Balance Sheet
1. The balance sheet “provides information about an entity’s assets, liabilities, and equity and
their relationships to each other at a moment in time.”
2. The balance sheet is a detailed presentation of the basic accounting equation: Assets =
Liabilities + Equity. The usual classifications include current assets, noncurrent assets,
current liabilities, noncurrent liabilities, contributed capital, retained earnings, and
accumulated other comprehensive income.
3.Current assets consist of “cash and other assets or resources commonly identified as
reasonably expected to be realized in cash or sold or consumed during the normal operating
cycle of the business” (ARB 43, Ch. 3A). Assets not qualifying as current are noncurrent.
Current liabilities are “obligations whose liquidation is reasonably expected to require the
use of existing resources properly classifiable as current assets, or the creation of other
current liabilities” (ARB 43, Ch. 3A). Liabilities not qualifying as current are noncurrent.
Equity of a business is the residual after total liabilities are subtracted from total assets.
Hence, any transaction affecting total assets and total liabilities differently also affects equity.
Equity is divided into capital contributed (paid-in or invested) by owners, retained earnings
(income reinvested or retained), and accumulated other comprehensive income (all
comprehensive income items not included in net income).
B.Statements of Income, Retained Earnings, and Comprehensive Income
1. The results of operations over a period are reported in the income statement on the accrual
basis. It reports revenues from and expenses of the entity’s major activities. Items not part
of continuing operations, i.e., discontinued operations and extraordinary items, are
presented separately. Continuing operations may be presented in a single or multiple-step
format depending on whether operating or nonoperating items are separated.
2. The statement of retained earnings consists of beginning retained earnings, plus or minus
any prior-period adjustments (net of tax); net income (loss); dividends paid or declared;
certain other rare items, e.g., quasi-reorganizations; and ending retained earnings.
3.Comprehensive income consists of net income and other comprehensive income (OCI).
OCI is classified separately into (a) foreign currency items, (b) certain amounts (gains or
losses, prior service costs or credits, and transition amounts) associated with postretirement
benefit plans, and (c) unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income and its components must be displayed in a financial
statement given the same prominence as other statements.
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C.Statement of Cash Flows
1. A statement of cash flows is required as part of a full set of financial statements of all
business entities and not-for-profit organizations. Its primary purpose is to provide
information about the cash receipts and payments of an entity during a period.
2. A secondary purpose is to provide information about investing and financing activities even if
they do not directly affect cash flows. These noncash transactions are disclosed separately.
3. Changes in cash and in cash equivalents also are to be explained in a statement of cash
flows.
4. A statement of cash flows should report the cash effects of an entity’s operations, its
investing transactions, and its financing transactions during the period.
a.Operating activities include all events not classified as investing and financing
activities. In general, the cash effects of events that enter into the determination of
income are classified as operating activities.
Investing activities include (1) making and collecting loans and (2) acquiring and
disposing of debt or equity instruments and productive assets. These assets are held
for or used in the production of goods or services (other than the materials held in
inventory).
Financing activities include (1) the issuance of stock, (2) the payment of dividends,
(3) treasury stock transactions, (4) the issuance of debt, (5) the repayment or other
settlement of debt obligations, and (6) exercise of share options resulting in excess tax
benefits. They also include receiving restricted resources that, by donor stipulation,
must be used for long-term purposes.
5. Operating activities are reported using an indirect or direct presentation, although the use of
the direct method is encouraged.
a. If the direct presentation is used, an entity should, at a minimum, report certain major
classes of gross operating receipts and payments.
b. The indirect presentation reconciles net income or the change in net assets to net
operating cash flow by removing (1) the effects of all past deferrals of operating cash
receipts and payments, (2) all accruals of expected future operating cash receipts and
payments, and (3) items whose cash effects are investing or financing cash flows.
D.Other Financial Statement Presentations
1. Financial statements based on a reporting system other than GAAP are said to be prepared
using an other comprehensive basis of accounting (OCBOA).
a. Examples of OCBOAs are: (1) a basis used for tax purposes; (2) a basis used to
comply with the requirements of a regulator; (3) the cash basis and modifications of
the cash basis having substantial support; and (4) a definite set of criteria having sub-
stantial support that is applied to all material items, for example, the price-level basis.
2.Personal financial statements must present assets at their estimated current values.
a. Liabilities, including payables, should be presented at their estimated current
amounts at the date of the statement.
b. Personal financial statements must include at least a statement of financial
condition.
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