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Transaction Analysis Slides

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0% found this document useful (0 votes)
23 views

Transaction Analysis Slides

Uploaded by

Ho Bach
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Corporate Transaction

Analysis
RECORDING AND ANALYZING BUSINESS TRANSACTIONS
Recording Business Transactions:
Some Advice
▪ There are a lot of details in this chapter:
▪ Pay attention to them, learn them
▪ Try not to get too bogged down by them!
▪ Focus on the big picture:
◦ What do businesses do?
◦ How do these transactions affect a business’s financial position?
How do various transactions affect a
business’s financial position?
▪ The financial position of a company is reflected by it’s Balance Sheet

Stockholders
Assets = Liabilities +
Equity

What we
= How we paid for it
Have
Some Rules
▪ Economic events that change the financial position of a company are accounting
transactions and need to be reported
▪Only past events (that have already occurred) are reported
▪The Balance Sheet must always balance
◦ Every transaction will have at least two parts
◦ Double entry accounting

Assets = Liabilities Stockholders Equity

All accounting transactions begin with a change in the balance sheet


Keeping the Balance Sheet
Balanced
▪The balance sheet must always stay balanced
◦ Thus, every transaction must have two parts
What do businesses do?
▪Companies engage in three types of business transactions:
▪ Financing- transactions related to borrowing money or seeking outside investors
to fund a business as well as transactions related to paying back investors and
creditors

▪ Investing
▪ Operating

▪Ongoing questions for today:


What do businesses do?
How do these transactions affect a
business’s financial position?
Investing Activities
▪ First: Seek funding
▪ Second: Use funding to build your business
▪ Investing activities - transactions related to
buying [or selling] assets that are used in a
business’s operations for more than one period
(long term)
▪ We invest now, to make money later
▪ Assets are “Probable future economic benefits”

▪Examples:
▪ Land, Building, Equipment, Software
What is the value of an asset?
How should it be recorded?
▪ Remember: What we own = How we paid for it
▪ Assets are recorded at historical cost – the original purchase price
▪Keeps the balance sheet balanced
▪Reliable value that came from a real transaction
▪ The fact that a transaction occurred, means both buyer and seller agreed
the sales price was a fair representation of the assets value (at least on that
date)
Is an asset’s historical cost informative?
▪ Historical Cost- cost when acquired
◦ Does not change over time
◦ Less Relevant but More Reliable (free from
error)
Relevance

Reliability ▪ Fair Value- current value that changes


over time
◦ More relevant but often times Less Reliable
◦ Used for certain assets and liabilities that are
actively traded  can easily calculate a reliable
value
The Balance Sheet Balances:
The Accounting Equation

Stockholders
Assets = Liabilities +
Equity

What we Have How we paid for it


=
(Investments) (Financing)
Now we’re ready to go:
Operating Activities
▪ First: Seek funding
▪ Second: Use funding to build your business
▪ Third: Run your business!
▪Operating Activities - the day to day transactions a business engages in that are
related to the main mission of the business
▪What do you expect Adamson Incorporated to do on a day to day basis to run its
business?
A few more Definitions:
Operating Activities
▪Revenue- inflows of assets (or settlements of liabilities) from delivering or
producing goods, rendering services, or other activities that constitute the entity’s
ongoing major or central operations
▪ Money (or assets) that the company has earned through its core operations (hard work)

▪Expense- outflows of assets (or incurrences of liabilities) from delivering or


producing goods, rendering services, or carrying out other activities that constitute
the entity’s ongoing major or central operations
▪ Costs incurred to earn revenue

▪Revenues and Expenses are reported on the Income Statement


▪ But I thought the Balance Sheet summarizes every transaction??
How is income reported on the balance sheet?
An expanded look at stockholders’ equity
▪ There is actually a third way to fund a business (two types of equity funding):
▪ Contributed Capital – investors contribute cash or other assets in exchange for an ownership
interest
▪ Earned Capital – as the company earns money, it can reinvest in itself
▪ Revenue and expenses are reported on the Income Statement but then flow into equity as earned
capital

The Income Statement

Reinvest →
Retained Earnings
Net Earned
Revenue Expense
Income Capital
Pay out to Investors
→ Dividends
The Accounting Equation Rewritten:
Financial Statement Effects Template
Balance Sheet Income Statement

Assets = Liabilities + Equity


Cash + Noncash = Liabilities + Contrib. + Earned Revenues - Expenses = Net
Capital Capital Income

Separately reported on the Income


Statement but rolls up into Equity
What is and is not an asset?
▪ Asset: Probable future economic benefits controlled by a particular
entity as a result of past transactions
▪ Assets are recorded at historical cost  must have a purchase price
▪ Assets will provide future economic benefits
▪ If a company incurs a cost that provides value now and now only
that is an expense
▪More on this next class
An expanded look at
The Accounting Equation
Balance Stockholders
Sheet Assets = Liabilities
Equity

Contributed Capital Earned Capital


(Stock) (Retained Earnings)

Statement of Statement
Stockholders’ of Retained Beginning
Retained Earnings
Net Income Dividends
Equity Earnings

Income Revenues Expenses


Statement
What links the Income Statement and
the Balance Sheet?
▪ Statement of Stockholders’ Equity
▪ Details changes in a company’s contributed capital and earned capital
▪ Links the income statement to the balance sheet by adding net income into retained earnings

▪ For now, we will just focus on changes in earned capital (retained earnings):
▪Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
Consolidated Statements of Shareholders’ Equity - USD ($)
Total
Cumulative Effect, Period of
Common Stock
Additional Paid-
Treasury Stock
Retained Accumulated Other
Comprehensive Income
$ in Thousands Adoption, Adjustment In Capital
Earnings (Loss)

Beginning balance at Dec. 31, 2018 $ 1,928,504 $ (5,549) $7 $ 371,225 $ (67,016) $ 1,625,481 $ (1,193)
Share-based compensation 8,154 8,154
Repurchase of common stock (5,439) (5,439)
Proceeds from options exercised 1 1
Changes in comprehensive income 406 406

Net income (loss) 335,255 335,255


Ending balance at Dec. 31, 2019 $ 2,261,332 (1,609) 7 379,380 (72,455) 1,955,187 (787)
Share-based compensation $ 11,575 11,575
Repurchase of common stock (1,669) (1,669)
Proceeds from options exercised 39 39
Changes in comprehensive income 169 169
Issuance of common stock and warrants, net 352,968 3 352,965
Equity component value of convertible debt issuance, net 55,590 55,590

Net income (loss) (428,700) (428,700)


Ending balance at Dec. 31, 2020 $ 2,249,695 $ (49,530) 10 799,549 (74,124) 1,524,878 (618)
Share-based compensation $ 12,536 12,536
Repurchase of common stock (1,515) (1,515)
Changes in comprehensive income 86 86
Issuance of common stock and warrants, net 375,332 1 375,331

Net income (loss) (472,569) (472,569)


Ending balance at Dec. 31, 2021 $ 2,114,035 $ 11 $ 1,131,826 $ (75,639) $ 1,058,369 $ (532)
• Statement of
Relationship between 4 Statements Cash Flows
• Operating
• Investing
• Financing
Retained
Earnings • Balance Sheet Cash Balance
• Assets
• Income • Statement of • Cash
Statement Stockholders’ Equity • Liabilities
Revenues ▲Contributed Capital • Stockholders Equity
-Expenses ▲Retained Earnings: • Contributed Capital
Beginning RE • Retained Earnings
+ Net Income
Net Income
- Dividends
Ending RE Financial Position
of a Company
Creating Financial Statements
▪ The Income Statement should always be made first
◦ Income statement accounts are temporary → they only exist for that period of time (quarterly, annually)
◦ The beginning of the next period will start with no revenue and no expenses

▪ Net Income flows into Retained Earnings on the Balance Sheet


◦ Balance sheet accounts are permanent → the ending balance rolls over as the beginning balance of next
period
◦ We still have assets and liabilities on the books at the beginning of the next period

▪ Dividends are also a temporary account that flow into Retained Earnings
▪ All transactions end up and accumulate on the balance sheet

On the financial statement effects


template, this process is done
continuously and automatically

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