StatementofChangesinStockholders’Equity

1TheBalanceSheetandtheStatementofChangesinStockholders’EquityChapter321.Knowinterrelationshipoffinancialstatements.2.Masterpurposesofthebalancesheet.3.Masterelementsofthebalancesheet.4.Mastermeasurementoftheelementsofthebalancesheet.5.Understandreportingclassificationsonthebalancesheet.6.Knowstatementofchangesinstockholders’equity.Objectives3FASBStatementofConceptsNo.5FASBStatementofConceptsNo.5recommendsthatafullsetoffinancialstatementsforanaccountingperiodshouldshowacompany’s...4(1)Financialpositionattheendoftheperiod.(2)Netincomefortheperiod.(3)Comprehensiveincomefortheperiod.(4)Cashflowsfortheperiod.(5)Investmentsbyanddistributionstoownersfortheperiod.FASBStatementofConceptsNo.55(1)Thebalancesheet.(2)Theincomestatement.(3)Thestatementofcashflows.(4)Thestatementofchangesinstockholder’equity.(5)Explanatorynotes.Financialstatements6InterrelationshipofFinancialStatementsBeginningBalanceSheetAssetsLiabilitiesStockholders’EquityTransactionsandEventsContinued7TransactionsandEventsIncomeStatementRevenuesExpensesStatementofCashFlowsOperatingActivitiesInvestingActivitiesFinancingActivitiesContinuedInterrelationshipofFinancialStatements8IncomeStatementRevenuesExpensesStatementofCashFlowsOperatingActivitiesInvestingActivitiesFinancingActivitiesEndingBalanceSheetAssetsLiabilitiesStockholders’EquityInterrelationshipofFinancialStatements9BasicAccountingEquationAssets=Liabilities+Stockholders’EquityEconomicresourcesEconomicobligationsNetassets10Acompany’sbalancesheetisintendedtohelpexternalusers:(1)Assessthecompany’sliquidity,financialflexibility,andoperatingcapability;(2)Evaluateinformationaboutitsincome-producingperformanceduringtheperiod(returnoninvestment).Purposesofthebalancesheet11LiquidityThetermliquidityisusedtodescribehowquicklyanassetcanbeconvertedintocashoraliabilitypaid.12FinancialFlexibilityFinancialflexibilityreferstotheabilityofacompanytouseitsfinancialresourcestoadapttochange.13OperatingCapabilityOperatingcapabilityreferstotheabilityofacompanytomaintainagivenphysicallevelofoperations.14Thecapital(netassets)ofacompanyistheeconomicresources(assets)lesseconomicobligations(liabilities),orowners’equity.Toprovideforareturnofinvestment,thestockholders’equity(capital)ofthecorporationmustbemaintained;thisisreferredtoascapitalmaintenance.Oncethiscapitalismaintained,anyincomeofthecorporationisanincreaseinstockholders’equityandisthebasisforprovidingareturnoninvestmenttostockholders.Capitalandcapitalmaintenance15Recognitionistheprocessofformallyrecordingandreportinganelementinthefinancialstatements.Therearefourfundamentalrecognitioncriteria:(1)meetthedefinition;(2)bemeasurable;(3)berelevant;(4)bereliable.Thus,tomeettheobjectivesofacompany’sbalancesheet—toproviderelevantandreliableinformationtoassessitsliquidity,financialflexibility,andoperatingcapabilityandtoevaluateitsincome-producingperformanceduringtheperiod.Recognitioninthebalancesheet16Three-StageProcessforDisclosingInformationontheBalanceSheet1.Identificationofwhatitemsmeetthedefinitionoftheelements.2.Measurement(valuation)oftheelements.3.Reporting(classification)oftheelements.17ElementsoftheBalanceSheet—AssetsAssetsareprobablefutureeconomicbenefitsobtainedorcontrolledbyacompanyasaresultofpasttransactionsorevents.181.Theresourcemustbeabletocontributedirectlyorindirectlytothecompany’sfuturenetcashinflows.2.Thecompanymustbeabletoobtainthefuturebenefitandcontrolothers’accesstoit.3.Thetransactionoreventgivingthecompanytherighttoorcontroloverthebenefitmusthaveoccurred.ElementsoftheBalanceSheet—Assets19Assetsmaybenaturalorman-made,tangibleorintangible,andexchangeableorusefulonlyinthecompany’sactivities.ElementsoftheBalanceSheet—Assets20Assetsmaybeacquiredbypurchase,production,stockholderinvestment,discovery,orothernonreciprocal(one-way)transfer.ElementsoftheBalanceSheet—Assets21Liabilitiesareprobablefuturesacrificesofeconomicbenefitsarisingfrompresentobligations...LElementsoftheBalanceSheet—Liabilities…ofacompanytotransferassetsorprovideservicestootherentitiesinthefutureasaresultofpasttransactionsorevents.221.Itmustinvolvearesponsibilitytoanotherentityorentitiesthatwillbesettledbyasacrificeinvolvingthetransferofassets,provisionofservices,orotheruseofassetsatspecifiedordeterminabledate,onoccurrenceofaspecifiedevent,orondemand.2.Theresponsibilitymustobligatethecompanyinsuchawaythatithaslittleorondiscretiontoavoidthefuturesacrifice.3.Thetransactionorothereventobligatingthecompanymusthaveoccurred.ElementsoftheBalanceSheet—Liabilities23ElementsoftheBalanceSheet—Stockholders’EquityAssets=Liabilities+Stockholders’EquityEquityisresidualinterestintheassetsofacompanythatremainafterdeductingliabilities.24Sinceacompanygenerallyisnotobligatedtotransferassetstoitsowners,owners’equityranksafterliabilitiesasaclaimtoorinterestintheassetsandthusisaresidualinterest.Foracorporation,stockholdersbeartheultimaterisksanduncertaintiesinvolvedinthecompany’soperationsandactivities,andobtaintheresultingrewards.Equityiscreatedbystockholders’investmentsofeconomicresou