ch 4 - 4 THE BALANCE SHEET AND STATEMENT OF CHANGES IN...

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Unformatted text preview: 4 THE BALANCE SHEET AND STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 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. Prepare a statement of changes in stockholders' equity. 8. Understand the other disclosure issues for a balance sheet. 4-1 9. Describe the SEC integrated disclosures. 10. Explain the reporting techniques used in an annual report. 4-2 SYNOPSIS Balance Sheet 1. A balance sheet, or statement of financial position, shows the financial position of a company at a particular date by disclosing the economic resources (assets), the economic obligations (liabilities), stockholders' equity, and related information. It reports a company's resource structure (major classes and amounts of assets) and its financial structure (major classes and amounts of liabilities and equity). It is a detailed explanation of the basic accounting equation: Assets = Liabilities + Stockholders' Equity. 2. The balance sheet information helps external users (a) assess the company's liquidity, financial flexibility, and operating capability, and (b) evaluate its income-producing performance for the period. Liquidity refers to how quickly a company can convert an asset into cash to pay its bills. Information about liquidity helps users evaluate the timing of cash flows. Financial flexibility is the ability of the company to use financial resources to adapt to change. Information about financial flexibility is necessary for evaluating the uncertainty of future cash flows. Operating capability is the company's ability to maintain a given physical level of operations defined by either the volume of inventory produced or the productive capacity of the plant, property, and equipment. This is important in evaluating the amount of future cash flows. 3. A company's capital , its economic resources less its economic obligations, is the same as its net assets or owners' equity. Information about a company's capital provides the basis for evaluating income-producing performance . By comparing beginning capital (owners' equity) with ending capital (owners' equity) the financial statement user can tell whether capital for the accounting period was decreased, maintained, or increased. To the extent capital is maintained, there is return of investment...
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ch 4 - 4 THE BALANCE SHEET AND STATEMENT OF CHANGES IN...

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