The Balance Sheet and the Statement of Changes in Stockholders’ EquityFASB Statement of Concepts No. 5Slide 3Basic Accounting EquationLiquidityFinancial FlexibilityOperating CapabilityThree-Stage Process for Disclosing Information on the Balance SheetElements of the Balance Sheet: AssetsSlide 10Elements of the Balance Sheet: LiabilitiesSlide 12Elements of the Balance Sheet: Stockholders’ EquitySlide 14Slide 15Slide 16Limitations of the Balance SheetCurrent AssetsOperating CycleSlide 20Slide 21Slide 22Slide 23Current LiabilitiesWorking CapitalLong-Term InvestmentsProperty, Plant, and EquipmentIntangible AssetsSlide 29Slide 30Long-Term LiabilitiesOther LiabilitiesConceptual GuidelinesStockholders’ EquitySlide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Statement of Changes in Stockholders’ EquitySlide 43Summary of Accounting PoliciesAccounting for Loss ContingenciesSubsequent EventsSEC Integrated DisclosuresSlide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56The Balance Sheet and the Statement of Changes in Stockholders’ EquityChapter4COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate AccountingIntermediate Accounting 11th edition 11th editionNikolai Bazley JonesNikolai Bazley JonesAn electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State UniversityFASB Statement of Concepts No. 5FASB Statement of Concepts No. 52FASB Statement of Concepts No. 5 recommends that a full set of financial statements for an accounting period should show a company’s...FASB Statement of Concepts No. 51. Financial position at the end of the period2. Net income for the period3. Comprehensive income for the period4. Cash flows for the period5. Investments by and distributions to owners for the period3Basic Accounting Equation4Assets=Liabilities+Stockholders’ EquityEconomic resourcesEconomic obligationsNet assetsLiquidity5The term liquidity is used to describe how quickly an asset can be converted into cash or a liability paid.Financial Flexibility6Financial flexibility refers to the ability of a company to use its financial resources to adapt to change.Operating Capability7Operating capability refers to the ability of a company to maintain a given physical level of operations.Three-Stage Process for Disclosing Information on the Balance Sheet1. Identification of what items meet the definition of the elements2. Measurement (valuation) of the elements3. Reporting (classification) of the elements8Elements of the Balance Sheet: Assets9Assets are probable future economic benefits obtained or controlled by a company as a result of past transactions or events.Assets are probable future economic benefits obtained or controlled by a company as a result of past transactions or events.Elements of the Balance Sheet: Assets1. The resource must be able to contribute directly or indirectly to the company’s future net cash inflows.2. The company must be able to obtain the future benefit and control others’ access to it.3. The transaction or event giving the company the right to or control over the benefit must have occurred.10Elements of the Balance Sheet: Liabilities11Liabilities are probable future sacrifices of economic benefits arising from present obligations...Liabilities are probable future sacrifices of economic benefits arising from present obligations...Elements of the Balance Sheet: Liabilities12…of a company to transfer assets or provide services in the future as a result of past transactions or events.…of a company to transfer assets or provide services in the future as a result of past transactions or events.Elements of the Balance Sheet: Stockholders’ Equity13Assets=Liabilities+Stockholders’ EquityEquity is the residual interest in the assets of a company that remains after deducting its liabilities.Equity is the residual interest in the assets of a company that remains after deducting its liabilities.14Historical cost is the exchange price in the transaction in which an asset was acquired.Historical cost is the exchange price in the transaction in which an asset was acquired.Fair value is the price that a company would receive to sell an asset (or transfer a liability) in an orderly transaction between market participants on the date of measurement.Fair value is the price that a company would receive to sell an asset (or transfer a liability) in an orderly transaction between market participants on the date of measurement.Measurement (Valuation) of the Elements of the Balance SheetThe present value of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset.The present value of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset.15Fair Value MeasurementNeed Fair ValueNeed Fair ValueSelect Highest Appropriate Level of Input for Valuation (Hierarchy of Valuation Methods)Level 1: Quoted Price for Identical Asset (or Liability) in Active MarketLevel 2: Adjusted Quoted Price (Exit Value) for Similar Asset (or Liability)Level 3: Unobservable Inputs (e.g., Present Value of Expected Cash Flows)Select Highest Appropriate Level of Input for Valuation (Hierarchy of Valuation Methods)Level 1: Quoted Price for Identical Asset (or Liability) in Active MarketLevel 2: Adjusted Quoted Price (Exit Value) for Similar Asset (or Liability)Level 3: Unobservable Inputs (e.g., Present Value of Expected Cash Flows)16Fair Value MeasurementMeasure Best Fair ValueMeasure Best Fair ValueUse Valuation Method Consistent withMarket Approach (Identical or Comparable Assets or Liabilities)Income Approach (Present Value)Cost Approach (Replacement Cost)Use Valuation Method Consistent withMarket Approach (Identical or Comparable Assets or Liabilities)Income Approach (Present Value)Cost Approach (Replacement Cost)Limitations of the Balance SheetThe use of historical cost to value assets and liabilities does not help users assess the likely amounts of future cash flows.“Human resources” such as high-quality management or highly creative employees are not included as assets.Many of the amounts that a company reports are based on estimates.In periods of inflation, some amounts listed do not show the “purchasing power” of assets and liabilities.17Current Assets18Current assets are cash and other