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Unformatted text preview: 4-14THE BALANCE SHEET AND THE STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CHAPTER OBJECTIVESAfter 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. 9. Describe the SEC integrated disclosures. 10. Explain the reporting techniques used in an annual report. 4-2SYNOPSISBalance Sheet1. 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. Liquidityrefers to how quickly a company can convert an asset into cash to pay its bills. Information about liquidity helps users evaluate the timingof cash flows. Financial flexibilityis the ability of the company to use financial resources to adapt to change. Information about financial flexibility is necessary for evaluating the uncertaintyof future cash flows. Operating capabilityis 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 amountof 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. This is capital maintenance. To the extent capital is increased, there is the potential for return on investmentthrough dividends and/or market price appreciation on the stock. Capital can be defined as either (a) financial capital, the monetary value of the net assets from investments by stockholders plus the value of the increase in net assets resulting from earnings retained by the corporation, or (b) physical capital...
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.
- Spring '11