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Balance Sheets and Income Statements, Liabilities and Stockholder's Equity

1. What is the relationship of liabilities and stockholder's equity, and why is it so?

What is the purpose of the income statement and the balance sheet? How are the two related? (these two items count as one question)
2. When you contrast the liability of the balance sheet for a manufacturing firm to that of financial services company, why would you expect to see a significant difference in the liquidity of the liabilities?
3. In analyzing the financial statements of a global organization, contrast the difference between shareholders and creditors in the U.S. and other countries.
4. What is the danger of making direct charges to shareholders' equity without running them through the income statement?
5. How would differences in managing inventories, cash balances, and accounts receivables impact the relationship between current assets and non-current assets (long-lived/investments), and current assets and liabilities? (Consider just-in-time, swept balances, and securitization of accounts receivables.)
6. How is the use of accelerated depreciation related to the timing of profits and tax liabilities?

Solution Preview

1. Liability and shareholder's equity together constitutes the asset of the balance sheet. Also both liability and the share holder's equity are source of fund in the balance sheet.

The purpose of the income statement is to show the financial position of the company for a specified financial year where balance is used to know the net worth and value of the company.
The current asset and the current liability of the balance sheet are main source and use of fund to generate sales and profit in the income statement. The income left after dividend payment is added back in the reserve and surplus of the balance sheet.

2. Liability portion of the manufacturing firm differs from the liability of financial service firm. The main reason behind this is risk sensitivity of the amount available in the liability portion of the balance sheet. Financial services companies' liquidity in liability portion of the balance is more exposed to risk such as interest rate, exchange rate risk ...

Solution Summary

The relationship between liabilities and stockholder's equity is examined. The purpose of income statements and balance sheets are given.