The Balance Sheet

The Balance Sheet

Picture in time.
Assets and liabilities presented in
Proprietary Theory.
Balance sheet accounts are permanent
accounts.
Elements of the Balance Sheet
Assets
Liabilities
Equity
Current vs. Noncurrent
Current is 12 months or operating cycle,
whichever is longer.
Current Assets
Cash
Cash equivalents
Receivables
Inventory
Short-term investments
Prepaid expenses
Current deferred tax assets
Noncurrent Assets
Long-term investments
Property, plant and equipment
Intangible assets
Long-term receivables, restricted cash,
long-term prepayments, long-term
deferred tax assets
Current Liabilities
Accounts payable
Dividends payable
Unearned revenues
Collections for other parties
Short term notes
Current portion of long term debt
Current deferred tax liabilities
Noncurrent Liabilities
Long term notes or bonds payable
Long-term portion of long-term debt and
liabilities for capital leases.
Warranty obligations
Long-term deferred revenue
Long-term deferred tax liabilities
Equity
Capital stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock
Non-controlling interests
Uses of Balance Sheet
Allows assessment of:
• Liquidity
• Solvency
• Financial flexibility
• Risk
Limitations of Balance Sheet
Many assets not reported on the balance
sheet.
Many assets measured at historical cost.
Judgments and estimates used.
The Income Statement
The Income Statement
Gives results for a period of time.

Income statement accounts are temporary

accounts.
Multi-Step Income Statement
Sales or service revenues
− Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
+ Interest and dividend income
− Interest expense
+/− Non-operating gains/(losses)
= Income from continuing operations before provision for income tax
− Provision for income taxes on continuing operations
= Income from continuing operations
+/− Gain/(loss) from operations of discontinued Component X
including gain/(loss) on disposal of $XXXX
+/− Income tax benefit or (income tax expense) on discontinued Component X
= Net income
Elements of Income Statement
Revenues
Expenses
Gains
Losses
Revenues and Expenses
Inflows or outflows as a result of delivering
goods or providing services that are the
entity’s main or central operations.
Gains and Losses
Increases or decreases in equity as a result
of transactions that are not part of the
company’s main or central operations
and that do not result from revenues or
expenses by the owners of the entity.
Other Income Items
1. Discontinued operations
2. Unusual gains and losses
3. Intra-period tax allocation
1. Discontinued Operations
A disposal of a
1. Component or group of components,
2. That represents a strategic shift that
has or will have a major effect on the
entity’s operations and financial results.
Accounting for
Discontinued Operations
All gains or losses that are incurred by the
discontinued segment are reported in the period in
which the gain or loss occurred.
• In current period all operations of the discontinued
component will be reported as discontinued (even
if decision was made December 30).
• Any gains or losses that will occur in the future
from either operations or the actual sale of the
assets will be reported in that future period in
which they occur.
Discontinued on Income Statement
Two lines on the Income Statement
1. Gain/Loss from operations of
discontinued component
2. Income tax benefit or loss from
discontinued component
2. Unusual Gains and Losses
Gains and losses that the firm shows
separately.

Are ordinary gains and losses and they are

part of income from operations.
3. Intra-period Tax Allocation
The reporting of income taxes within one
period on the income statement.

Taxes must be allocated between income

from continuing operations and
discontinued operations.
Uses of Income Statement
Helps users evaluate the company’s past
performance and to compare it to the
performance of its competitors.
Provides a basis for predicting future
performance.
Helps users assess the risk or uncertainty
of achieving future cash flows.
Limitations of Income Statement
Assumptions and judgment are used.
Income is impacted by the accounting
methods used.
Items that cannot be measured reliably are
not reported in the income statement.
The income statement is limited to
reporting events that produce reportable
revenues and expenses.
Statement of Cash Flows
Statement of Cash Flows
Shows the sources and uses of cash for the
company.
Categories of Activities
Operating activities
Investing activities
Financing activities
Uses of Statement of Cash Flows
Helps users assess:
• The ability of the company to generate
positive future cash flows.
• The reasons for differences between net
income and net cash in/out flows.
• The effect of investing and financing
transactions on the company’s financial
position.
• The company’s need for external financing.
Limitations of Statement of Cash
Flows
Only shows what cash flows were, and not
how they happened.

Indirect method does not show clearly the

sources and uses of cash.
 Statement of
Comprehensive Income
Statement of Comprehensive Income
Comprehensive income includes all
transactions of the company except for
those transactions that are made with
the owners of the company.
Comprehensive income includes
everything on the income statement plus
some things that do not appear on the
income statement.
Forms of Statement of CI
May be presented as:
1. A single statement with the income
statement, or
2. As two separate, but consecutive
statements.
A Single Statement
Must be presented in two sections,
net income and other comprehensive income.
It must present:
• total net income along with the components
that make up net income; and
• a total amount for the other comprehensive
income along with the components that make
up other comprehensive income.
Two Consecutive Statements
It must present
• Total net income and the components of
net income in the statement of net
income; and
• Total other comprehensive income and
the components of other comprehensive
income in a statement of other
comprehensive income that immediately
follows the statement of net income.
Tax Effects
The items above may be shown as either
1. Net of tax, or
2. Before related tax effects with one
amount shown for the aggregate income
tax expense or benefit related to the
total of other comprehensive income.
Other Comprehensive on BS
Accumulated other comprehensive income
is a line in the equity section of the
balance sheet that includes these items
that are not reflected on the income
statement.
Other Comprehensive Income
Items
Foreign currency translation
adjustments.
Unrealized holding gains and losses on
available-for-sale securities.
Subsequent decreases or increases in the
fair value of available-for-sale debt
securities previously written down as
impaired.
Other Comprehensive Income Items
The effective portion of gains and losses
on derivative instruments that are
designated as, and qualify as, cash flow
hedges.
The effective portion of gains and losses
on foreign currency transactions that are
designated as economic hedges of a net
investment in a foreign entity.
Other Comprehensive Income Items
Gains or losses associated with pension or
other postretirement benefits.
Prior service costs or credits associated
with pension or other postretirement
benefits.
Transition assets or obligations
associated with pension or other
postretirement benefits.
If No OCI Items
Company is not required to prepare a
statement of other comprehensive income.
Statement of Changes in
Owners’ Equity
Statement of Changes in Equity
Reports the changes in each account in the
stockholders’ equity section of the balance
sheet and in total stockholders’ equity
during the year.

Also reconciles the beginning balance in

each account with the ending balance.
Limitations of Financial
Statements
Limitations of Financial Statements
Measurements are made only in terms of
money.
Information supplied by financial reporting
involves estimation, classification,
summarization, judgment, and allocation.
Financial statements primarily reflect
transactions that have already occurred;
consequently, many aspects of them are
based on historical cost.
Limitations of Financial Statements
Only transactions involving an entity being
reported upon are reflected in that
entity’s financial reports.
Financial statements are based on the
going-concern assumption.