StatementofChangesinStockholders’Equity

1、Chapter311. Know interrelationship of financial statements.2. Master purposes of the balance sheet.3. Master elements of the balance sheet.4. Master measurement of the elements of the balance sheet.5. Understand reporting classifications on the balance sheet.6. Know statement of changes in stockhold

2、ers equity.2FASB Statement of Concepts No. 5 recommends that a full set of financial statements for an accounting period should show a companys.3(1) Financial position at the end of the period.(2) Net income for the period.(3) Comprehensive income for the period.(4) Cash flows for the period.(5) Inv

3、estments by and distributions to owners for the period.4(1) The balance sheet.(2) The income statement.(3) The statement of cash flows.(4) The statement of changes in stockholder equity.(5) Explanatory notes.5Beginning Balance Sheet Assets Liabilities Stockholders EquityTransactions and Events 6Tran

4、sactions and Events Income Statement Revenues ExpensesStatement of Cash Flows Operating Activities Investing Activities Financing Activities7Income Statement Revenues ExpensesStatement of Cash Flows Operating Activities Investing Activities Financing ActivitiesEndingBalance Sheet Assets Liabilities

5、Stockholders Equity8Assets=Liabilities+Stockholders EquityEconomic resourcesEconomic obligationsNet assets9vA companys balance sheet is intended to help external users: (1) Assess the companys liquidity, financial flexibility, and operating capability; (2) Evaluate information about its income-produ

6、cing performance during the period (return on investment).10The term liquidity is used to describe how quickly an asset can be converted into cash or a liability paid.11Financial flexibility refers to the ability of a company to use its financial resources to adapt to change.12Operating capability r

7、efers to the ability of a company to maintain a given physical level of operations.13vThe capital (net assets) of a company is the economic resources (assets) less economic obligations (liabilities), or owners equity.vTo provide for a return of investment, the stockholders equity (capital) of the co

8、rporation must be maintained; this is referred to as capital maintenance. vOnce this capital is maintained, any income of the corporation is an increase in stockholders equity and is the basis for providing a return on investment to stockholders.14vRecognition is the process of formally recording an

9、d reporting an element in the financial statements.vThere are four fundamental recognition criteria: (1)meet the definition; (2)be measurable; (3)be relevant; (4) be reliable.vThus, to meet the objectives of a companys balance sheetto provide relevant and reliable information to assess its liquidity

10、, financial flexibility, and operating capability and to evaluate its income-producing performance during the period.151. Identification of what items meet the definition of the elements.2. Measurement (valuation) of the elements.3. Reporting (classification) of the elements.16Assets are probable fu

11、ture economic benefits obtained or controlled by a company as a result of past transactions or events.171.The resource must be able to contribute directly or indirectly to the companys future net cash inflows.2.The company must be able to obtain the future benefit and control others access to it.3.T

12、he transaction or event giving the company the right to or control over the benefit must have occurred.18Assets may be natural or man-made, tangible or intangible, and exchangeable or useful only in the companys activities.19Assets may be acquired by purchase, production, stockholder investment, dis

13、covery, or other nonreciprocal (one-way) transfer.20Liabilities are probable future sacrifices of economic benefits arising from present obligations.L of a company to transfer assets or provide services to other entities in the future as a result of past transactions or events.211. It must involve a

14、 responsibility to another entity or entities that will be settled by a sacrifice involving the transfer of assets, provision of services, or other use of assets at specified or determinable date, on occurrence of a specified event, or on demand.2. The responsibility must obligate the company in suc

15、h a way that it has little or on discretion to avoid the future sacrifice.3. The transaction or other event obligating the company must have occurred.22Assets=Liabilities+Stockholders EquityEquity is residual interest in the assets of a company that remain after deducting liabilities.23vSince a comp

16、any generally is not obligated to transfer assets to its owners, owners equity ranks after liabilities as a claim to or interest in the assets and thus is a residual interest.vFor a corporation, stockholders bear the ultimate risks and uncertainties involved in the companys operations and activities

17、, and obtain the resulting rewards.vEquity is created by stockholders investments of economic resources and subsequently is modified by additional investments, net income, distributions to owners, and other changes in assets and liabilities.2425The historical cost of an asset is the exchange price i

18、n the transaction in which the asset was acquired. After acquisition, the historical cost of an asset may be reduced due to the recognition of depreciation, amortization, impairment, or other adjustments.The current cost of an asset is the amount of cash (or equivalent) that would be required on the

19、 date of the balance sheet to obtain the same asset. Current cost is an input value and is sometimes referred to as current replacement cost.The current market value of an asset is the amount of cash (or equivalent) that could be obtained on the date of the balance sheet by selling the asset in an o

20、rderly liquidation. Sometimes current market value is referred to as current exit value.The net realizable value of an asset is the amount of cash (or equivalent) into which the asset is expected to be converted in the ordinary operations of the company, less any expected conversion costs( e.g., com

21、pletion, disposal, or collection costs) .Net realizable value is sometimes referred to as expected exit value. The present value of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset.26Initially, the amount of cash received whe

22、n an obligation was incurred (historical proceeds); subsequent to incurrence, the historical amount may be adjusted for amortization.The current proceeds is the amount of cash that would be obtained if the same obligation were incurred.The current market value of a liability is the amount of cash th

23、at would be required currently to eliminate the liability.The net realizable value of a liability is the amount of cash expected to be paid to eliminate the liability in due course of business.The present value of future cash outflows to eliminate the liability in due course of business.27 Use of hi

24、storical cost to value assets and liabilities does not help assess the likely amounts of future cash flows. “Human resources” or “intellectual capital,” such as high-quality management or highly creative employees are not included as assets. Many of the amounts that a company reports are based on es

25、timates. In periods of inflation, the amounts listed do not show the “purchasing power” of its assets and liabilities.28The arrangement of each companys balance sheet items and subtotals should be designed to be useful to its various external user groups.29Current assets are cash and other assets th

26、at are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.30An operating cycle is the average time taken by a company to spend cash for inventory,.process and sell the inventory, and collect the receivables, converting them back i

27、nto cash.3132Cash includes cash on hand and readily available in checking and savings accounts.Cash equivalents are risk-free securities, such as money market funds and treasury bills that will mature in three months or less from the date acquired by the holder.33Temporary investments in marketable

28、securities include debt and equity securities that are classified as “trading securities” and “available-for-sale securities.” They are listed at their market (fair) value (current market value).34Receivables include accounts receivable and notes receivable with short-term maturity dates. They are l

29、isted at their estimated collectible amounts (net realizable values).Inventories include goods held for resale in the normal course of business plus, in the case of a manufacturing company, raw materials and goods in process inventories. They are listed at their historical cost or market value (curr

30、ent cost), whichever is lower.Prepaid items include insurance, rent, office supplies and taxes that will not be converted into cash but will be consumed. Prepaid items are listed at the historical cost of the remaining amounts.35Current liabilities are those obligations whose liquidation is expected

31、 to require the use of existing current assets, or the creation of other current liabilities. These obligations are listed on the balance sheet at the amount owed (historical proceeds) or estimated to be owed.361. Obligations for items that have entered into the operating cycle (accounts payable and

32、 salaries payable).2. Advance collections for the future delivery of goods or performances of service (unearned rent and unearned ticket sales).3. 3. Other obligations that will be paid within one year or the operating cycle (short-term notes payable).37Current Assets - Current Liabilities=Working C

33、apital38Investment items that management expects to hold for more than one year or the operating cycle, whichever is longer, are classified as long-term (noncurrent) investments.39The company expects the market value of the investment to increase.The company wishes to receive income from interest or

34、 dividends.The company may desire to exercise control over another company or a supplier.The company may acquire property, plant, or equipment for future operations.A company makes investments for a variety of reasons.40vLong-term investment include:Holding of available-for-sale debt and equity secu

35、rities that the management does not to convert into cash within one year or the normal operating cycle;Investments in debt securities ( e.g., bonds) expected to be held to maturity;Long-term investment are listed at their market (fair) value, historical cost, book value, or present value, depending

36、on the type of investment.41Property, plant, and equipment includes the tangible assets used in the firms operations.42 Often these tangible assets are called fixed assets because of their relative permanency in the companys operations. Except for land, all the fixed assets are depreciable or deplet

37、able (in the case of natural resources). So, land is listed at its historical cost, while the remaining fixed assets are listed at their book values (historical cost less accumulated depreciation or depletion).43Intangible assets are those noncurrent economic resources that are used in the operation

38、s of the business but have no physical existence.PatentsCopyrightsFranchisesTrademarks a registered trademarkComputer software costsGoodwill44A company may have three categories of intangible assets:1. Intangible assets with finite useful lives.2. Intangible assets with indefinite lives.3. Goodwill.

39、45Intangible assets with finite useful lives are amortized over their useful lives and reported on the balance sheet at their book values (historical cost less accumulated amortization).46The Other Assets section occasionally is used to report miscellaneous assets that may not be readily classified

40、within one of the previous sections.Sometimes referred to as “deferred charges”47Long-term liabilities are those obligations that are not expected to require the use of current assets or not expected to create current liabilities within one year or the normal operating cycle (whichever is longer).48

41、Deferred tax liabilities and obligations of a component of the company that is being discontinued are examples of items that might be included as other liabilities.49vFASB suggested guidelines for developing homogeneous classes of assets and liabilities.Reporting assets according to their type or ex

42、pected function in the central operations or other activities of the company.Reporting as separate items assets and liabilities that affect the financial flexibility of the company differently.Reporting assets and liabilities according to measurement method used to value the items.50Stockholders equ

43、ity is the residual interest of the stockholders in the assets of the corporation.A partnership involves two or more persons who have agreed to combine their capital and efforts in the operations of a company.A sole proprietorship is a single-owner company.The corporation is a complex business organ

44、ization. Usually there is absentee ownership.51 In a sole proprietorship, normally the total owners equity is summarized in a single capital account. But in a partnership, separate capital accounts are used for each partner to summarize the partners equity.52Contributed capitalRetained earningsAccum

45、ulated other comprehensive incomeIn the corporation, the components of stockholders equity include:53Legal capital is the minimum amount of stockholders equity that the corporation may not distribute as dividends.Preferred stock receives preference in declared dividends.Common stock carries the righ

46、t to vote at the annual stockholders meeting and to share in residual profits.Contributed Capital54A corporation sells 100 shares of its $5 par common stock for $30 per share.Cash3,000Common Stock, $5 par500Additional Paid-in Capital on Common Stock2,500Contributed Capital55A corporation sells 20 sh

47、ares of its $100 par preferred stock for $110 per share.Cash2,200Preferred Stock, $100 par2,000Additional Paid-in Capital on Preferred Stock200Contributed Capital56A corporation sells 100 shares of its no-par common stock at $50 per share.Cash5,000Common StockNo-Par Value5,000Contributed Capital57Re

48、tained earnings is the total amount of corporate net income that has not been distributed to stockholders as dividends.To use in daily operationsTo maintain its productive facilitiesFor growth581. Unrealized increases (gains) or decreases (losses) in the market value of investments in available-for-

49、sale securities.2. Transaction adjustments from converting the financial statements of a companys foreign operations into U. S. dollars.3. Certain gains and losses on “derivative” financial instruments.4. Certain pension liability adjustments.Comprehensive income includes both net income and other c

50、omprehensive income. Accumulated other comprehensive income might include four items:59If a corporation has more than one item of other comprehensive income, it may report the amount of each item in stockholders equity.60Or, it may report the total amount of accumulated other comprehensive income fo

51、r all the items in stockholders equity. This approach requires a note to the statements.61vIn rare instances a company may increase its assets without a corresponding outflow of assets, increase in liabilities, recognition of income, or issuance of capital stock.vFor instance, a company may receive

52、donated assets from a governmental unit or it may discover previously unrecorded assets.vThese items are listed separately in stockholders equity.Miscellaneous items62A corporation must disclose the changes in its stockholders equity account when issuing financial statements.This statement should sh

53、ow investments by and distributions to owners during the period, among other items.63FASB Statement of Concepts No. 6 defined investments by owners and distributions to owners, as follows:q Investments by owners are increases in the equity of a company resulting from transfers of something valuable

54、to the company from other entities in order to obtain or increase ownership interests.q Distributions to owners are decreases in the equity of a company caused by transferring assets, rendering services, or incurring liabilities to owners.64Balance, Jan. 1, 2004$65,000$143,400$ 64,900 $10,000$283,30

55、0 Unrealized increase in value of available- for-sale securities2,0002,000 Net income62,500 62,500 Cash dividends paid(11,200 )(11,200 )Common stock issued 6,500 30,500 37,000 Balance, Dec. 31, 2004 $71,500$173,900$116,200 $12,000$373,600 SCHEDULE ACARON MANUFACTURING COMPANY Accumulated Common Addi

56、tional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income TotalStatement of Changes in Stockholders EquityFor Year Ended December 31, 2004Exhibit 3-865A selection from existing acceptable alternatives.Principles and methods peculiar to the industry in which the company operate

57、s.Unusual or innovative applications of GAAP.APB Opinion No. 22 requires that a company include a description of all significant accounting policies as an integral part of its financial statements.In particular, when these principles and methods involve-66FASB Statement No. 107 requires a company to

58、 disclose the fair value of all its financial instruments, whether recognized or not on its balance sheet. The Statement also requires a company to disclose all significant concentrations of credit risk due to its financial instruments. A company typically makes these disclosures in the notes to its

59、 financial statements.67FASB Statement No. 133 requires a company to recognize all derivative financial instruments as either assets or liabilities on the balance sheet.These instruments should be measured at fair value.Fair value is the amount at which the instrument could be purchased or sold in a

60、 current transaction between willing parties.68The type of derivative instruments it holds.Its objectives in holding the instruments.Its strategies for achieving these objectives.FASB Statement No. 133 also requires the following information:69LossProbable (?)Reasonably estimated (?)NoNoorDisclosureandY