,Financial Statements,Chapter 3,Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield,Prepared by Coby Harmon, University of California, Santa Barbara,1. Understand the purposes of the balance sheet. 2. Define the elements of a balance sheet. 3. Explain how to measure the elements of a balance sheet. 4. Classify the assets of a balance sheet. 5. Classify the liabilities of a balance sheet. 6. Report the stockholders equity of a balance sheet. 7. Understand the concepts of income. 8. Explain the conceptual guidelines for reporting income.,Learning Objectives,9. Define the elements of an income statement. 10. Describe the major components of an income statement. 11. Compute income from continuing operations. 12. Compute results from discontinued operations. 13. Identify extraordinary items. 14. Prepare a statement of retained earnings. 15. Report comprehensive income.,Learning Objectives,Resources (Assets),Balance Sheet,A = L + OE,Basic Accounting Identity,Balance Sheet,Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.,Basic Definitions - SFAC No. 6,Balance Sheet,Basic Definitions - SFAC No. 6,Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.,Balance Sheet,Owners Equity The residual interest in the assets of an entity that remains after its liabilities are deducted.,Basic Definitions - SFAC No. 6,Balance Sheet,Asset Classifications,Current Assets,Balance Sheet Format,Asset Classifications,Balance Sheet Format,Liability Classifications,Accounts Payable,Short-term Notes Payable,Collections in advance of unearned revenue,Accrued Expenses,Balance Sheet Format,Current assets Less: Current liabilities Equals: Working Capital Current assets Current liabilities,= Working Capital Ratio,Working Capital,Liability Classifications,Balance Sheet Format,Equity Classifications,Owners Equity,Balance Sheet Format,A corporation must disclose the changes in its stockholders equity account when issuing financial statements.,This statement should show investments by and distributions to owners during the period, among other items.,Statement of Changes in Stockholders Equity,FASB Statement of Concepts No. 6 defined investments by owners and distributions to owners, as follows:,Investments by owners are increases in the equity of a company resulting from transfers of something valuable to the company from other entities in order to obtain or increase ownership interests. Distributions to owners are decreases in the equity of a company caused by transferring assets, rendering services, or incurring liabilities to owners.,Statement of Changes in Stockholders Equity,Balance, Jan. 1, 2007 $65,000 $143,400 $ 64,900 $10,000 $283,300 Unrealized increase in value of available- for-sale securities 2,000 2,000 Net income 62,500 62,500 Cash dividends paid (11,200) (11,200) Common stock issued 6,500 30,500 37,000 Balance, Dec. 31, 2007 $71,500 $173,900 $116,200 $12,000 $373,600,SCHEDULE A CARON MANUFACTURING COMPANY,Accumulated Common Additional Other Stock Paid-in Retained Comprehensive $5 par Capital Earnings Income Total,Statement of Changes in Stockholders Equity For Year Ended December 31, 2007,Statement of Changes in Stockholders Equity,Offsetting assets and liabilities Loss and gain contingencies Valuations reported in the Balance Sheet Terminology Comparative Statements,Additional Reporting Issues,Loss,Disclosure,Contingent Liabilities and Assets,Current value amounts generally are not shown on the Balance Sheet. Contains many estimates. Certain assets and liabilities are not shown on the Balance Sheet, e.g., human resources.,Limitations of Balance Sheet,Economic Income,Accounting Income,vs.,Income Statement,Capital Maintenance Concept,Under this concept, corporate income for a period of time is the amount that may be paid to stockholders during that period and still enable the corporation to be as well off at the end of the period as it was at the beginning.,Concepts of Income,Assume a corporation has net assets of $45,000 at the beginning and $80,000 at the end of the year, and that no additional investments or withdrawals were made.,Ending net assets $80,000 Less: Additional investment 0 Ending net assets excluding investment $80,000 Less: Beginning net assets (45,000 ) Total income for the year $35,000,Capital Maintenance Concept,Concepts of Income,Assume a corporation has net assets of $45,000 at the beginning and $80,000 at the end of the year. Stockholders made additional capital investments of $10,000.,Ending net assets $80,000 Less: Additional investment (10,000 ) Ending net assets excluding investment $70,000 Less: Beginning net assets (45,000 ) Total income for the year $25,000,Capital Maintena