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Video Transcript File: What are equity investors and what information do they use to make

investment decisions?
Slide 1 (:12s) Welcome to Introduction to Accounting Preparing for a Users Perspective. What
are equity investors and what information do they use to make investment decisions?
Slide 2 (:09s) his is !ill. !ill currently sits on a pile of resources "ut wants to make his pile of
resources grow.
Slide 3 (:05s) !ut how can he make it grow?
Slide (:0!s) !ill is considering "ecoming an investor.
Slide 5 (:23s) When people like !ill# invest their resources in ideas# pro$ects# and companies#
they often receive some form of o"ners#ip equity in the investment. When such investments
are in corporations# the investors receive o"ners#ip s#ares to represent their ownership and
are called %equity$ investors.
Slide ! (:1s) When equity investors invest in a company they increase their o"ners% equity
claims against the company and t#ere&y provide equity 'inancin(.
Slide ) (:33s) &or e'ample# during (oogles &usiness lifetime# it has o"tained a variety of
resources such as cas## ve#icles# 'urniture and &uildin(s. *esources owned and)or controlled
"y an entity are called assets. *ike all &usinesses# (oogle must o"tain its assets "y 'inancin(
them from the only two sources availa"le# +, o"ners# or -, creditors .which are the focus of our
ne't learning topic,.
Slide + (:25s) herefore# at all times# (oogles total assets WI** and /U0 A*WA10 "e
e'actly equal to the 'inancin( it received to o"tain those assets. his logic leads to one of the
most fundamental formulas in all of "usiness called the &alance s#eet equation. It is written as
,ssets 2 -ia&ilities 3 .quity.
Slide 9 (:)s) In other words# if you wanted to quickly see what assets (oogle had at the end of
the year -4+- and how they were 'inanced# you could o"tain its "alance sheet either directly
from (oogles we"site# or from the Securities ./c#an(e 0ommission (S.0) which we will
learn a"out later. 5n that &alance s#eet you would notice that (oogle had 678 "illion in assets.
1ou would also notice that (oogles o"ners had 69- "illion in equity representing their claims
against (oogle as a result of their equity 'inancin(# and (oogle had 6-- "illion in lia"ilities to
its creditors for their creditors claims against (oogle as a result of their de&t 'inancin(. As
you can see# the "alance sheet will A*WA10 "alance.
Slides 10 (:12s) We will later learn the advantages and disadvantages that companies face as a
result of "eing 'inanced via de&t or equity.
Slide 11 (:19s) 1alance s#eet users can learn more a"out the company "y reviewing its sources
of 'inancin(. &or e'ample# if we knew that a company had 6+44 in assets# we would also
immediately know that the company had 6+44 in 'inancin( that provided those assets.
Slide 12 (:1!s) :ven "etter# if we knew that a company had 6+44 in assets A;< we knew that it
had 6=4 of lia&ilities# we could solve for the unknown o"ners% equity and arrive at 694.
Slide 13 (:51s) A companys equity can also "e referred to as its net assets2 T#is concept o'
net assets &e(ins "it# t#e standard &alance s#eet equation2 ,ssets 3 -ia&ilities 4 .quity2
Assume a company has 6-44 in assets and 6+-4 in lia"ilities. 1ou could solve for equity "y
deducting the 6+-4 of lia"ilities from "oth sides of the equation to arrive at the following net
assets equation Assets > *ia"ilities 2 :quity. A companys net assets# 6?4 in this e'ample# are
the same thing as owners equity and represent the amount of the companys assets that the
o"ner would %net@ A&:A the company paid off all of its lia&ilities.
Slide 1 (:15s) A companys total de&t 'inancin( as would appear within the lia&ilities
account# is also referred to as temporary 'inancin( "ecause it usually must "e repaid within a
specific period of time.
Slide 15 (:2)s) .quity investors# like !ill# invest in companies to achieve 'inancial returns
"#ic# #elp t#em (ro" t#eir pile o' resources. !ills equity investments can provide him
'inancial returns in two different waysB
+, Ce can receive dividend income when the companies he invests in pay out their pro'its in
t#e 'orm o' stoc56 cas# or ot#er asset dividends.
Slide 1! (:3s) Ce can also achieve (ains on t#e sale of his o"ners#ip s#ares when he sells
them to other investors at higher prices.
a. &or e'ample# if !ill took one s#are of (oogle stoc5 that he purchased originally for 6+44 and
then sold it to a new investor for 6?44# his 6?44 sales price could "e "roken out into two pieces
+, a 6+44 return 7F #is investment and
-, a 6944 return 78 #is investment called a (ain on sale.
Slide 1) (:20s) ". Watch out though# if !ill sold his 6+44 share for only 694# he would only
receive a 694 return 7F #is investment and would incur a 6=4 -oss 7F #is investment.
Slide 1+ (:15s) .quity 'inancin( is also known as permanent 'inancin( "ecause there is
usually no specific time frame when the companies are le(ally o&li(ated to pay "ack the
o"ners ori(inal investments.
Slide 19 (:59s) 9nvestors like !ill want to make good investment decisions# "ut making good
investment decisions is not always easy.
o assist them in making the "est investment choices possi"le# investors will strive to o"tain
and properly analyDe a variety of different in'ormation.
0ome in'ormation used "y investors is disorganiDed and comes from a variety of random
sources at random points in time# such asB news reports# social media# and personal e'periences.
5ther information is quite wellEorganiDed and is often produced "y (overnmental or non:pro'it
a(encies# such as housing# unemployment and production data. &or profit companies also
provide wellEorganiDed investor information such as !loom"erg# /oodys and 0tandard F
0till other information comes in preEspecified formats# such as the (eneral purpose 'inancial
Slide 20 (:1)s) T#e (eneral purpose 'inancial statements are produced directly "y the
companies themselves.
When properly analy;ed# (eneral purpose 'inancial statements can "e e'tremely helpful to
investors and creditors when making investment and lendin( decisions.
Slides 21 to 2! (:2+s) A companys (eneral purpose 'inancial statements consist of its income
statement# statement o' equity# &alance s#eet# statement o' cas# 'lo"s# and related 'ootnote
We will spend the rest of this course studying the (eneral purpose 'inancial statements with
the hope that you will learn how to prepare# read and use them when making investin( and
lendin( decisions.