Kế toán, kiểm toán - Chapter 2: A closer look at the financial statements

2 A Closer Look at the Financial StatementsChapter 2:3Describe the balance sheet in terms of equity and debt capital and producing and operating assets.Learning Objective 14A Story that builds a Set of Financial StatementsBusinesses’ needs are evaluated and can be acquired utilizing capitalBusiness Plan – shows your ideas on how the business will show a profitContributed CapitalGiven in return for ownership interestInvestors expect a return on their investment (dividends and growth)Debt CapitalCapital paid back over time (liability)Interest charged for the use of the capital 5A Story that builds a Set of Financial StatementsCapital investment (equity and debt) can be used to purchase assetsProducing assets Support the generation of revenueUseful over the long term (several years)Examples – land, buildings, equipmentOperating assetsSupport the generation of revenueUsed up quickly – replaced oftenAssets that are for sale 6Concept Practice 1 7Explain the concept of net income, who owns it and what they can do with it.Learning Objective 28Reporting through the Financial StatementsFinancial statements communicate the operations and status of the organizationIncome Statement Revenues – ExpensesRevenues are generated from sale of goods/servicesExpenses include cost of goods sold and operating expenses needed to run the businessOptions with profitsReinvest in the businessPay out to owners (dividends) 9Concept Practice 2 First – calculate Total revenueThen – take out dividends which are paid out to ownersWhat remains in the net income reinvested (becomes part of retained earnings)Next – subtract Expenses for Net Income10Define the three major activities of a business.Learning Objective 311Statement of Cash FlowsBusiness activities produce cash inflows and outflows that are highlighted in the statement of cash flows. There are three categories of business activitiesOperating ActivitiesCash inflows are collections from customers and clientsCash outflows are for purchasing operating assets and paying expensesInvesting ActivitiesOutflows from purchase of producing assets and inflows from sale of these assets Financing ActivitiesInflows from borrowing or shareholder contributionsOutflows from paying back creditors or paying dividends 12Figure 2-6Operating, investing andfinancing activities13Statement of Shareholders’ EquityExchanges with owners are highlighted by the statement of shareholders’ equity.Contributions made directly to the businessReinvested earnings (called retained earnings)DividendsPayments to shareholders to buy back stock 14The acquisition of equity and debt financing is considered:a. a financing activity.b. net income.c. an investing activity.d. an operating activity.15Which of the following is considered an operating activity?a. Payment to a vendor for supplies.b. Purchase of company trucks for cash.c. Payment of dividends to shareholders.d. Issuing stock to investing.16Describe the four financial statements in greater detail.Learning Objective 417The Classified Balance SheetThe balance sheet reports the financial position at a point in time (end of a month, quarter, or year). It is a ‘photograph’.Assets = Liabilities + Shareholders’ EquityThe classified balance contains more detail of assets and liabilitiesAssetsCurrent assetsLong-term investmentsLong-lived assetsLiabilitiesCurrent liabilitiesLong-term liabilities 18LiquidityAssets are listed on the balance sheet in order of liquidityLiquidity is the order in which assets are expected to be converted into cashMore liquid assets are closer to the topCurrent assets are before long-term assetsCash is the most liquid (first current asset)19Current AssetsBenefits realized or turned into cash within one yearCash (savings, checking, petty cash)Short – term investments (stocks & bonds that are readily marketableAccounts receivable (money owed from customers)Less uncollectable accountsInventory (items intended to sell)Acquisition or cost of replacementPrepaid ExpenseInsurance, rents paid prior to their useExpensed only after used (passage of time)20Long – Term InvestmentsProvide benefits beyond one yearLong-term notes receivable Less uncollectable accountsLand held for investment or not yet put into serviceDebt and equity securities 21Long – Lived AssetsIncludes property, plant, equipment and intangiblesUsed in day – to – day operations to last more than one yearReferred to producing assetsPropertyCarried at costLand used in daily operationsPlant and equipmentReported at cost less accumulated depreciationNet book valuePhysical structures used in operations22Long – Lived AssetsIntangible AssetsCarried at cost less accumulated amortizationNote that indefinite life intangibles are not amortizedNo physical substanceExamplesTrademarksPatentsGoodwill23Current LiabilitiesShort term obligations to be paid or be fulfilled within one yearMost obligations are fulfilled by payment in cashUnearned revenue obligations may be fulfilled by completion of work (service provided)Common ExamplesAccounts payable – due to suppliersSalary and wages payable – due to employeesInterest payableCurrent maturities of long-term debtsUnearned revenues (paid in advance by customers)24Long-Term LiabilitiesObligations expected to require payment over a period of time beyond the current yearCommon ExamplesNotes payable - direct borrowings or arrangements to finance the purchase of assetsBonds payable – notes issued to debt investors25Shareholders’ EquityContributed capital by owners and retained earnings not paid out to owners (reinvested in the business)Common ExamplesCommon StockRetained EarningsTreasury Stock (reduction of shareholders’ equity through the repurchase of stock from owners)26Income StatementCan be called the statements of operationsMeasures operating performance over a period of timeThree categoriesOperating revenuesOperating expensesNonoperating revenues and expensesNet of these categories yields net income, net loss, net earnings or profit27Income StatementOperating revenues Inflows of assets or decrease of liabilitiesCommonly sales and/or service revenuesKey to successful business is to generate revenue from ongoing core operationsOperating ExpensesOutflows of assets or increase of liabilities required to generate operating revenuesCost of goods sold is the original cost of inventory itemsAdditional operating expenses differ depending on the company’s operations28Income StatementNonoperating revenues and expenses Generated from noncore business activitiesInterestRentsGains/losses on sales of producing assets2930Statement of Cash FlowsCash from operating activitiesCash inflows and outflows associated with sale and acquisition of a company’s products and servicesDiffers from income statement – it is only cash flows vs. revenues and expenses31Statement of Cash FlowsCash from investing activitiesCash inflows and outflows associated with the purchase and sale of producing assetsLong-term investments and long-lived assets32Statement of Cash FlowsCash from financing activitiesCash inflows and outflows associated with outside capital : liabilities and owner investmentsTotal of three sectionsReconciliation of the change of cash on the balance sheet33Statement of Shareholders’ EquitySummarizes activity in accounts tracking shareholders’ investmentSale of equity securities (contributed capital)Repurchase of equity security (treasury stock)Profits reinvested in the company (retained earnings)Dividends paid to owners34Statement of Shareholders’ Equity35Concept Practice 4 36Concept Practice 4 – cont. 37Discuss how the financial statements can be viewed as a package and use the package to assess five fundamental metrics of a company’s performance. Learning Objective 538Five Fundamental Measures of Performance1 – How profitable?Income statement – do revenues exceed expenses and by how much?Balance sheet and statement of retained earnings - retained earnings indicate past profits have financed assets2 – How large of an investment was required?It is more desirable to get a profit return for less investment in assets. This can be measured by comparing Profits/Average Asset Balance = Return on Assets39Five Fundamental Measures of Performance3 – Where did the assets come from / how financed?Debt or equity financing?Take Total Debt/Total Assets on the balance sheet to determine the assets financed by debt.4 – Cash generated by operating activities and how managed?Statement of cash flows indicates cash generated and where it has been utilized 40Five Fundamental Measures of Performance5 – What happened to the shareholder investment and what was the return?Statement of shareholders’ equity indicates increases and decreases in shareholder investments.This can be measured by comparing Profits/Average Shareholder Equity Balance = Return on EquityMore return for less equity investment is desirableLearning Objective 6 (Appendix 2A)Discuss forms of business organizations.4142Organizational Form and the Equity Section *Appendix 2ACorporation – legal entity separate and distinct from its ownersShareholders/Stockholders buy an ownership interest Right to vote on the board of directors.Right to corporate profits.Distinction between contributed capital, what has been contributed vs. what has been retained43Organizational Form and the Equity Section *Appendix 2AProprietorship or partnership – not separate legal entitiesLegal liability is not limited to the business assetsAsset distribution is a withdrawalEquity called owners’ equityNo distinction between contributions and retained earningsFocus is on each owner’s balance, all contributions less withdrawals 44Organizational Form and the Equity Section *Appendix 2A45A partnership and a corporation differ in that:a. a partnership is a legal entity, while a corporation is not.b. the equity sections of partnership and corporate balance sheets report different items.c. partnerships always have more cash than corporations.d. a corporation has an income statement and a partnership does not.46Wiley © 2017