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


Chapter 3 3

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


Chapter 3 4

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


Chapter 3 5

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


Chapter 3 6

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


Chapter 3 7

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


Chapter 3 8

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


Chapter 3 9

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)


Chapter 3 10

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)


Chapter 3 11

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


Chapter 3 12

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)


Chapter 3 13

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


Chapter 3 14

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


Chapter 3 15

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


Chapter 3 16

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


Chapter 3 17


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


Chapter 3 18

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


Chapter 3 19


LIABILITIES AND STOCKHOLDERS' EQUITYOther Liabilities 1,152 1,192

Company-obligated... preferred securities… 485 485


Chapter 3 20

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



Chapter 3 21

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


Chapter 3 22

Owners’ Equity

• Retained earnings– Increased (decreased) by net income (loss)– Decreased by dividends paid

• Comprehensive income– Nonowner changes to equity


Chapter 3 23

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


Chapter 3 24

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


Chapter 3 25

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



Chapter 3 26

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)


Chapter 3 27

Statement of Shareholders’ Equity

• Provides details of changes in Equity

• Stock

• Other comprehensive income

• Retained earnings

• Includes beginning and ending balances in accounts


Chapter 3 28

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)


Chapter 3 29

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


Chapter 3 30

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

understanding the balance sheet and statement of owners’ equity chapter 3 robinson, munter, grant

Documents

munter robinson chapter

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current assets cash

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longterm assets

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