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Intermediate 1 Chapter 4 Class Notes

by: Emily Sears

Intermediate 1 Chapter 4 Class Notes 3310

Marketplace > Auburn University > Accounting > 3310 > Intermediate 1 Chapter 4 Class Notes
Emily Sears
GPA 3.2

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These notes cover Chapter 4 Material on Test 1
Intermediate Accounting I
Dr. Duane Brandon
Class Notes
Intermediate 1
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This 6 page Class Notes was uploaded by Emily Sears on Tuesday January 26, 2016. The Class Notes belongs to 3310 at Auburn University taught by Dr. Duane Brandon in Spring 2016. Since its upload, it has received 30 views. For similar materials see Intermediate Accounting I in Accounting at Auburn University.


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Date Created: 01/26/16
CHAPTER 4: The Balance Sheet and the Statement of Changes in Stockholder’s Equity Purpose of the Balance Sheet Recall, a Balance Sheet (Statement of Financial Position) reports the financial position (assets, liabilities, ad equity) of a company at a particular date The BS does not attempt to show the total fair value of a company. Rather, it is meant to be useful to external users who wish to estimate the company’s fair value FMV of company does NOT equal BV of company Recognition in the Balance Sheet Recall, recognition is the process of formally recording and reporting an element in the financial statements To be recognized, SFAC #6 states that an item: 1. Must meet the definition of an element 2. Must be measurable 3. Must be relevant, and 4. Must be reliable Elements of the Balance Sheet Assets- (a) probable future economic benefits (b) obtained or controlled by a company (c) as a result of past transactions or events. Primary attribute is service potential (ex: the potential to benefit from the asset) Liabilities- (a) probable future sacrifices of economic benefits (b) arising from present obligations of a company (with little to no discretion to avoid) to transfer assets or provide services in the future (c) as a result of past transactions or events Stockholders’ Equity- residual interest in the assets of a company that remain after deducting liabilities Measurement (Valuation) of Balance Sheet Elements How are the elements of a balance sheet measured? U.S. GAAP follows a mixedattributemodel. Different types of assets and liabilities are valued using different measurement bases. Common historical values:  Historical cost (or acquisition cost)  Historical proceeds or originally incurred liabilities  Allocated historical amounts  Initial present value and adjusted present value Common current values:  Fair value (amount received to sell asset; “exit value”)  Present Value  Current replacement cost (amount paid to acquire asset; “entry value”)  Net realizable value (net amount to be received if asset sold or present value of cash expected to be received from an asset) GAAP seeks optimal mix of relevant and representationally faithful information How do we determine FairValue? Hierarchy of valuation methods: Level 1: Quoted price for identical asset (or liability) in active market Level2: Adjusted price (exit value) for similar asset (or liability) Level 3: Estimates and assumptions GAAP requires extensive disclosures about fair value measurements Balance Sheet Reporting Classifications andMeasurements Statement of Changes in Stockholders’ Equity Corporations must disclose the changes in its stockholders’ equity accounts. This disclosure may appear in 1. A financial statement (required by SEC for listed companies), 2. A supporting schedule, or 3. A note to the financial statements Many corporations choose to prepare and report a “Statement of Changes in Stockholders’ Equity” Example Additional Balance Sheet Disclosures Summary of Significant Accounting Policies  APB Opinion No. 22 requires that significant accounting policies be disclosed (revenue recognition, basis for consolidation, depreciation and amortization methods, inventory cost methods)  The disclosure is most often made in the first footnote to the f/s Fair Value and Risk of Financial Instruments  FAS 107 requires that the FMV of all financial instruments (assets and liabilities) be disclosed whether or not they are reported on the b/s  FAS 133 requires derivative financial instruments be reported on the b/s (as either assets or liabilities) at FMV  FAS 133 requires many derivative-related footnote disclosures Other Disclosure Issues Loss Contingencies- a condition that exists, at the end of the fiscal period, that gives rise to a possible loss to the company, the amount of which will be determined by a future event Accounting Treatment: based on the following: Gain Contingencies- a condition that exists, at the end of the fiscal period, which gives rise to a possible gain to the company, the amount of which will be determined by a future event Accounting Treatment: Gain contingencies are not recorded. They may be disclosed in the footnotes only when the probabilities are high that the gain will materialize. Care should be exercised with the footnote disclosure to avoid over optimism. (Example of Conservatism principle) Subsequent Events- occur between a company’s balance sheet date and the date the annual report is subsequently issued. Note, SEC registrants have 60, 75, or 90 days to file Form 10-K Accounting Treatment Type I: If the event (1) provides additional evidence about conditions that existed on the b/s date and (2) significantly affects estimates within the f/s, the f/s must be adjusted. Examples: management learns that an A/R is uncollectible, settlement of liability Type II: If the event provides evidence about conditions that did not exist on the b/s date, the f/s are not adjusted. Instead, the information is disclosed elsewhere. Examples: Fire or flood loss, stock or bond issuance, purchase of a business Related Party Transactions- Details of transactions between the company and subsidiaries, management, management’s family, etc. must be disclosed (FASB Stmt. No. 57) Auditor’s Report- The f/s and internal controls over financial reporting are the responsibility of company management. An independent (external) auditor audits the f/s and related controls. The report discloses the auditor’s opinion on whether the financial statements are presented in accordance with GAAP and whether internal controls over financial reporting are effective. SEC Integrated Disclosures  Comparative financial statements- three years for income statement and two years for balance sheet  Selected financial data- summary financial data for previous five years  Management’s Discussionand Analysis (MD&A)- offers management’s perspective on the company and “forward-looking” information  Common StockMarket Prices and Dividends- high and low stock prices by quarter for two years; number of stockholders; dividends paid and dividend restrictions International Balance Sheets See Example 4.7 in text


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