understanding financial statements balance sheet – liabilities & stockholders’ equity
Post on 21-Dec-2015
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UNDERSTANDING FINANCIAL STATEMENTS
BALANCE SHEET – Liabilities & Stockholders’ Equity
LIABILITIES Liabilities- probable future sacrifices of economic
benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future, as a result of past transactions or events.
May be CURRENT or LONG-TERM -- same criteria of “one-year or operating cycle, whichever is longer”
Current Liabilities Accounts Payable Short-term Notes Payable Accrued Liabilities Unearned Revenues (Deferred Credits) Current Maturity Portion of Long-term Debt Deferred Taxes
Long-Term Liabilities Notes or Mortgages Payables Bonds Payable Leases Payable (capital leases) Pension Obligations Post-retirement benefits other than pensions Deferred Taxes Warranty Obligations Contingencies Payable
Accounts Payable Usually defined as obligations arising from
purchases of merchandise for resale or of raw materials
Few valuation or reporting issues Significant changes from period to period
often result from changes in sales volume
Short-Term Notes Payable Promissory notes due within a year (or
operating cycle if more appropriate) Usually are interest-bearing Usually reported at face value because of
short-term nature
Accrued Liabilities Result from accrual basis of accounting Represent expenses that have been
INCURRED and thus ACCRUED, but have NOT BEEN PAID in cash
Examples are Interest Payable and Wages Payable
Unearned Revenue Examples:
Unearned rent revenueAdvances from customers
Sometimes called “deferred credits” Results from a prepayment received in advance for
services or products Under accrual accounting, revenue is recognized
when EARNED, not when received in cash -- in this case, cash flow precedes revenue recognition
Current Maturities - LT Debt Represent principal payments (not interest) on
debt that are due within one year Includes principal payments on notes,
mortgages, bonds, leases
Long-term Liabilities Notes or Mortgages Payable Bonds Payable Leases Payable (Capital Leases Payable) -
recorded at the present value of expected future cash outflows starting when the lease begins (PPE will also be recorded)
(Operating leases are recorded as lease expense and no liability nor PPE are recorded)
Pension Obligations - reported at the present value of expected future cash outflows
Warranty Obligations - Represent estimated liability of a firm to repair or replace merchandise that it sells
Long-term Liabilities
Postretirement benefits other than pensions
An estimate of the obligation for paying medical insurance premiums or medical expenses of retired employees and spouses.
These future benefits are accrued as the employees are working for the company.
Long-term Liabilities Contingencies – potential liabilities such as possible
losses assessed in a lawsuitIf the loss is probable, then record the liability and loss and disclose in a footnote. If the loss is not estimable, then do not record the liability and loss, but must disclose in a footnote.If the loss reasonably possible, then do not record the liability and loss, but must disclose in a footnote.If remote, then do not record, must not disclose.
Deferred Income Taxes Taxes paid are based on taxable income on Tax Return Tax expense reported on income statement is based on
FINANCIAL Income Statement Deferred Income Taxes result from TIMING (temporary)
differences in taxable and financial statement income Classification may be current or long-term depending on
the asset or liability underlying the temporary difference Examples:
depreciation pension expense installment sale accounting
OWNERS’ EQUITY Forms of business contrasted as to owners’ equity
section. a. Proprietorship: report owners’ equity as a
single capital account. b. Partnership: report separate capital account
for each partner. c. Capital account reflects all changes:
investments, withdrawals, earnings, and losses.d. Corporations report stockholders’ equity, including contributed capital and retained earnings.
STOCKHOLDERS’ EQUITY
Common stock, at par valuePreferred stockAdditional Paid-in Capital (also called Paid- in Capital in Excess of Par)Retained EarningsAccumulated Other Comprehensive IncomeLess: Treasury Stock (at cost)
Total Stockholders’ Equity
Common Stock and Additional Paid-In Capital Common stock represents ownership of the company Voting privileges No fixed return (no required dividend rate)
But over the company’s lifetime the common stock dividends should be higher than the preferred stock dividends
Must disclose par value and number shares: Authorized Issued Outstanding
Preferred Stock No voting privileges If company terminates, then their investment is returned
before the common stockholders Stated dividend rate (i.e., 8%) Usually annual dividend is not required, but when dividends
are declared by B of D, then the current year preferred stock dividends would be paid before the common stock dividends.
If “cumulative preferred stock”, then missed dividends (called dividends in arrears) would be paid first when dividends are declared by B of D.
If “redeemable preferred stock” (preferred stkhlders are repaid their investment after a stated period, like bonds), then the company is not allowed to show in SE section (show between liabilities and SE section.
Retained Earnings Represents the cumulative undistributed
earnings of the business since its inception Accumulated net income (net loss) less
dividends declared since inception Current year detail is shown in Statement of
Retained Earnings (Beg. RE+Net Income-Dividends declared= Ending RE)
Only Ending RE balance is shown on BS
Treasury Stock Repurchased shares of stock to be retained
and possibly reissued later is called Treasury Stock.
The stock may be repurchased:
To distribute the stock to employees under stock option plans or retirement plans.
To prevent a hostile takeover.
Treasury Stock The repurchase of a company’s own stock can be
accounted for by one of two methods:
(1) At Cost Method (the amount paid to repurchase the stock is shown as a separate line item as a subtraction from stockholders’ equity)
(2) Par Value Method (the amount paid to repurchase the stock reduces Common Stock and Additional Paid-In Capital)