1、Financial StatementsChapter 22Chapter OutlinelStatement of Financial Position(The Balance Sheet)lStatement of Comprehensive Income(The Income Statement)lStatement of cash flowlSupplements to financial statements in annual reportthree important financial statements3 Important financial statementsBala
2、nce-sheetIncome statementStatement of Cash flow Asset Liabilities ShareholdersequityFinancial conditionsOperation resultCash flow Revenue Expenses Income Cash inflow Cash outflow Net cash flow4Statement of Financial Position(The Balance Sheet)lThe balance sheet is a snapshot of the firms assets and
3、liabilities at a given point in timelAssets are listed in order of liquiditylEase of conversion to cashlWithout significant loss of valuelBalance Sheet IdentitylAssets=Liabilities+Stockholders EquityThe Balance-Sheet-T format Current AssetsNon-current assetFixed AssetsIntangiblesotherShareholders Eq
4、uityCurrent LiabilitiesLong-Term Debt AssetlDefinitions and examples la resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.l Examples are:lcash at bank linventories(goods purchased but unsold at balance date)equipme
5、nt for example computers lvehicles lClassificationlAssets are listed on the Balance Sheet and grouped(classified)according to their use and their liquidity.6Asset:Current assetlAn asset is considered current if:lThe business is holding the asset to trade it.For example,inventory.lThe business will t
6、urn the asset into cash during the next operating cycle,for example the amounts owed to the business by the credit customers,known as Accounts Receivable.lThe item is cash or cash equivalent.An example of cash equivalent is money invested for one or two days.lAll other assets are classified as non-c
7、urrent.7Asset:Non-Current assetlNon-Current Assets lThese have lives longer than current assets.They are assets of a more permanent nature.lNon-Current Assets are further divided(classified)into three groups:lProperty,Plant and Equipment;Intangible Assets;Investment Assets.These are the main assets
8、used for earning revenue or for administrative purposes and are not intended for sale in the ordinary course of business.8Asset:Non-Current assetl1.Property,Plant and Equipment(fixed asset)Fixed asset.mp3 These are the main assets used for earning revenue,and are not intended for sale in the ordinar
9、y course of business.PP&E are often shown in the financial statements at historical cost (purchase price plus the cost of acquiring,installing and improving the asset)less depreciation(an expense amount to show the using up of the future economic benefit of the asset).lExamples are:land and building
10、s;plant and machinery;vehicles furniture;fixtures and fittings(items such as the shelves and counters in a shop).l2.Intangible Assets Intangible asset.mp3lThese assets have no physical form you cant see or touch them,but they are of value to the entity as they will provide future economic benefit.lE
11、xamples are:（Goodwill）;Patents;Franchises;Copyright;Brands(trade mark);Business secret etc.l3.Long-term Investment:These assets come from the additional cash funds that the business invests in income-earning securities.lExamples are:funds on term deposit;shares in other companiesLiability:Current li
12、abilitynDefinition of Liability:Liabilities are amounts owed by the business to others(the debts of the business that will be paid in the future).nClassification:Liabilities are listed on the Balance Sheet and grouped(classified)according to when the payment will take place.Current Liabilities A lia
13、bility is considered current if:the business intends to pay the amount in the entitys normal operating cycle (usually 1year)Examples:Bank overdraft;accounts payable;short-term loan;notes payable Notes payable11Liability:Non-current liabilitylNon-Current LiabilitieslA liability is considered non-curr
14、ent if they are not expected to be met within the next year(next accounting period)or within 12 months of balance sheet date.lExamples are:The non-current portions of Mortgages and Loans If a business takes a loan for 3 years,the first third of the loan is current and the last two thirds is non-curr
15、ent EquitylDefinition:Equity(also known as owners equity,capital or proprietorship)is the owners investment in the business.Revised accounting equation:A-L=E Equity then is the difference between the assets and liabilities of the business the net assets and so is a residual interest in the assets of
16、 the entity after deducting all its liabilities.lSources of Equity:Investment by the owner(Paid-in capital(common stock),paid in surplus)Profits arising from the everyday operations of the business.(Retained earnings)14 Debt vs.equitylThe basic feature of a debt is that it is a promise by the borrow
17、ing firm to repay a fixed dollar amount of by a certain date.lThe shareholders claim on firm value is the residual amount that remains after the debtholders are paid.lIf the value of the firm is less than the amount promised to the debtholders,the shareholders get nothing.15Debt and Equity as Contin
18、gent Claims$F$FPayoff to debt holdersValue of the firm(X)Debt holders are promised$F.If the value of the firm is less than$F,they get the whatever the firm if worth.If the value of the firm is more than$F,debt holders get a maximum of$F.$FPayoff to shareholdersValue of the firm(X)If the value of the
19、 firm is less than$F,share holders get nothing.If the value of the firm is more than$F,share holders get everything above$F.Algebraically,the bondholders claim is:Min$F,$XAlgebraically,the shareholders claim is:Max0,$X$F16$F$FCombined Payoffs to debt holders and shareholdersValue of the firm(X)Debt
20、holders are promised$F.Payoff to debt holdersPayoff to shareholdersIf the value of the firm is less than$F,the shareholders claim is:Max0,$X$F=$0 and the debt holders claim is Min$F,$X=$X.The sum of these is=$XIf the value of the firm is more than$F,the shareholders claim is:Max0,$X$F=$X$F and the d
21、ebt holders claim is:Min$F,$X=$F.The sum of these is=$XCombined Payoffs to Debt and Equity17Sample balance-sheet-vertical format18Statement of Comprehensive Income(income statement)lThe income statement is more like a video of the firms operations for a specified period of time.lYou generally report
22、 revenues first and then deduct any expenses for the periodlMatching principle GAAP say to show revenue when it accrues and match the expenses required to generate the revenueElements of Income statementlIncome:Income includes Revenue,Other Income and Gains.lClassification:lRevenue is the inflow of
23、cash from the ordinary activities of the business-that is from the main activity of the business.Examples are:sales(cash or credit)from the sale of goods fees(cash or credit)from the sale of services19Other income will result in an inflow of cash or increase of economic benefit but from activities t
24、hat are not the main activities of the business.Examples are:interest from an investment dividends from shares in other companies rent from hiring an unused portion of the building.Gains are the other items that increase cash or economic benefit.An example is gain on sale of equipment when the equip
25、ment is sold for more than it is valued in the business records.20Elements of Income statementlExpenses are the outflow of resources including cash from the ordinary activity of the business and also losses.Examples are:rent;wages;electricity;interests etclClassification Expenses can be classified a
26、ccording to their:function(trading expenses;selling and distribution costs;administrative expenses;finance costs and other expenses)INCOME LESS EXPENSES=PROFIT(or Loss)FOR THE PERIOD 21Elements of Income statementSample income statement2223Work the Web ExamplelPublicly traded companies must file reg
27、ular reports with the Securities and Exchange CommissionlThese reports are usually filed electronically and can be searched at the SEC public site called EDGAR24TaxeslThe one thing we can rely on with taxes is that they are always changinglMarginal vs.average tax rateslMarginal the percentage paid o
28、n the next dollar earnedlAverage the tax bill/taxable income25Corporate tax ratesTaxable income Tax rate 0-50,000 15%50,001-75,000$7,500+25%Of the amount over 50,000 75,001-100,000$13,750+34%Of the amount over 75,000 100,001-335,000$22,250+39%Of the amount over 100,000 335,001-10,000,000$113,900+34%
29、Of the amount over 335,000 10,000,001-15,000,000$3,400,000+35%Of the amount over 10,000,000 15,000,001-18,333,333$5,150,000+38%Of the amount over 15,000,000 18,333,334+3526Example:Marginal Vs.Average RateslSuppose your firm earns$0.15 million in taxable income.lWhat is the firms tax liability?lWhat
30、is the average tax rate?lWhat is the marginal tax rate?lIf you are considering a project that will increase the firms taxable income by$1 million,what tax rate should you use in your analysis?27282930313233343536Types of opinion37 Standard unqualified opinion report Qualified opinion report Adverse
31、opinion reportDisclaimer opinion reportChap 2Quizl1.What are four statements and supplements being released in annual report for public companies?l2.List out basic elements of balance sheet and income statement.l3.Explain average tax rate and marginal tax rate.l4.What are four basic consumptions of GAAP?What are four basic principles of GAAP?What are four basic constraints of GAAP?l5.What are four basic types of audit report?
