding – Held by investors (Issued less Treasury)
– Treasury – Firm purchased its own shares on the market
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Owners’ Equity
• Retained earnings– Increased (decreased) by net income (loss)– Decreased by dividends paid
• Comprehensive income– Nonowner changes to equity
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Owners’ EquityPreferred Stock
• Listed after Liabilities and before Common stock
• Shares properties of debt and equity
• In the event of liquidation, receive funds before Common shareholders
• Dividend specified as dollar amount or percentage of par
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Motorola, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31 (In millions, except per share amounts) 2001 2000Shareholders' equityPreferred stock, $100 par value (none issued)Common stock, $3 parAuthorized shares: 2001 and 2000, 4,200Issued and outstanding 2001, 2,254; 2000, 2,191.2 6,764 6,574 Additional paid-in capital 1,707 1,188 Retained earnings 5,434 9,727 Non-owner changes to equity (214) 1,123 Total stockholders' equity 13,691 18,612 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 25,026 36,546
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December 31, 2001 2000SHAREHOLDERS' EQUITY AND LIABILITIESShareholders' equityShare capital 284 282 Share issue premium 2,060 1,695 Treasury shares (21) (157) Translation differences 326 347 Fair value and other reserves 20 - Retained earnings 9,536 8,641
12,205 10,808
Nokia Consolidated balance sheet, IAS (EURm)
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Nonowner changes to equityOther comprehensive income (GAAP)
• Adjustments to fair value for available-for-sale securities (Chapter 13)
• Foreign currency translation adjustment (Chapter 17)
• Gains/losses on cash flow hedge derivatives (Chapter 16)
• Gains/losses on investment hedge instruments (Chapter 16)
• Adjustments related to underfunding a defined benefit pension plan (Chapter 15)
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Statement of Shareholders’ Equity
• Provides details of changes in Equity
• Stock
• Other comprehensive income
• Retained earnings
• Includes beginning and ending balances in accounts
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Motorola, Inc. and Subsidiaries
(In millions, except per share amounts)
Common Stock and Additional
Paid-In Capital
Fair Value Adjustment to Available For
Sale Securities
Foreign Currency
Translation Adjustments
Other Items
Retained Earnings
Comprehensive
Earnings (Loss)
Balances at December 31, 2000 7,762 1,536 (339) (74) 9,727 Net loss (3,937) (3,937)
Unrealized losses on securities, net (1,193) (1,193)
Foreign currency translation adjustments (173) (173)
Minimum pension liability adjustment 30 30 Issuance of common stock and stock options exercised 753
Equity security units issuance costs (44)
Loss on derivative instruments, net (1) (1)Dividends declared ($0.16 per share) (356)Balances at December 31, 2001 8,471 343 (512) (45) 5,434 (5,274)
Non-Owner Changes to Equity (net of tax)
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Nokia Statement of Changes in Shareholders’ Equity(partial, IAS, EURm)
Number of shares
Share capital
Share Issue
PremiumTreasury shares
Translation differences
Fair value and other reserves
Retained earnings Total
Balance at 12/31/00 4,692,133 282 1,695 (157) 347 (56) 8,641 10,752 Share issue 41,386 2 407 409 Acquisition of treasury shares (995) (21) (21)
Reissuance of treasury shares 3,778 (52) 157 105 Stock options issued on acq'n 20 20 Stock opt exerc'd related to acq'n (10) (10) Dividend (1,314) (1,314) Translation diff. 65 65 Net investment hedge losses (86) (86) Cash flow hedge 76 76 Other increase 9 9 Net profit 2,200 2,200 Balance at 12/31/01 4,736,302 284 2,060 (21) 326 20 9,536 12,205
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Summary
• The Balance sheet is a snapshot of a firm’s financial position at a point in time
• Assets = Liabilities + Equity
• Statement of Stockholders’ equity depicts changes in owners’ claims over time