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Lecture Financial accounting in an economic context (9th edition): Chapter 2 – Jamie Pratt

Chapter 2 - A closer look at the financial statements. In this chapter students will be able to: Describe the balance sheet in terms of equity and debt capital and producing and operating assets, explain the concept of net income, who owns it and what they can do with it, define the three major activities of a business,. | 2 The Financial Statements Chapter 2 2 3 Flow of Capital Business Management Activities Business activities are reflected in financial statements; business activities include: Operating activities – production and sale of goods and services. Investing activities – acquisition and sale of productive assets. Financing activities – issue and retirement/repayment of liabilities and equity. The Balance Sheet The balance sheet reports the financial position at a point in time (end of the month, quarter, or year). The Balance Sheet is also called Statement of Financial Position The components of the Balance Sheet are: Assets Liabilities Shareholders’ (Owners’) Equity 5 5 The Balance Sheet The balance sheet is represented by the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity A = L + SE The effects of all business transactions may be represented in this formula. Asset and Liability accounts are typically grouped into more detailed classifications leading to the Classified Balance Sheet. 6 6 Assets Items on the balance sheet that are expected to produce value Current assets – benefit realized within 1 year Cash Short-term investments Accounts receivable Inventory Prepaid expenses Long-term investments Property, plant, and equipment Intangible assets 7 7 Liabilities Obligations resulting from transactions which may result in the use of assets Current liabilities – expected to be relieved within 1 year Accounts payable Wages payable Interest payable Short-term notes payable Current maturities of long-term debt Deferred revenues Other payables Long-term liabilities 8 8 Shareholders’ (Owners’) Equity Interest of the holders of shares in a company after liabilities have been relieved. Contributed capital – assets contributed by owners Shareholders’ equity (par or stated value) Paid-in capital in excess of par value Earned capital - Earned Capital has 2 components: Retained Earnings and Other accumulated comprehensive income. We will cover other . | 2 The Financial Statements Chapter 2 2 3 Flow of Capital Business Management Activities Business activities are reflected in financial statements; business activities include: Operating activities – production and sale of goods and services. Investing activities – acquisition and sale of productive assets. Financing activities – issue and retirement/repayment of liabilities and equity. The Balance Sheet The balance sheet reports the financial position at a point in time (end of the month, quarter, or year). The Balance Sheet is also called Statement of Financial Position The components of the Balance Sheet are: Assets Liabilities Shareholders’ (Owners’) Equity 5 5 The Balance Sheet The balance sheet is represented by the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity A = L + SE The effects of all business transactions may be represented in this formula. Asset and Liability accounts are typically grouped into more detailed classifications leading to the .