Overview of Financial Statements
Read each section in this chapter, which explains the purpose of the balance sheet, income statement, and the cash flow statement. It also is a guide to where you will find financials on publicly traded companies. You should get as much practice working on these statements as you can, since they are the fundamental information on any organization. Make the connections between each financial statement. The more you understand the connectivity of these statements, the better understanding you will have of how the entire accounting system works, which is important if you want to understand the overall operations of any company.
The Balance Sheet
Temporal Classification
Cash, receivables, and liabilities on the Balance Sheet are re-measured into U.S. dollars using the current exchange rate.
Learning Objective
- Identify when it would be necessary to use the temporal method on the balance sheet
Key Points
- Inventory, property, equipment, patents, and contributed capital accounts are re-measured at historical rates resulting in differences in total assets and liabilities plus equity which must be reconciled resulting in a re-measurement gain or loss.
- If a company's functional currency is the U.S. dollar, then any balances denominated in the local or foreign currency, must be re-measured.
- The re-measurement gain or loss appears on the income statement.
Terms
- Temporal Method
Cash, receivables, and liabilities are re-measured into U.S. dollars using the current exchange rate. - translation
Uses exchange rates based on the time assets. Liabilities acquired or incurred are required.
A Classified Balance Sheet
"Classified" means that the balance sheet accounts are presented in distinct groupings, categories, or classifications. Most accounting balance sheets classify a company's assets and liabilities into distinct groups such as current assets property, plant, equipment, current liabilities, etc. These classifications make the balance sheet more useful.
The Temporal Method
Cash, receivables, and liabilities are re-measured into U.S. dollars using the current exchange rate. Inventory, property, equipment, patents, and contributed capital accounts are re-measured at historical rates resulting in differences in total assets and liabilities plus equity which must be reconciled resulting in a re-measurement gain or loss.
If a company's functional currency is the U.S. dollars, then any balances denominated in the local or foreign currency, must be re-measured. Re-measurement requires the application of the temporal method. The re-measurement gain or loss appears on the income statement .
Re-measurement to U.S. dollars.
Translation
A method of foreign currency translation that uses exchange rates based on the time assets and liabilities are acquired or incurred, is required. The exchange rate used also depends on the method of valuation that is used. Assets and liabilities valued at current costs use the current exchange rate and those that use historical exchange rates are valued at historical costs.
By using the temporal method, any income-generating assets like inventory, property, plant, and equipment are regularly updated to reflect their market values. The gains and losses that result from translation are placed directly into the current consolidated income. This causes the consolidated earnings to be volatile.