Income Statements » What’s Behind Statements of Changes in Owners’ Equity? » Learning Objectives and Key Take-aways
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What’s Behind Statements of
Changes in Owners’ Equity?
L E A R N I N G
O B J E C T I V E S
After completing this module you will be able to:
• Trace the financial-statement effects of entries to line items on balance
sheets, income statements and statements of changes in owners’ equity.
• Record dividend and closing entries and create statements of changes in
owners’ equity.
Key take-aways:
• The power of learning entries is that it helps you better interpret numbers
and connect them to the underlying business activities. The entries are the
“connective glue” that ties the financial statements to the business. The
Record-Keeping and Reporting (R&R) Map illustrates these connections.
• The effects of some entries, like recording dividends and closing entries, are
disclosed directly on the statements. Knowing the related entries not only
helps you connect what you see to the business activity, moreover, they also
help you know the effects that aren’t disclosed - the other side of the entry
- such as dividends payable and cash. This also helps you connect what you
see on one statement to another.
Key terms:
• Closing entries - Entries to transfer income account balances to permanent
owners’ equity accounts, leaving income account balances at zero at the end
of the reporting period. For example, entries to transfer net income account
balances to retained earnings.
• Dividends - Distribution (usually cash) of a company’s retained earnings to
its shareholders.
• Owners’ equity - Owners’ claims on entity’s assets. Total owners’ equity is
the accounting or book value of the owners’ claims, which generally differs
from fair values. Also called stockholders’ equity or shareholders’ equity.
• Retained earnings - Net profits and losses (earnings) the company has
accumulated since it started less the accumulated distributions of earnings to owners in the form of dividends or share repurchases. Also called
Retained losses.
• Reserves - Other comprehensive income the company has accumulated
since it started. Also called surplus, accumulated other comprehensive
income, and other comprehensive income.
You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons
Attribution-Noncommercial-Share Alike United States license. © 1991–2011 NavAcc LLC.
www.navigatingaccounting.com
2
NAVIGATING ACCOUNTING®
Figure 1 Common Entries Behind Statements of Changes in Owners’ Equity
This figure demonstrates how the affects of dividend and closing entries are disclosed on the statement.
Entries Preview
BISCHOFF GLOBAL SPORTSWEAR
STATEMENT OF CHANGES IN EQUITY
(In Millions)
December 31, 2011
Share
Capital
Retained
Earnings
Reserves
$180
$179
$16
Comprehensive income
Profit (loss)
76
Common stock issued
Dividends declared
Other
December 31, 2012
24
Comprehensive income
Profit (loss)
Other comprehensive income
Total
Common stock issued
Dividends declared
Other
December 31, 2013
76
24
7
(7)
7
$239
$33
34
$486
24
24
89
24
113
(7)
$50
10
(25)
36
$613
89
89
10
(25)
7
$310
29
$253
Dividend
entries
24
100
7
(23)
(23)
27
$214
$375
76
Other comprehensive income
Total
Total
Closing
entries
© 1991–2011 NavAcc LLC, G. Peter & Carolyn R. Wilson
3
KEY TAKE-AWAYS
Figure 2 Record-Keeping and Reporting (R&R) Map — Phase 2
This figure illustrates how entries in the balance-sheet-equation matrix flows into the statements.
Record-Keeping & Reporting Map (Phase 2)
Assets
Current
+
C
+
AR
$78
+
Inven
+
$103
=
+
+
PrEx
+
$20
+
OCA
+
$158
+
Non-current
Liabilities
=
Net PPE
Current
PPEhc - AcDep + ONCA = +
+
$20
DivP
+
$7
+
OCL
+
$68
+
LTD
+
$60
$13
+
+
+ 10
+
+
+
+
+
-
+
= +
+
+
+
+
E2
Issued non-current debt for cash
+
+ 10
+
+
+
+
+
-
+
= +
+
+
+
+
E3
- 20
+
+
+
+
+
E4
During Period
+
+
+
$35
+
Issued share capital for cash
Owners' Equity
+ 10
+
Permanent
ONCL + SCap +
$239
+
Reserv +
Comprehensive Income
Net Income
CGS
-
$0
-
DepEx - MSGA - OSGA + PPEGL +
-
TaxEx +
OCI
+
$0
-
-
-
+
+
+
-
+
+
+
+
+
+
+
-
-
-
-
+
+
+
-
+
+
+
+
+
+
+
-
-
-
+
$0
+
-
-
$0
IncS
+
+
$0
$0
+
+
$0
ONOI
+
-
$0
+
+
+ 10
-
$0
+
$214
-
$0
OOI
+
+
$0
-
+
+
$33
Rev
+
+
$70
RE
+
Purchased PP&E with cash
+
Purchased merchandise on account for resale
+
+
+
+
+
+
-
+
= +
+
+
+
-
-
-
+
+
E5
Paid invoices due
+
- 225 +
+
+
+
+
-
+
= + - 225 +
+
+
+
+
+
+
+
+
-
-
-
-
+
+
+
-
+
+
E6a
Recognized revenue when goods were delivered
+
+ + 415 +
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+ + 415 -
-
-
-
+
+
+
-
+
+
E6b
Recognize product cost when goods were delivered
+
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+
- + 208 -
-
-
+
+
+
-
+
+
-
+
+
-
+
E7
+
+
+
+ 80
- 208
+
+
+ 20
-
+
= +
+ 80
+
+
+
+
+
+
-
-
+
+
+
-
+
+
-
+
+
+
Collected amounts due from customers
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
-
-
-
+
-
+
+
E8
Paid previous expenses not invoiced
+
+
+
+
+
+
-
+
= +
+
- 10
+
+
+
+
+
+
+
+
-
-
-
+
+
-
+
+
E9
Received invoices previously expensed
+
+
+
+
+
+
-
+
= +
+7
+
-7
+
+
+
+
+
+
+
+
-
-
-
-
+
+
+
-
+
E10
Recognized expenses when invoiced
+
+
+
+
+
+
-
+
= +
+ 20
+
+
+
+
+
+
+
+
+
-
-
-
+ 20
-
+
+
+
-
+
+
E11
Recognized expenses when paid
+
- 30
+
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+
-
-
-
+ 30
-
+
+
+
-
+
+
E12
Prepaid future expenses
+
- 20
+
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+
-
-
-
-
+
+
+
-
+
+
E16
Sold PP&E for cash
+
+ 15
+
= +
+
E17
Declared dividends on share capital
+
E18
Paid dividends on share capital
+
- 20
+
+
- 74
+
Other during period
End of
Period
$199 =
AcrL
E1
-
$45
+
December 31, 2012
+
$220
AP
+
+ Non-current +
+ 380 + - 380 +
- 10
+
+
+
+
+
+
Recognized expenses before invoiced
+
+
+
+
E14
Recognized expenses previously prepaid
+
+
+
+
E15
Recognized depreciation expense
+
Other end of period
Close profits and losses
+
+
+2
+
$31
+
+
-9
+
$106
- 25
+ 32
+
$147
+
+2
+
$10
-
-
+
-8
+
+0
+
-
+
+ 32
+
-
+
+ 26
= +
+
= +
+
+
+
+
+
+
+
-
+
+
+
+
+
+
+
+
-
+
-
+
= +
+
+
+
+4
+
$264
-
+7
-
+ 26
-
$70
+
= +
+
+8
= +
$233 =
+
+
+
-1
$25
+
+
+8
+
$14
+
+
+0
+
$12
+ 40
+
+
+ 54
+
$71
+
+
- 18
+
+
-5
+
$105
+ 12
+
+
+ 48
+
$100
+
+ 17
+
$253
+0
+
$221
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+
+
+
+
+
-
+
= +
+
+
+
+
+
+
+
+
+
+
$31
+
+
$106
+
+
$147
+
+
$10
+
+
$219
+
-
$264
-
+
$70
= +
$233 =
+
+
+
$25
+
+
$14
+
+
$12
+
+
$71
+
+
$105
+
+
$100
+
+ 89
+
$253
+
+
-7
+
+
+
Close other comprehensive income
+
+7
+
+
+
December 31, 2013
- 25
+
+
+
-
+
+
+
+
+
+
+
- 51
+
+
+3
+
+
+
+
+
+
+
+
+0
= +
+ 29
+
+
- 20
+
$219
+
+ 25
+
-
+
+
+
+
+0
+
+
+
= + + 109 +
+
+
+
- 20
+ 40
+
+
-7
+
+
+
+
+
+ 140
E13
Pre-close trial balance
+
+
+
+2
+ 20
+
$310
+
-
+
-
+ + 110 -
+
+
+0
+
$26
-
-
-
-
-
-
-
+ 55
+
-
-
+3
+
+0
+
+
-
+
+
+
-
+
+
+
-
+
+
-
-
+ 25
-
+
+
+
-
+
+
-
+7
-
- 10
-
+0
-
+ 21
-
+ 18
+
+0
+
+0
+
-5
-
+ 40
+
+ 15
-
$253
-
$7
-
$99
-
$18
+
$3
+
-$3
+
$1
-
$40
+
$0
+
$24
-
- 253
-
-7
-
- 99
-
- 18
+
-3
+
+3
+
-1
-
- 40
+
+ 89
+
+
- 89
+
+
+ 24
+
+
$50
+
-
-
$0
-
-
-
$0
-
-
-
+
-
-
$0
$0
-
+
+
+
$0
+
+
+
+
$0
+
+
-
+
$0
-
+
+
+0
+
-
$0
+
$0
+
$0
For years ended December 31, 2012 and 2013
2013
2012
$31
106
147
10
219
513
$13
78
103
20
158
372
264
(70)
194
233
427
$940
220
(45)
175
199
374
$746
25
14
12
71
122
35
20
7
68
130
105
100
205
327
60
70
130
260
253
310
50
613
$940
214
239
33
486
$746
Net revenues
Cost of goods sold
Gross profit
Selling, general, and administrative expenses:
Depreciation
Other selling, general, and administrative
Total
Other operating income and (expense):
Gain (loss) on sale of building
Other
Total
Operating profit
Other income and (expenses)
Profit before taxes
Income tax expense
Net profit (loss)
Other comprehensive income
Comprehensive income (loss)
Liabilities and Stockholders' Equity
Liabilities
Current
- 24
+
$0
2013
2012
$505
(253)
252
$440
(220)
220
(7)
(117)
(124)
(6)
(105)
(111)
3
(3)
0
128
1
129
(40)
89
24
$113
3
(3)
0
109
1
110
(34)
76
24
$100
BISCHOFF GLOBAL SPORTSWEAR
STATEMENT OF CHANGES IN EQUITY
(In Millions)
December 31, 2011
Share
Capital
Retained
Earnings
Reserves
Total
$180
$179
$16
$375
Comprehensive income
Profit (loss)
Other comprehensive income
Total
Common stock issued
7
Dividends declared
Other
27
December 31, 2012
$214
Comprehensive income
Profit (loss)
Other comprehensive income
Total
Common stock issued
10
Dividends declared
Other
29
December 31,, 2013
$253
$
© 1991–2011 NavAcc LLC, G. Peter & Carolyn R. Wilson
+
BISCHOFF GLOBAL SPORTSWEAR
STATEMENT OF COMPREHENSIVE INCOME
(In Millions)
Share capital
Retained earnings
Reserves
Total stockholders' equity
Total liabilities and stockholders' equity
-
+9
- 20
-
+
+
$505
+
-
+0
+
+
-
+0
+
December 31, 2013 and December 31, 2012
Accounts payable
Accrued liabilities
Dividends payable
Other current liabilities
Total current liabilities
Non-current
Long-term borrowings
Other non-current liabilities
Total non-current liabilities
Total liabilities
Stockholders' equity
+
+3
+6
+
+
-
-3
-
+
-
+0
+
+
+
-
-
(In Millions)
Total current assets
Non-current
Property, plant, and equipment:
Historical cost of PP&E
Less accumulated depreciation
Net
Other non-current assets
Total non-current assets
Total assets
+
-
+
+0
+ - 505
+
BISCHOFF GLOBAL SPORTSWEAR
STATEMENTS OF FINANCIAL POSITION
Assets
Current
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Other current assets
-
+
+
-
+0
+
+
76
76
(23)
7
$239
24
24
(7)
$33
89
89
(25)
7
$310
$
24
24
(7)
( )
$50
$
76
24
100
7
(23)
34
$486
89
24
113
10
(25)
29
$613
$
4
NAVIGATING ACCOUNTING®
Figure 3 Accounting is not a spectator sport — it’s game time
This figure lists Scenic route menus for additional information.
Accounting is not a spectator sport – it’s game time
Check the
solutions
Tackle the
exercises
Take
corrective
actions
Identify
things you
don’t know
Seek additional
information
as needed
Scenic route menu
Scenic 1: Accounts
• Entries
• Introduction
• Dividends
• Declaring
• Paying
• Closing entries
• R&R map
• Creating statements
• Balance sheet
• Income statement
• Statement of change in owners’ equity
• Mapping entries into statements
• Stock issuance
• Inventory purchase
• Depreciation
• Take-aways
© 1991–2011 NavAcc LLC, G. Peter & Carolyn R. Wilson