Balance Sheet

Deferred revenue (delivery of goods in a year): Liability, Current
Customer's promise to buy goods in the future: Asset (receivable when earned); typically current
Note payable (due in 5 years): Liability, Non-current
Accounts receivable: Asset, Current
Ad campaign: typically an asset (prepaid) or intangible asset if acquired; classification may be non-current depending on timing
Brand name: Intangible asset, typically Non-current
Product warranties (1 year): Liability (carries a current obligation for warranty costs)
Signing an executive to a contract: Potential liability or accrued expense (depends on terms) and/or asset if related to a service covered
Income tax for year, to be paid in 6 months: Liability, Current
Inventory: Asset, Current
Lawsuit against company: Liability (timing depends on settlement/recognition; can be current or non-current)
Buildings and machinery: Asset, Non-current

Shareholders’ equity is the residual interest in the firm: ext{Equity} = ext{Assets} - ext{Liabilities}
Components include:
- Accumulated Other Comprehensive Income (AOCI)
- Treasury Stock (Contra Equity)
- Noncontrolling Interest
Equity is often divided into:
- Operating Equity (equity generated from ongoing operations)
- Financing Equity (capital raised from owners)
- Earned Capital (retained earnings and other earned components)
- Contributed Capital (paid-in capital, e.g., common/preferred stock, APIC)

Distinction between:
- Operating Equity: funds generated by operating activities (retained earnings, etc.)
- Financing Equity: funds raised from owners or investors (common stock, APIC, etc.)
Components highlighted in many equity sections include Earned Capital and Contributed Capital.

Cash from owners or investors:
- Common Stock
- Par value (or stated value) of the outstanding common stock
- Preferred Stock
- Par value (or stated value) of the outstanding preferred stock
- Additional Paid in Capital (APIC): value of assets received above the par value of the stock
Par value concepts:
- Par value is the nominal value per share set by the firm’s articles of incorporation.
- It is a legal relic and typically unrelated to market value.
- Usually very low (e.g., $0.01 or $0.00); may be zero (no par value).

Example 1: 100 shares of stock issued with no par value and $300 cash received.
- Journal entry:
- Debit Cash 300
- Credit Common Stock (no par) 300
Example 2: 100 shares of stock issued with $1 par value and $300 cash received.
- Journal entry:
- Debit Cash 300
- Credit Common Stock 100
- Credit Additional Paid in Capital (APIC) 200
Summary:
- If stock is issued with no par value, the entire amount goes to Common Stock.
- If stock has par value, Common Stock is recorded at par, and the excess over par goes to APIC.

Components visible on equity statements include:
- Common Stock
- Additional Paid-in Capital (APIC)
- Retained Earnings
- Accumulated Other Comprehensive Loss (AOCI)
- Total stockholders’ investment
Details often show: Common Stock authorized, issued and outstanding levels, and par value per share.
Example data (illustrative from slides):
- Common stock authorized: 6,000,000,000 shares; par value $0.0833
- Shares issued/outstanding (as of Jan 30, 2021): 500,877,129
- Shares issued/outstanding (as of Feb 1, 2020): 504,198,962
- Preferred stock: Authorized 5,000,000 shares; par value $0.01; no shares issued

Equity can be categorized into:
- Operating Equity
- Financing Equity
- Earned Capital
- Contributed Capital

Definition: Accumulated net earnings less payouts over the life of the firm.
How it changes:
- Increased by profits (net income)
- Reduced by losses
- Reduced by dividend payments to shareholders
For any accounting period:
- RE{END} = RE{BEG} + NI - Dividends ext{ Declared}
Dividends declared may be paid now or later; if not paid yet, Dividends Payable is used.
Retained earnings is a component of stockholders’ equity and reflects the company’s reinvested earnings.

Example setup (from slides):
- Revenues: 3{,}000{,}000
- Cost of Goods Sold: 2{,}500{,}000
- Gross Profit: 500{,}000
- Other Income Items: 200{,}000
- Net Income: 700{,}000
- Gains on asset sale: 300{,}000
- Loss on asset sale: 100{,}000
To close to Retained Earnings (illustrative flow):
- Revenues and gains are closed to reduce the revenue balance and transfer net income to Retained Earnings.
- A simplified closing entry (as shown in slides) results in Retained Earnings increasing by the net income amount: +700{,}000 after closing.
Educational takeaway: After closing, income statement accounts carry zero balances into the next period.

Scenario setup (Pearl Street Bikes, Dec 31, 2024):
- Dividends declared of 50 on year-end, not paid yet
- Tax rate: 30%
- Taxes owed to be paid in March 2025
- Unearned revenue relates to goods to be delivered in June 2025
- Prepaid insurance will be fully consumed within the next year
Task: Prepare a balance sheet for the current year (as of 12/31/2024) adjusting for the above items.
Additional in-class data (from slides) includes a sample set of balances (Cash, Accounts Receivable, Inventory, Prepaid Insurance, etc.) and a sample Income Statement with revenues, COGS, depreciation, gains from disposal, and dividends. Students typically adjust current assets and current liabilities for year-end items such as unearned revenue, prepaid expenses, dividends payable, and tax payable.

Classified balance sheet highlights current vs. non-current assets and liabilities.
Working capital is a key liquidity measure: WC = CA - CL
If there is a par value, APIC records the amount received above par value.
Dividends declared reduce Retained Earnings (even if not yet paid in cash).