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Statement
of
Retained
Earnings Balance
Sheet
Past Emphasis
Income statement
Based on the assumption that flows
were more important than stocks
Frequently resulted in the
measurement of stocks at
residual values
FASB
Asset - Liability approach
Changes in balance sheet amounts becoming
more important in income determination
In this chapter
Assets
Liabilities
Equity
Assets Liabilities
Current assets Current liabilities
Investments Long-term debt
Property, plant, and equipment Other liabilities
Intangible assets
Other assets Stockholders Equity
Capital stock
Additional paid-in capital
Retained earnings
Asset Valuation
Liability Measurement
Current Liabilities Liquidation Value
Long-term & Liquidation Value
Other Liabilities or Present Value
Do measurement techniques
bias statements in favor of
current investors?
Stockholders Equity Accounts and Their
Associated Measurement Techniques
$(75)
Modification of Transaction Price Presumption
Return on Assets
Net income
Average total assets
Profit margin
Net income
Net sales
Asset turnover ratio
Net sales
Average total assets
Hershey & Tootsie Roll Return on Assets
Hershey
2011 2010
$628,962 $509,799
($4,412,199 + 4,272,732)/2 ($4,272,732 + 3,675,031)/2
=14.48% =12.83%
Tootsie Roll
2011 2010
$43,938 $53,063
($857,856 + 857,959)/2 ($857,959 + 838,247)/2
=5.12% =6.26%
Hershey and Tootsie: Return on Assets
Return on Assets
16.00% 14.48%
12.83%
14.00%
12.00%
10.00%
8.00% 6.26%
5.12%
6.00%
4.00%
2.00%
0.00%
2010 2011
Categories:
Business
Operating
Investing
Financing
Income Taxes
Discontinued Operations
Equity
Financial Analysis of Cash Flow Information
A major objective of accounting
To provide data allowing the presentation of cash
flows to investors and creditors
To allow evaluation of risk
Net income is not directly
associated with cash
Investors expect return equal to
market rate of interest for investments with
equal risk
(in thousands)
Current cost
Realizable value
Present value
Level 1 inputs
Quoted prices in active markets for identical assets or
liabilities
Level 2 inputs
Inputs other than quoted market prices that are observable
for the assets or liability
Level 3 inputs
Unobservable inputs for the asset or liability Level 3
Level 2
Level 1
End of Chapter 7
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