Understanding the Balance Sheet and
Statement of Owners’ Equity
Chapter 3
Basic Financial Statements
• Balance sheet
– Assets = Liabilities + Owners’ Equity
– A snapshot at a particular moment in time
• Income statement
– Revenue – Expenses
– Covers a period of time
• Cash flow statement
– Changes in cash during the period
• Equity statement
– Changes in equity during the period
Ch 3
2
Articulation of Financial Statements
Income Statement
Balance Sheet
Revenue
Assets
Equity Statement
Cash Flows
-Expenses
=
Beginning cash
Net Income Beginning balance
Liabilities
+ Net Income
± Operating
+
- Dividends
± Investing
Equity
Ending balance
± Financing
Ending cash
Ch 3
3
Assets = Claims
The Accounting Equation
• Assets are the cash, property or other
resources controlled by the entity used to
provide future economic benefits.
• Claims are the contractual and other
obligations held against the firm’s assets.
– Liabilities – creditors’ claims
– Owners’ equity – residual claim
Ch 3
4
Assets
(GAAP)
Probable future economic benefits obtained or
controlled by a particular entity as a result of past
transactions or events
• List in order of liquidity
– Begin with cash
– IAS does not specify an order
• Differentiate between current and long-term
– Longer of one year or the operating cycle
– Current ratio = Current assets/Current liabilities
Ch 3
5
Current Assets
• Cash and cash equivalents
• Accounts receivable (net of estimated bad debts)
• Inventory
– Raw material, work in process, finished goods,
merchandise
– LIFO, FIFO, Weighted average, Specific identification
– At lower of historical cost or current market value
• Prepaid expenses
• Marketable securities
– At market value
Ch 3
6
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
Ch 3
2001
6,082
80
4,583
2,756
2,633
1,015
17,149
2000
3,301
354
7,092
5,242
2,294
1,602
19,885
7
Noncurrent Assets
• Property, plant and equipment
– Net book value
• Historical cost less accumulated depreciation
– Except for land which is not depreciated
– Include all costs incurred in preparing the asset for use
– Construction period (capitalized) interest for selfconstructed assets
• Be aware of exceptions to historical cost (IAS 16,
UK)
Ch 3
8
Noncurrent Assets
Intangible assets
• Copyrights, trademarks
– Historical cost less accumulated amortization
• Amortization is similar to straight-line depreciation
• Goodwill
– Excess acquisition cost beyond current market value of net
assets acquired
– Tested for impairment annually (GAAP)
– Amortized over no more than 20 years (IAS)
Ch 3
9
SFAS141, 142, IAS
• SFAS 141: No pooling method allowed
• SFAS 142: No mandatory amortization IAS:
No mandatory amortization after 20050101
Ch 3
10
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
Property, plant and equipment, net
Investments
Long-term deferred income taxes
Other assets
TOTAL ASSETS
Ch 3
2001
2000
8,913
2,995
1,152
3,189
35,399
11,157
5,926
5,375
44,343
11
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
ASSETS
Fixed assets and other non-current assets
Capitalized development costs
893
Goodwill
854
Other intangible assets
237
Property, plant and equipment
2,514
Investments in associated companies
49
Available-for-sale investments
399
Deferred tax assets
832
Long-term notes receivable
1,128
Other non-current assets
6
6,912
Current assets
Inventories
1,788
Accounts receivable, less allowances for
doubtful accounts (2001:217, 2000: 236)
5,719
Prepaid expenses and accrued income
1,480
Short-term loan receivable
403
Available-for-sale investments
4,271
Bank and cash
1,854
15,515
Total assets
22,427
Ch 3
2000
640
1,112
242
2,732
61
337
401
808
55
6,388
2,263
5,594
1,418
44
2,774
1,409
13,502
19,890
12
Special assets
• Deferred tax asset
– Results from a current tax payment that relates
to a future financial statement expense
– A prepayment (a deferred tax liability
represents a deferred payment)
• Inventory reserves
– Reflect a reduction of market value below
historical cost
Ch 3
13
Motorola, Inc. Inventories (Note 2)
Inventories, net, consist of the following:
31-Dec
2001
Finished goods
Work-in-process and production materials
Less inventory reserves
Ch 3
2000
1,140
2,005
2,782
3,922
(1,166)
2,756
4,281
6,286
(1,044)
5,242
14
Claims
• Liabilities (GAAP)
– Probable future economic sacrifices arising
from present obligations as a result of past
transactions
– Claims that must be paid first are listed first
(GAAP)
– IAS does not specify an order
• Equity
– Residual claims against assets
Ch 3
15
Current Liabilities
• Accounts payable to suppliers
– Purchase material without paying cash
• Accrued expenses
– Interest, taxes, wages…
• Current portion of debt (reported nominal amount)
– Principal to be paid within the next year
Ch 3
16
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Ch 3
2001
2000
870
2,434
6,394
9,698
6,391
3,492
6,374
16,257
17
Noncurrent Liabilities
• Principal associated with
– Long-term portion of Loans, Notes, Mortgages, Bonds
Interest is a component of Current liabilities
• Current portion of debt is a Current liability
• Net of discounts or premiums (reported the present value by
discounting future cash flows using historical interest rate)
• Details are discussed in the notes to the statements
Ch 3
18
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities
Company-obligated... preferred securities…
Ch 3
2001
2000
1,152
1,192
485
485
19
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
2000
Minority interests
196
177
Long-term liabilities
Long-term interest-bearing liabilities
207
173
Deferred tax liabilities
177
69
Other long-term liabilities
76
69
460
311
Current liabilities
Short-term borrowings
831
1,069
Current portion of long-term debt
47
Accounts payable
3,074
2,814
Accrued expenses
3,477
2,860
Provisions
2,184
1,804
9,566
8,594
Total shareholders' equity and liabilities
22,427
19,890
Ch 3
20
Owners’ Equity
Preferred Stock
• Listed after Liabilities and before Common
stock
• Shares properties of debt and equity
• In the event of liquidation, receive funds
before Common shareholders
• Dividend specified as dollar amount or
percentage of par
Ch 3
21
Owners’ Equity
• Value listed
Common Stock
– Par or stated value
– Additional paid in capital
– Reflects what was paid for stock at original issuance
• Number of shares
– Authorized – Upper limit of number of shares that can be
issued
– Issued – Sold to investors
– Outstanding – Held by investors (Issued less Treasury)
– Treasury – Firm purchased its own shares on the market
Ch 3
22
Owners’ Equity
• Preferred Stock
• Common Stock
• Retained earnings
– Increased (decreased) by net income (loss)
– Decreased by dividends paid
• Comprehensive income
– Nonowner changes to equity
Ch 3
23
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
Shareholders' equity
Preferred stock, $100 par value (none issued)
Common stock, $3 par
Authorized shares: 2001 and 2000, 4,200
Issued and outstanding 2001, 2,254; 2000, 2,191.2
Additional paid-in capital
Retained earnings
Non-owner changes to equity
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Ch 3
2001
6,764
1,707
5,434
(214)
13,691
25,026
2000
6,574
1,188
9,727
1,123
18,612
36,546
24
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
2000
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Share capital
284
282
Share issue premium
2,060
1,695
Treasury shares
(21)
(157)
Translation differences
326
347
Fair value and other reserves
20
Retained earnings
9,536
8,641
12,205
10,808
Ch 3
25
Nonowner changes to equity
Other comprehensive income (GAAP)
• Adjustments to fair value for available-for-sale securities
(Chapter 13)
• Foreign currency translation adjustment (Chapter 17)
• Gains/losses on cash flow hedge derivatives (Chapter 16)
• Gains/losses on investment hedge instruments (Chapter 16)
• Adjustments related to underfunding a defined benefit
pension plan (Chapter 15)
Ch 3
26
Statement of Shareholders’ Equity
•
•
•
•
•
Provides details of changes in Equity over time
Stock
Other comprehensive income
Retained earnings
Includes beginning and ending balances in
accounts
Ch 3
27
Motorola, Inc. and Subsidiaries
Non-Owner Changes to Equity (net of tax)
(In millions, except per share amounts)
Balances at December 31, 2000
Net loss
Common
Fair Value
Foreign
Comprehen
Stock and
Adjustment to
Currency
Other Retained
sive
Additional
Available For
Translation Items Earnings
Earnings
Paid-In
Sale Securities Adjustments
(Loss)
Capital
7,762
1,536
(339)
(74)
9,727
(3,937)
(3,937)
Unrealized losses on securities, net
(1,193)
Foreign currency translation adjustments
Minimum pension liability adjustment
Issuance of common stock and stock
options exercised
Equity security units issuance costs
Loss on derivative instruments, net
Dividends declared ($0.16 per share)
Balances at December 31, 2001
(1,193)
(173)
(173)
30
30
(1)
(1)
753
(44)
8,471
343
Ch 3
(512)
(45)
(356)
5,434
(5,274)
28
Nokia Statement of Changes in Shareholders’ Equity
(partial, IAS, EURm)
Balance at 12/31/00
Share issue
Acquisition of
treasury shares
Reissuance of
treasury shares
Stock options
issued on acq'n
Stock opt exerc'd
related to acq'n
Dividend
Translation diff.
Net investment
hedge losses
Cash flow hedge
Other increase
Net profit
Balance at 12/31/01
Number of
shares
4,692,133
41,386
Share
Share
Issue
capital
Premium
282
1,695
2
407
Fair value
Treasury Translation and other Retained
shares differences reserves earnings
(157)
347
(56)
8,641
(995)
3,778
(52)
(21)
(21)
157
105
20
20
(10)
(1,314)
65
(86)
76
4,736,302
284
2,060
Ch 3
Total
10,752
409
(21)
326
20
9
2,200
9,536
(10)
(1,314)
65
(86)
76
9
2,200
12,205
29