7/4/2020

Balance Sheet

Income Statement
Examine
Financial Statement of Retained
Statements Earnings

Statement of Cash Flows

Assets

Divided into 3
Liabilities
Sections
Balance Sheet
Equity

Reports based on “One Point in Time”

Accounts are termed “Permanent Accounts,” because

they carry over from period to period

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Flow of Costs

 Expense – if Immediate benefit
 Capitalize – if Benefits more than one period.
 All costs are ultimately recognized as Expenses on the Income Statement

Balance
Sheet
Asset Section

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Cash—currency, bank deposits, and investments with an

original maturity of 90 days or less (called cash equivalents).

Short-term investments—marketable securities and other

investments the company expects to dispose of in the short
run.

Accounts receivable, net—amounts due to the company from

Current Assets customers arising from the sale of products and services on
credit (“net” refers to the subtraction of uncollectible
accounts).
Inventories—goods purchased or produced for sale to
customers.

Prepaid expenses—costs paid in advance for rent, insurance,

advertising, and other services.

Property, plant, and equipment (PPE),

net—land, buildings, and equipment
(“net” refers to the subtraction of
accumulated depreciation).

Long-term investments—investments
Long-Term the company does not intend to sell in the
near future.
Assets
Intangible and other assets—assets
without physical substance (such patents,
trademarks, franchise rights, and goodwill).

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Measuring Assets
◦ Most assets are reported at their original acquisition
costs, or historical costs, and not at their current
market values.
◦ If a company cannot value an asset with relative
certainty, it does not recognize an asset on the balance
sheet.
◦ This means that sizable “assets” are not reflected on a
balance sheet.
◦ Excluded intangible assets often relate to knowledge-based
(intellectual) assets, such as a strong management team, a well-
designed supply chain, or superior technology.

Liabilities & Stockholders’ Equity

Stockholders’ equity
represents capital that has
Liabilities represent a
been invested by the
company’s future
stockholders, either
economic sacrifices.
directly or from Retained
Earnings.

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Balance Sheet - Liabilities & Equity Sections

Balance
Sheet
Liabilities &
Equity Sections

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◦ Accounts payable—amounts owed to suppliers for

goods and services purchased on credit.
Current ◦ Accrued liabilities—obligations for expenses that
have been incurred but not yet paid (i.e., wages
Liabilities earned by employees but not yet paid).
◦ Unearned revenues—obligations created when the
company accepts payment in advance for goods or
services it will deliver in the future.
◦ Short-term notes payable—short-term debt
payable to banks or other creditors.
◦ Current maturities of long-term debt—principal
portion of long-term debt that is due to be paid
within one year.

Long-Term ◦Long-Term Notes Payable

Liabilities ◦Mortgage Payable
◦Bonds Payable

*Any Long-term Debt (due in

greater than 1 year)

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IF….
◦ Current Assets are Expected to be Collected in
1 Year
◦ Current Liabilities are Expected to be Paid in 1
Year
Net Working
Then, the difference in these shows the amount of
Capital excess capital available, for the 1-year time frame.

Note: This isn’t entirely the case, due to

uncertainty of liquidating assets.

Note: Days Payable Outstanding reflects as a credit to your Cash Operating Cycle.
This is credit from your vendors, that you do not have to pay immediately, so it
effectively generates positive cash flow – offsetting negative cash flows.

Measures how long our cash is tied up;

Cash Operating Cycle from buying and paying for goods
through getting paid from customers.

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◦ Common stock—par value received from the original sale

of common stock to investors.
Stockholders’ ◦ Additional paid-in capital—amounts received from the
original sale of stock to investors in excess of the par value
Equity of stock.
◦ Preferred stock—value received from the original sale of
preferred stock to investors.
◦ Treasury stock—amount the company paid to reacquire
its common stock from shareholders.
◦ Retained earnings—accumulated net income (profit) that
has not been distributed to stockholders as dividends.
◦ Accumulated other comprehensive income or loss—
accumulated changes in asset and liability fair values that are
not reported in the income statement.

Book Value vs. Market Value

Total Stockholders’ Equity is the “Book Value” of a Company.

Market Value is based on the Market’s perception of the value of the

company.

Variances in these values are due to several factors, such as

• The mismatch of Historical Costs versus Fair Market Value in valuing Assets.
• The Inability to accurately measure and report Intangible and Other Assets.
• Other information available in the accompanying financial disclosures.
• The Market’s perception of Demand for Products.
• Expected Future performance.

For U.S. companies, it is estimated that Book Value is on average only

about one-half of Market Value.

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INCOME
STATEMENT

• Operating expenses are the usual and customary costs a company

incurs to support its operating activities. Reports Revenues
• Nonoperating expenses relate to the company’s financing and and Expenses –
investing activities.
• Discontinued Operations are segregated, because they will not
for a Span of Time
continue.

Accrual Basis

• Revenue Recognition Principle – Revenues are

recognized when “Earned,” at an amount expected to be
received, regardless of whether Cash has been received.
• Matching Principle – recognized expenses as incurred,
matched in the same period to the Revenues they are
Accrual Basis used to create.

Cash Basis (not an Acceptable Basis for

vs. Cash Basis GAAP) –
• Recognizes Revenues when Cash is Received.
• Recognizes Expenses when Cash is Paid.

Generally Accepted Accounting Principles require that

Financials be reported on the Accrual Basis of Accounting.

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Analysis of The
Income Statement
◦ 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛
◦ Variance Analysis
◦ Vertical Analysis - (and Common-size ratios) –
compare each item as a percentage of Sales
◦ Horizontal Analysis – Compare each item to the
same item in different periods
Answer the questions,
“What is Different, and Why?”

Statement of
Stockholders’
Equity
◦ Reconciles the
Beginning and
Ending Equity
◦ By Source

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STATEMENT OF CASH FLOWS

Became effective in December 1989

Bridges the Gap between Income

Statement and Balance Sheet
Analysis of
Statement of Three Sections
Cash Flows • Operating Activities
• Investing Activities
• Financing Activities
Measures Cash Inflows and Outflows, by
Category

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Financial Statement
Linkages
◦ Financial Statements are inter-related.
◦ Costs Flow from the Beginning Balance
Sheet, through the others, to the Ending
Balance Sheet
◦ Balance Sheet Accounts are Permanent –
reported at a point in time
◦ Other Accounts are Temporary – reported
based on a time frame.

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