Balance Sheet: Assets, Liabilities, Equity

• Balance sheets include assets, liabilities, and owner's equity.
• Balance sheets capture a company's financial status at a specific point in time.

LE-NATURE'S INC. Balance Sheet (December 31, 2020) in millions of dollars

• Cash: $10.6
• Accounts receivable: $6.6
• Inventories: $51.2
• Property, plant, and equipment: $459.0
• Total assets: $527.4
• Accounts payable: $26.0
• Notes payable to banks: $381.7
• Total liabilities: $407.7
• Common stock: $55.7
• Retained earnings: $64.0
• Total stockholders' equity: $119.7
• Total liabilities and stockholders' equity: $527.4

Balance Sheet Definitions

• Assets are resources controlled by the company.
  • Cash represents the amount of cash in the company’s bank accounts.
  • Accounts receivable represent amounts owed by customers from prior sales.
  • Inventories are ingredients and beverages ready for sale.
  • Property, plant, and equipment include factories, production equipment, and land.
• Total assets are the total amount of the company’s resources.
• Liabilities and stockholders' equity are sources of financing for the company’s resources.
• Liabilities represent financing supplied by creditors.
  • Accounts payable represent amounts owed to suppliers for prior purchases.
  • Notes payable to banks represent amounts owed to banks on written debt contracts.
• Stockholders' equity represents financing provided by stockholders.
  • Common stock represents amounts invested in the business by stockholders.
  • Retained earnings represent past earnings not distributed to stockholders.
• Total liabilities and stockholders' equity are the total sources of financing for a company’s resources.

LE-NATURE'S INC. Income Statement (For the Year Ended December 31, 2020) in millions of dollars

• Sales revenue was $275.1
• Cost of goods sold was $140.8
• Selling, general, and administrative expenses: $77.1
• Interest expense: $17.2
• Income before income taxes: $40.0
• Income tax expense: $17.1
• Net income: $22.9

Income Statement Definitions

• Sales revenue represents cash and promises received from the sale of beverages.
• Cost of goods sold represent the cost to produce beverages sold.
• Selling, general, and administrative expenses include other operating expenses like utilities and delivery costs.
• Interest expense is the cost of using borrowed funds.
• Income before income taxes= Income taxes on period’s income before income taxes
• Net income = Revenues earned minus expenses incurred

Statement of Cash Flows

• Tracks cash movements across three activities over a specific time period.

• Operating cash flows are directly related to earning income.

  • Examples include cash collected from customers less cash paid for operating expenses (such as cash paid to suppliers and employees).

• Investing cash flows are related to the acquisition or sale of the company's plant, equipment, and investments.

• Financing cash flows are directly tied to the financing enterprise.

  • Examples include the receipt or payment of money to investors and creditors, except suppliers.

• Insurance expenses go on the income statement.

• Independent auditors are responsible for the auditors' report.

  • The report reviews a company’s financial statements for accuracy, compliance, and reliability.

• Managers develop accurate and truthful reports.

  • CFOs and CEOs must certify financial statements.

Sarbanes-Oxley Act

• Included reforms that toughened penalties for corporate fraud.
• Restricted the types of consulting CPAs that may perform on public company audit clients.
• This act mandates the CFOs and the CEOs sign and certify financial statements.

Legal Company Structures

• Sole Proprietorship: Easy to set up, has unlimited liability, and is taxed once.
• Partnership: Easy to set up, unlimited liability for general partners, and taxed once.
• Corporations: Offer limited liability but are subject to double taxation.
• The tax formula is: Taxable Income × Tax Rate = Tax

Individual Income Tax Formula

• Gross Income
• For AGI deduction = Adjusted Gross Income
• From AGI deduction
  • The Greater of:
    • Standardized deduction or
    • Itemized deduction
  • Deduction for qualified business income = Taxable Income × Tax Rates = Income tax liability

• Other taxes = Total taxes

• Tax Credit
• Tax prepayments = Tax due or (refund)

Tax Rate Types:

• Progressive: Imposes an increasing marginal tax rate as the tax base (income) increases.
• Proportional (flat): Imposes a constant tax rate throughout the tax base (sales, Medicare).
• Regressive: Imposes a decreasing marginal tax rate as the tax base increases (social security).
• DEA increases when debited and decreases when credited.
• LER increases when credited and decreases when debited.

Basic Transaction

• ex. An investor puts $20,000 cash into a company:
  • Debit cash and credit common stock
• Dividends + Expenses + Assets = Liabilities + Owner's Equity + Revenue

Three types of Risk:

• Business Risk: Risk related to the company’s operations such as competition, supply chain issues, and/or economic downturns.
• Financial Risk: Risks associated with a company’s financial health, including debt levels, cash flow, and profitability.
• Information Risk: The risk that a financial statements contains inaccurate or misleading information, whether due to error or fraud.

SAS and SARS

• Statement of Auditing Standards (SAS):
  • Issued by the ASB (Auditing Standards Board).
  • Sets guidelines to external auditors on the generally accepted auditing standards.
• Statement on Standard for accounting and review services:
  • Standards for compilation or reviews, not audits of financial statements.

Types of Audits

• Compliance: Ensures compliance with laws, such as an IRS audit of taxpayers’ return.
• Operational: Evaluates the efficiency of operations.
• Integrated: Provides assurance of financial statements and effective internal control over financial reporting.
• Financial: Examination of an organization’s financial statements and records to ensure accuracy.

CPA Requirements:

• Bachelor’s degree in accounting or related field.

• 150 credit hours.

• One year of working experience.

• Pass the CPA test.

• Continuing education.

• Audits are management of risk.

• Independence implies impartiality and objectivity.

Levels of Assurance

Explore balance sheets, which detail a company's financial status. Review assets like cash, accounts receivable, inventory, and property. Understand liabilities, equity, and their role in financial health.