Professional Documents
Culture Documents
CharlesUniversity,Prague
Recap
PurposeofAccounting accountingislanguageofbusiness captureskeyconsequencesofcomplexbusiness activitiesinaparsimonious andstandardized way allowstobuildunderstandingofafirms financialpositionandofitshistoricaland prospectivefinancialperformance standardsettersmust: prioritizebetweenusers(ownersandcreditors) tradeoffvariouscriteriaofaccountingquality (relevancevs.reliability)
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Lecture2
BalanceSheet
JiriNovak
IES,UK
Recap
Account Structure recordofallchangesinaparticularitemover oneperiod(accountofevents) Tshapeaccountsrecordincreasesononeside anddecreasesonother(nominuses) and decreases on other (no minuses) eachtransactionisrecorded onthedebit (=left)sideand onthecredit (=right)sideofanotheraccount accountingbooksmustalwaysbeinbalance debits = creditst
2.1FinancialStatements l
FinancialStatements
BalanceSheet
BalanceSheetComponents assets(As) whatthecompanyowns liabilities(Li) whatthecompanyowestoits creditorsandbusinesspartners equity(Eq) whatthecompanyowestoits owners(i.e.shareholders) BalanceSheet assets equity
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BalanceSheet capturesthefinancialpositionofacompanyat onepointintime IncomeStatement(P&L) summarizestheeconomicperformanceofthe i th i f f th companyoveranaccountingperiod StatementofCashFlow showshowmuchcashthecompanycollected andpaidoutoveranaccountingperiod StatementofShareholdersEquity detailsoutchangesinshareholdersequityover anaccountingperiod
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liabilities
JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
IncomeStatement
IncomeStatement showswhatrevenuesacompanygeneratedand whatexpenseswereincurredinafiscalyear IncomeStatement expenses losses
earnings or netincome or profit
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StatementofCashFlow
StatementofCashFlow SCFreportsthecashreceiptsandoutlaysinthe periodoftheiroccurrence,classifiedinto operating,investingandfinancingactivities
StatementofCashFlow cashflowfromoperating activities
revenues gains
+/ cashflowfrominvesting activities +/ cashflowfromfinancing activities totalcashflow
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FinancialStatements
Creditvs.Debit assets,expenses foundonthedebitsideofBSof ISandsoincreasesarerecordedasdebits(Dr) anddecreasesascredits(Cr) liabilities,equity,revenues foundonthecredit sideofBSofISandsoincreasesarerecordedas credits(Cr)anddecreasesasdebits(Dr)
Assets Inventories Liabilities BankLoan Equity ContributedCapital
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FinancialStatements
December31,2000 BalanceSheet2000 cash noncashassets liabilities equity cash noncashassets IncomeStatement 2001 revenues expenses netincome December31,2001 BalanceSheet2001 liabilities equity
Expenses CostofGoodsSold
Revenues NetSales
BalanceSheet
BalanceSheetComponents assets(As) whatthecompanyowns liabilities(Li) whatthecompanyowestoits creditorsandbusinesspartners equity(Eq) whatthecompanyowestoits owners(i.e.shareholders) BalanceSheet assets equity
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2.2BalanceSheet l h
liabilities
JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
BalanceSheet
BalanceSheetEquation asaconsequenceofdoubleentryaccounting balancesheet(BS)mustalwaysbeinbalance yp ( ) atanypointintimetotalassets(As)mustbe equaltothesumofliabilities(Li)&equity(Eq)
Ast =Lit +Eqt t
BalanceSheet
balancesheetmustalwaysbeinbalance
assets
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liabilities equity
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BalanceSheet
BalanceSheet
notespayable cash marketablesecurities accountsreceivable currentassets inventories prepaidexpenses currentmaturitiesofltdebt accountspayable currentliabilities accruedliabilities unearnedrevenue
Classification
Assets assetsareclassifiedbasedonliquidity,easewith whichtheycanbeconvertedintocash (distinctionbetweencurrentor fixed) Liabilities liabilitiesareclassifiedbasedon: maturity timeuntiltheyarepayable (~liquidity:current or longterm) nature eitheroperating orfinancial
longtermliabilities
deferredtaxes property,plant&equipment intangibleassets
longtermdebt
fixedassets
contributedcapital retainedearnings
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equity
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Classification
Assets
BalanceSheet IncomeStatement
CurrentAssets shorttermassetsthatarecontinuallyturned overinthecourseofabusinessduringnormal businessactivity,thatswhy current cash and other assets expected to be converted cashandotherassetsexpectedtobeconverted tocash,sold,orconsumedeitherinayearorin theoperatingcycle,whicheverislonger FixedAssets longtermassetsthatareusedformorethanone yearorbusinesscycle thecostoftheseassetsisdistributedovertheir usefullifethroughdepreciation
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JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
Assets
IntuitiveDefinition(broad) Athingorpersonofuseorvalue., i.e.anything thatisofvalueorfuturebenefit (OxfordEnglishDictionary) AccountingDefinition(narrower) everythingthatacompanyownsasa consequenceofpastbusinessactivitiesandcan benefitfrominthefuture e.g.land,buildings,machinery,equipment, motorvehicles,rawmaterials,finished products,receivables,cash,securities
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Assets
AccountingDefinition
Assets
Control abilityofanentitytobenefitfromtheassetandto denyorregulatetheaccessofotherstothebenefit mostly(butnotalways)ownershipofanobjector rightimpliescontroloverit Examples intellectualcapital mostlycannotberecognized asanassetduetolackofcontrolofthecompany ofitspersonnel leasing controlovertheleasedpropertyowned bythelessoristransferredtothelessee
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Assets
ResultofPastEvents specificationofapasteventdifferentiatesassets fromintentionstoacquireassets(notrecognized) existenceofapasttransactionimpliesacostor valueofanassetthatcanbemeasuredreliably Examples orders/agreements notrecognizedasassetsuntil theagreeduponexchangetakesplace
Assets
Liabilities
AccountingDefinition
ExpectedEconomicBenefits reasonablycertainpotentialtocontributetothe objectivesoftheentity Example researchanddevelopment(R&D)expendituresfail tomeetthecriteriabecauseitistoouncertain thatfutureeconomicbenefitswillarise intangibleassets recognizedonlyiftheyresult fromamergeroranacquisition(M&A)
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JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
Liabilities
RecognitionCriteria presentobligations companyisliable totransfer benefitstootherparties(liability) probablefuturesacrificesofeconomicbenefit liabilitiescanbeseenasnegativeassets netassets=assets liabilities Examples loanfromabank,bondsheldbycreditors accountspayabletosuppliers,salariespayable, taxespayable
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Equity
BalanceSheet IncomeStatement
Equity
ResidualStake residual stakeofownersinfirmconsistingof: contributedcapital accumulatedowners p y investmentinthecompanyovertime retainedearnings accumulatedpastprofits notpaidoutasdividends(i.e.retained) LiquidationPerspective iffirmisliquidated,allassetsaresoldandcash proceedsusedtosettleall(ifpossible)liabilities; whateverleftbelongstoowners equity=differencebetweenassetsandliabilities
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Equity
AccountingDefinition
Equity
StatementofShareholdersEquity detailsoutchangesinequitycomponents: contributedcapital capitalinvestedbythe owners(+)incommonandpreferredstock retainedearnings netincomeoftheyear(+), dividendspaidouttotheowners() treasurystock repurchaseofacompanysown stock() othercomprehensiveincome unrealizedgains orlossesonavailableforsalesecurities(+/), foreigncurrencytranslationadjustments(+/)
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FinancialStatements
StatementofCashFlow2001 operatingcashflow +/ investingcash flow +/ financingcashflow cash IncomeStatement 2001 revenues expenses netincome StatementofEquity2001 contributedcapital +/ retainedearnings /+ treasurystock +/ otherincome +/ other income comprehensiveincome
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JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
ExcitingAccounting
goodluckinthedeepwatersofaccounting!
2.3DoYouRecognizeThem? Y h
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Equity
Equity
AccumulatedRetainedEarnings netincome recordsallprofitsthefirmearnedinthepast equity~ownerswealth;thereforeifafirm generatesprofititincreasesowner swealth generates profit it increases owners wealth dividends ownerscanretrievesomeoftheaccumulated profitsbypayingoutdividends whendividendsarepaidoutownerswealth investedinthecompanyisreduced
ContributedCapital commonstock regulartypeofstock;claimsof commonstockholderstothefirmsassets,met througheitherdividendsorliquidation,are subordinatetotheclaimsofcreditorsand b di t t th l i f dit d preferredstockholders preferredstock numberofforms;theyhave liquidationanddividendpreferencerelativeto commonstock,butusuallyhavenovoting power
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Equity
TreasuryStock insteadofpayingdividendsafirmmaydecide todistributewealthtoownersbyrepurchasing someofitsownshares cash paid to owners who decide to sell their cashpaidtoownerswhodecidetoselltheir sharesrepresentsareductionininvestedwealth wealthdistributionthroughstockrepurchases (unlikedividends)isselective,whichis preferableduetotaxreasons
Equity
OtherComprehensiveIncome someeventsthataffectthecompanyvalue(i.e. equity),butarebeyondmanagerialcontroldo notaffectprofitandarerecordeddirectlytoEq foreign currency translation adjustments foreigncurrencytranslationadjustments whentranslatingvalueofforeignsubsidiaries thatuseadifferentaccountingcurrency unrealizedgainsorlossesonavailableforsale securities whenusingfairvalue(markedto market)accountingvaluefluctuationsare bookeddirectlyagainstequity
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JiriNovak,IESUK
FinancialAccounting(JEB044)
CharlesUniversity,Prague
Exercise2
Task classifyfollowingitemsasassets(As),liabilities (Li),equity(Eq)ornone() y ifnecessaryassumethediscountrateof10% Purpose tryyourgutfeelingsconcerningthe recognitionofassetsandliabilities itsfineifyouarenotsure;justmakeaguess afterconsideringtheprincipleswehave discussedinthislecture
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2.4DoYouRecognizeThem? Y h
Exercise2
Classifyfollowingitemsintoassets(As), liabilities(Li),equity(Eq),ornone()
cashonthecompanysbankaccountof100 lineofcreditopenforthefirmintheirbankwith maximumoverdraftof500;firmcurrentlyuses380 a computer purchased a year ago for 600 acomputerpurchasedayearagofor600 depreciatedlinearlyover3years amachinepurchased12yearsagofor800 depreciatedlinearlyover10years rawmaterialinwarehousepurchasedfor200that haslostinvalueandiscurrentlyworthonly180 salariesforlastmonthnotyetpaidoutworth650in fixedsalariesand150inbonuses preferredstockatparvalueof100issuedfor800 lastyearsprofitof500(nodividendspaidthisyear) stocksinanothercompanypurchasednowfor70
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Exercise2
Classifyfollowingitemsintoassets(As), liabilities(Li),equity(Eq),ornone()
bondsissuedbythecompanywithfacevalueof120 soldtodayatadiscountfor115 abankloanof1000obtainedayearagoafterpaying aninterestof80thisyear commonstocksissuedfor2000afterprofitof500 wasearnedandadividendof300hasbeenpaidout aninvoicefor100fromasupplier(payable)forraw materialitsuppliedtothecompanyonemonthago aninvoicefor130tothecustomer(receivable)for productsdeliveredtohim2monthago insurancefornextyear;theinsurancefeeof35was paidthisyear 240paidtothecompanythisyearforconsultation servicesthatitwillperformednextyear
Exercise2
Classifyfollowingitemsintoassets(As), liabilities(Li),equity(Eq),ornone()
aclaimafterthecompanymadebyitscustomers worth50fordamagecausedbyitsproducts(the companyexpectstolosethetrialwithPr=80%) aclaimthecompanyhasafteritssuppliersworth40 forsupplyingdefectivespareparts(thecompany f l i d f ti t (th expectstowinthetrialwithPr=80%) auniqueoptiontopurchase$2000for1000inone yearstimewhentodaysexchangerateis1.5 patentwithestimatedvalueof160obtainedduring anacquisition(i.e.M&A)ofasmallercompetitor technicalexpertiseusedinproductionthatcosted 300todevelopinternallyinthecompany askillfulmanagerafteracompanyinvested20last yearand30thisyearinhertraining
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JiriNovak,IESUK