Tài chính doanh nghiệp - Chapter 2: Financial reporting mechanics

Chapter 2Financial Reporting mechanicsBusiness activities and financial statement elementsBusiness ActivitiesOperatingSell products or services to generate revenue1Incur expenses2 while generating revenueInvestingUse (longer-term) assets3 to operate the businessFinancingBorrow from creditors, creating a liability4Sell ownership interest (equity5) to shareholdersFirms use financial reports to communicate about these activities and their resultsCopyright © 2013 CFA Institute21–5: financial statement elementsFinancial statement elementsFinancial statement elements defined in general termsAssets: economic resources of a company Liabilities: creditors’ claims on the resources of a company Owners’ equity: residual claim on the resources of a company Revenue: inflows of economic resources to the companyExpenses: outflows of economic resources or increases in liabilitiesFinancial statements are constructed using these elements.Accounts provide individual records of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense.Copyright © 2013 CFA Institute3Asset accountsCash and cash equivalentsAccounts receivable, trade receivablesPrepaid expensesInventoryProperty, plant, and equipmentInvestment propertyIntangible assets (patents, trademarks, licenses, copyright, goodwill)Financial assets, trading securities, investment securitiesCopyright © 2013 CFA Institute4Liability accountsAccounts payable, trade payablesDebt payableBonds (payable)Copyright © 2013 CFA Institute5Assets and liabilitiesCopyright © 2013 CFA Institute6Borrower$ € ₤ When a bank lends money to a borrower, it creates an asset for the bank (loan receivable) and a liability for the borrower (loan payable).Asset:Loan ReceivableLiability:Loan PayableEquity accountsCapital (such as common stock)Additional paid-in capitalRetained earningsAccumulated other comprehensive incomeCopyright © 2013 CFA Institute7REVENUE AND EXPENSE ACCOUNTSREVENUERevenue, salesGainsInvestment income (e.g., interest and dividends) EXPENSECost of goods soldSelling, general, and administrative expenses (SG&A; e.g., rent, utilities, salaries, advertising) Depreciation and amortizationInterest expenseTax expenseLossesCopyright © 2013 CFA Institute8BASIC ACCOUNTING EQUATIONASSETS = LIABILITIES + OWNERS’ EQUITYThis is the equation that underlies the balance sheet.This equation reflects a company’s financial position.The amount of assets equals the claims on those assets:Liability claims andOwners’ equity, the residual claim.The slightly rearranged balance sheet equation reflects the concept of equity as the residual claim.ASSETS – LIABILITIES = OWNERS’ EQUITYCopyright © 2013 CFA Institute9BASIC and expanded accounting equation: components of owners’ equityCopyright © 2013 CFA Institute10Assets =Liabilities +Owners’ EquityAssets =Liabilities +Contributed CapitalEnding Retained EarningsAssets =Liabilities +Contributed Capital +Beginning Retained Earnings + Net Income -DividendsAssets =Liabilities +Contributed Capital +Beginning Retained Earnings + REV -Expenses -Dividends+BASIC and expanded accounting equation: retained earningsCopyright © 2013 CFA Institute11Assets =Liabilities +Owners’ EquityAssets =Liabilities +Contributed Capital Ending Retained EarningsAssets =Liabilities +Contributed Capital +Beginning Retained Earnings + Net Income -DividendsAssets =Liabilities +Contributed Capital +Beginning Retained Earnings + REV -Expenses -Dividends+BASIC and expanded accounting equation: net incomeCopyright © 2013 CFA Institute12Assets =Liabilities +Owners’ EquityAssets =Liabilities +Contributed Capital Ending Retained EarningsAssets =Liabilities +Contributed Capital Beginning Retained Earnings + Net Income –DividendsAssets =Liabilities +Contributed Capital Beginning Retained Earnings + Revenue –Expenses –Dividends+++BASIC and expanded accounting equationCopyright © 2013 CFA Institute13Assets =Liabilities +Owners’ EquityAssets =Liabilities +Contributed Capital Ending Retained EarningsAssets =Liabilities +Contributed Capital Beginning Retained Earnings + Net Income –DividendsAssets =Liabilities +Contributed Capital Beginning Retained Earnings + Revenue –Expenses –Dividends+++Example: ABC company Financial statement linksCopyright © 2013 CFA Institute14Example ABC companyCopyright © 2013 CFA Institute15ABC Company, Inc.(Beginning) Balance SheetAs of 31 December 20X0Assets2,000  Liabilities500Contributed equity1,250Retained earnings250Owners’ equity1,500Total liabilities and equity2,000During the year 20X1:ABC earned $250 in revenues, for which it received cash.ABC incurred $50 expenses, for which it paid cash.Example: ABC company income statement and retained earningsABC Company, Inc.Income StatementFor the Year Ended 31 December 20X1  Revenue250  Expense50Net income200Copyright © 2013 CFA Institute16ABC Company, Inc.Statement of Retained EarningsYear Ended 31 December 20X1Beginning retained earnings250Plus net income200Minus dividends0Ending retained earnings450Example: ABC company ending balance sheetABC Company, Inc.(Ending) Balance SheetAs of 31 December 20X1 Assets2,200  Liabilities500Contributed equity1,250Retained earnings450Owners’ equity1,700Total liabilities and equity2,200Copyright © 2013 CFA Institute17Accounting system based on the accounting equationThe basic structure of an accounting system mirrors the basic accounting equation: Assets = Liabilities + Owners’ Equity.As each transaction is recorded, the accounting equation remains in balance.An account is a record of increases and decreases in a specific asset, liability, or owners’ equity item.In a tabular summary, each transaction is entered on a new row. Columns are organized by account (and sometimes grouped for display considerations).At any point, subtotals provide information to prepare financial statements.Copyright © 2013 CFA Institute18Example: ABC company tabular accounting systemAssets =Liabilities + Owners’ EquityCashPayableContributed CapitalRetained Earnings Beginning balance2,0005001,250250Received cash for services250250RevenuePaid cash for expenses–50–50ExpenseSubtotal2,2005001,250450Copyright © 2013 CFA Institute19Example: ABC company tabular accounting systemAssets =Liabilities + Owners’ EquityCashPayableContributed CapitalRetained Earnings Beginning balance2,0005001,250250Received cash for services250250 RevenuePaid cash for expenses–50–50ExpenseSubtotal2,2005001,250450Copyright © 2013 CFA Institute20Example: ABC company tabular accounting systemAssets =Liabilities + Owners’ EquityCashPayableContributed CapitalRetained Earnings Beginning balance2,0005001,250250Received cash for services250250RevenuePaid cash for expenses–50–50ExpenseSubtotal2,2005001,250450Copyright © 2013 CFA Institute21Example: ABC company tabular accounting systemAssets =Liabilities + Owners’ EquityCashPayableContributed CapitalRetained Earnings Beginning balance2,0005001,250250Received cash for services250250RevenuePaid cash for expenses–50–50ExpenseSubtotal2,2005001,250450Copyright © 2013 CFA Institute22Total = $2,200Example: ABC company. tabular accounting system with closing entryAssets =Liabilities +Owners’ EquityCashPayableContributed CapitalRetained Earnings RevenueExpensesBeginning balance2,0005001,250250Received cash for services250250Paid cash for expenses–50–50Subtotal (pre-closing)2,2005001,250250250-50Closing200–25050Post closing2,2005001,25045000Copyright © 2013 CFA Institute23accrualsIn the ABC example, the company received cash for all revenues when they were earned and paid cash for all expenses when they were incurred.In practice, a company may Earn revenue before it receives cash or earn revenue after it receives cash.Incur an expense before it pays cash or incur an expense after it pays cash.Accrual accounting requires that revenues be recorded in the period they are earned and that expenses be recorded in the period they are incurred, irrespective of when the related cash movement occurs.Copyright © 2013 CFA Institute24Accruals: revenueCopyright © 2013 CFA Institute25Cash Movement prior to Accounting RecognitionCash Movement in the Same Period as Accounting RecognitionCash Movement after Accounting RecognitionUNEARNED (DEFERRED) REVENUESettled transaction – no accrual entry neededUNBILLED (ACCRUED) REVENUEOriginating entry: Record cash receipt and establish liability (e.g., unearned revenue) Originating entry: Record revenue and establish an asset (e.g., unbilled revenue)Adjusting entry: Reduce the liability while recording revenue Adjusting entry: When billing occurs, reduce unbilled revenue and increase accounts receivable. When cash is collected, eliminate receivable.Accruals: expenseCash Movement prior to Accounting RecognitionCash Movement in the Same Period as Accounting RecognitionCash Movement after Accounting RecognitionPREPAID EXPENSESettled transaction – no accrual entry neededACCRUED EXPENSESOriginating entry: Record cash payment and establish an asset (such as prepaid expense) Originating entry: Establish a liability (such as accrued expenses) and record an expenseAdjusting entry: Reduce the asset while recording expense Adjusting entry: Reduce the liability as cash is paidCopyright © 2013 CFA Institute26flow of information in an accounting systemCopyright © 2013 CFA Institute27JournalJournal Entries and Adjusting EntriesLedgerGeneral Ledger and T- AccountsTrial BalanceTrial Balance and Adjusted Trial BalanceFinancial StatementsFinancial Statementsusing the results of the accounting process in security analysisFinancial statements serve as a foundation for credit and equity analysis, including security valuation.The accounting process requires judgments and estimates.Examples:For depreciation expense, estimating useful life and salvage value of property, plant, and equipmentFor revenue recognition, judging when the revenue has been earnedFor valuing investments, estimating the future cash flows and appropriate discount rateFor receivables, estimating future uncollectible amountsRefer to the critical accounting policies/estimates section of management’s commentary (also referred to as management’s discussion and analysis, or MD&A) and the significant accounting policies footnote, both found in the annual report. Copyright © 2013 CFA Institute28Using the results of the accounting process in security analysisExample disclosure under IFRS. Excerpt from 2011 annual report of Barry Callebaut AG. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. . . . In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in the following table:Copyright © 2013 CFA Institute29Note 1Acquisitions — Fair value measurementNote 18Goodwill — Measurement of the recoverable amounts of cash-generating unitsNote 19Deferred tax assets and liabilities — Utilization of tax lossesNote 24Employee benefit obligation — Measurement of defined benefit obligationsNote 26Discontinued operations and assets held for sale and liabilities directly associated with assets held for sale — Valuation of assetsusing the results of the accounting process in security analysisExample disclosure under U.S. GAAP. Excerpt from 2011 annual report of Hershey.Our consolidated financial statements are prepared in accordance with GAAP. In various instances, GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that our most critical accounting policies and estimates relate to the following:Accounts Receivable—TradeAccrued LiabilitiesPension and Other Post-Retirement Benefits PlansGoodwill and Other Intangible AssetsCommodities Futures Contracts. . . . While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. We discuss our significant accounting policies in Note 1, Summary of Significant Accounting Policies.Copyright © 2013 CFA Institute30summaryFinancial statements are constructed using elements: assets, liabilities, owners’ equity, revenues, and expenses.The basic accounting equation is reflected on the balance sheet Assets = Liabilities + Owners’ equityThe accounting equation can be expanded to provide a combined representation of the balance sheet and income statement.Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue – Expenses – DividendsThe basic structure of an accounting system mirrors the basic accounting equation, which remains in balance as each transaction is recorded. Accrual accounting requires that revenues be recorded in the period they are earned and that expenses be recorded in the period they are incurred, irrespective of when the related cash movement occurs.Copyright © 2013 CFA Institute31