 Hello and welcome to this session in which we would look at the liabilities and owners equity section of the balance sheet. In the prior section we looked at the balance sheet and we examined the asset components which are the current and the non-current sections. We talked about current assets, long-term investments, property, plant and equipment and intangible asset. In this session we will focus on discussing current and long-term liabilities or current and non-current and the topic stockholders equity, what goes into stockholders equity. Now the balance sheet is an important topic on the CPA exam. Actually it's extremely important and the reason is simple. A large portion of FAR financial accounting and financial accounting and reporting section is about the balance sheet. So you will need to study in-depth all the current assets, cash, receivable inventory. You would need to learn in-depth long-term investments. You need to learn in-depth property, plant and equipment, intangible, so on and so forth. So in this session and in the previous session all what I'm giving you is really the big picture and overview. But it's very important that you understand the big picture before you dive into each topic separately. Now whether you are an accounting student or a CPA candidate, I can help you succeed on your CPA exam. Most likely you are taking a CPA review course which is great. You keep your CPA review course. My material is in addition to your CPA review course. It's supplemental. It helps you understand the material differently. Where the CPA review course doesn't go in-depth, where the CPA review course doesn't give you more details, I do give you those details. The CPA review course will review it with you. Your risk with me is one month of subscription. Try it. Give it a try. You like it. You keep it. If not for anything take a look at my website to find out how well or not well your university doing on the CPA exam. I have a list of accounting courses, intermediate, advanced taxation, governmental that can help you on the exam. My courses are aligned with your CPA review course, whether you are taking Becker, Wiley, Roger, Gleam. So it's very easy to go back and forth between the courses. And I do have all the AI CPA previously released questions with detailed solution on the CPA exam. So you can view them to see previous questions as well. Also, if you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with others, connect with me on Instagram, Facebook, Twitter and Reddit. So now we're going to dig deep into the current liabilities first. So liabilities starting with current. What are current liabilities? Liabilities expected to be paid off within one year or the company operating cycle. We usually assume it's one year, whichever is longer. We usually assume one year is longer than the operating cycle. Therefore, we would always assume it's a year through the use of current assets. So you are using current assets. You are not refinancing with long term debt. You are using current assets. You are not paying off this debt with issuing stocks. You are using current assets. Usually, you guess that cash or the creation of another current liability. That's fine. If you took an account payable and you refinancing into a short term debt, that's okay. It's still a current liability because the short term debt, which is you have to pay it within one year. So what are some of the typical accounts that might appear under the current liabilities? Well, the most common one for most companies is accounts payable. And what is accounts payable is when the company buys goods and services on account. Now, in the real world, accounts payable usually listed first. It doesn't have to be. There's no particular order. Sometimes short term debt is listed first. But in addition to the number on the financial statements, we will see more details like if they have any discount policy, if they take advantage of their discount, they would list that in there. Short term debt, which is short term notes payable, loans that they have to pay within one year. It's listed under current liabilities. Unearned revenue. If somebody gave us money, sometimes it's called deferred revenues on some balance sheet. Unearned revenue means the customer gave us the cash up front before we performed the service. Unearned revenue, I would say, is the best liability to have because unearned revenue turned into revenues. Once you complete the work, income taxes payable is what you owe to the government. You have tax bill. You have not paid it. It's income taxes payable. Current liabilities might include an accrued liability section. Accrued liability might have several types of liabilities that you bunch them all together like sick pay, vacation pay, maybe bonus pay that you have not paid yet. You accrue them all and you list them. For example, in the real world, you'll have a schedule of all these liabilities with a total of 7,000. Then it will tie up to this 7,000 on the balance sheet. Then we also have something called current maturity of long term debt. So this is, what is this? It says long term debt. Well, this is the current portion of long term debt. It means within long term debt, there's always a current portion. Why? Because if you have a five year loan, well, guess what? In the next year, you're going to have to make some payments. So if you have a five year loan, year one, two, three, four and five. One, two, three, four and five. Guess what? The next year, you have to make this payment. This is the current portion of the long term debt. It is a long term debt. You're not going to pay it off within a year, but you're going to pay one year out of it in the next year. Therefore, it's the current portion of long term debt. And any liability that, you know, we can't, it seems it's current. It doesn't fit any of the others we listed under other current liabilities. That's not very common category. Nevertheless, just know any liability we have to pay within one year using cash or current liabilities refinancing with current liabilities is a current liability. And that's all what current liabilities are about. Long term liabilities, I mean, again, I'm not like downgrading this topic, but it's going to be covered. There's one whole chapter about current liabilities. Then we're going to have long term liabilities or noncurrent. What do you find under noncurrent liabilities? We're going to have long term debt. Notice we have short term debt under current liabilities. Also, we have long term debt. Now this long term debt, it's going to be listed net of short term debt. Hold on a second. Net of what? Net of long short term debt. It means this is the balance that you have to pay that you have to pay longer than a year. So notice if we take 1,260,000 plus 240,000, your total debt is 1.5 million. However, 240 of it is short term, 1,260,000 is long term. Therefore, when we show the debt, we show it, we show the current portion under the current liabilities and the long term portion under long term liabilities. In other words, all long term debt will have a current portion because you're going to have to make payment within the next year. Now also for the debt, you prepare a schedule. For example, this is the schedule of long term debt. We have senior notes, half a million mortgage notes. We list the average interest rate on these notes and mortgages 300,000. We have commercial paper of 400,000 bank loans of 300. This is the total 1.5 million. Then we subtract the current portion, then the current portion goes under the current liabilities. And this is the long term portion that goes on the long term section of the balance sheet. So the debt will have a current portion in the long term portion. We could have unearned revenue. Notice unearned revenue could be long term, unearned revenue could be short term. You might have a long term project where the customer pays you upfront for several years. It is possible unearned revenue. Bonds payable. Bonds payable is a form of borrowing, and we're going to have a whole chapter about bonds. Bonds is when you sell a piece of paper to creditors, to anyone, could be banks, could be any individual, and they give you money. Bonds are usually not usually they are listed less of the discount or less or plus the premium. And we'll talk about that later. But basically what we're saying here, we have bonds. The face value of the bond must be 2 million because we subtracted 20,000 of discount. When we have a discount, we subtract the discount. Therefore, the net bond is 1.9 million. So you have to show less the bond, less the discount. Sometime you might list the discount on a separate line. That's fine, but you have to show the discount net. The bond is showing at net. And if you have any other current liabilities, again, other non-current liabilities, you could have many. You could have contingencies. You could have some sort of a lawsuit. We don't know, but other current liabilities will have that section. And this is the total, it should be non-current. I did not change that, liabilities. So this is the total of non-current liabilities. And the next section is stockholders' equity, which is the other section on the exam, stockholders' equity. Under stockholders' equity, we have many sections. And we're going to go over them today, over the overall section, but rest assured, we're going to cover those sections in the future much, much, much, much more in details. First are what the investors put in the business, what the investors invested. When the investors invest money in the business, they buy usually common stock. And the company could have preferred stock. Common stock and preferred stock, those figures here, all of them, they represent what the investors invested in the business. Let's look at them. Let's start with common stock. The company has common stock, power value of a dollar, usually the power value is assigned. The company can issue half a million shares because they are authorized to do so. They have 300 shares issued and outstanding. The common stock, so this is the common stock. So if I told you what's the common stock number, the common stock is 300,000. How do we come up with common stock? Common stock is the number of shares. And this is important for later on times the power value. So number of shares issued and outstanding is 300,000 times a dollar will give us 300,000. The same concept will apply to preferred stock. The preferred stock also a dollar. We have 400 shares out, 400,000 shares. This is where the 400,000 coming from. Let's go back to the common stock. Now, when we issued the common stock, we issued them for more than 300. We issued them for 1.3 million. So 300,000 will be considered common stock as I showed you above how it was computed. And the million will be additional paid in capital, what we called APIC or additional paid in capital, or sometimes we call it capital and access of power value. So the investors purchased 1.3 million of common stock. However, since the common stock have a power value, first we have to account for the power value and the power value equal to the number of shares issued times the power and anything left will go into the access. And this will give us a million. Preferred stock is the same concept. We issued 400,000 of preferred stock at a dollar apiece, I'm sorry not a power value of a dollar, but we issued in total a million. A million dollar, what we issued in total in preferred stock. 400,000 is the power value and 600,000 is the remainder. So we have 1 million of preferred stock, 1.3 million of common stock. We can say that the investors invested in total 2.3 million in both common stock and preferred stock. So the common stock and the preferred stock plus the capital and access of power value or additional paid in capital, those represent what the investors invested in the business. And for this simple company, the investors invested in the business in total of 2.3 million. 1 million comes from the preferred shareholders, 1.3 million comes from the common shareholders. What else could you see on the stockholders equity? You could see accumulated other comprehensive income, which we talked about in the prior session when we spoke about the income statement. Accumulated other comprehensive income is accounts that affect equity, but bypass the income statement. Again, I would suggest you look at the prior recording comprehensive, this isn't spelled comprehensive income. Also, what goes on the balance sheet is retained earnings, and this is an important number, retained earnings, retained earnings. Retained earnings for this company is 3.5 million. What is retained earnings coming from? Retained earnings account for the accumulated earnings, losses, dividend, and anything that affects retained earnings, but usually those are the three things. The three things that affect retained earnings is your earnings, which is net income. Every time you have net income, retained earnings goes up. If you have a loss, you would reduce retained earnings, and dividend would reduce retained earnings. So the retained earnings is the cumulative account that keeps track of your net income, net losses, and dividend over the years. Now that's not the only thing that affects retained earnings. Retained earnings is affected by something called treasury stock, sale of treasury stock could be affected by this. It could be affected if we made a mistake from prior years, if we made an accounting change. But again, we'll look at those later on in a more detailed session, but retained earnings is what the company earned and capped 3.5 million over the years. Then we will add all of the equity, 5,830, unless we have non-controlling interest in some other company. Non-controlling interest is a reduction in equity. When we consolidate, and we spoke about the non-controlling interest when we talked about the income statement, when we consolidate, when we consolidate with another company, sometime, not sometime, often time we own less than 100%. So remember to consolidate, as long as you have 50%, you consolidate. So sometime you might have 80%. So what happened is you have 20%, that's not really yours. You have 80%, but 20%, it's still owned by the minority or the non-controlling interest. Well, guess what? You consolidate 100% because you consolidate 100%, you have to deduct the ownership of the minority interest. So the ownership of the minority interest, given my example, 20% represent 300,000. Now how did you come up with that 300,000? Well, this is what advanced accounting will teach you about how to compute non-controlling interest. For intermediate accounting, you need to know that non-controlling interest goes on the balance sheet, reduces your equity. That's all you have to know for now. Also on the balance sheet, you could have treasury stock. And what is treasury stock? Treasury stock is when the company buys back its own stock. Remember we said the investors purchase 2.3 million from the company shares. Guess what? The company might buy back some of the shares in form of treasury stock. When that happens, treasury stock is a contra equity. It reduces equity. Notice it's negative. I put it in red. I put less in red. It should be only less without the red negative, but I put it both to kind of emphasize the point. So treasury stock is a number that reduces equity. And we'll talk about treasury stock later on. And by the way, this is not 100% an accurate income statement balance sheet because if it was, then I'll have to show you how many treasury stocks I have and deduct them from either the from the common or the preferred. But that's not our job here. Our job is to give you an overview about the balance sheet. So we looked at the liability section, the stockholders' equity section from really brief overview. Each one of these topics, we have one recording about retained earnings. We have one recording about preferred income in stock. We have one recording about accumulated other comprehensive income. We have pretty much half a course about non-controlling interest, one recording about treasury stock. So this is just an overview. What goes where and what does it look like? Now again, the company, the balance sheets are notes. So anytime there's something on the balance sheet, most likely the company will describe that number in form of notes, which method we are using. If there's any details and your restriction, any pledging of these assets or liabilities will be disclosed in the notes. At the end of this recording, again, I'm going to invite you, whether you are an accounting student or a CPA candidate, to take a look at my website, farhatlectures.com. I don't replace your CPA review course. I provide you with supplemental resources, supplemental, multiple choice supplemental lectures. You need your CPA course. Keep it. Good luck. Study hard. Don't shortchange yourself. The CPA is worth it. An investment in this with me is a nominal thing. It's going to help you tremendously. Try it for a month. You like it. You keep it. You don't. You let it go. Good luck. Study hard.