NIPA Methodology

1. NIPA Methodology

2. National Income Accounting and the Flow of Funds • National income accounting aims to answer two fundamental questions: • What is the size and composition of the US economy? • How was this output produced and distributed?

3. National Income Accounting and the Flow of Funds • National income accounting aims to answer two fundamental questions: • What is the size and composition of the US economy? • How was this output produced and distributed? • These questions are answered in three quarterly reports. • NIPA (National Income and Product Accounts) - BEA • Capital Finance Account (Flow of Funds) – Federal Reserve • Input/Output Accounts - BEA

4. The Business Sector • Businesses have three common accounting statements for financial reporting • Balance Sheet • Statement of Income and Retained Earnings • Statement of Change in Financial Position • With a little manipulation, we can transform these into economic accounting reports

5. The Balance Sheet • The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity

6. Assets Current Assets Financial Assets Cash & Equivalent Accounts Receivable Inventories Securities Fixed Assets Plant & Equipment lessaccumulated depreciation Liabilities Current Liabilities Loans Accounts Payable Bonds Stockholders Equity The Balance Sheet

7. Assets Current Assets: $12,274 Financial Assets: $11,634 Cash & Equivalent: $6,438 Accounts Receivable: $5,196 Inventories: $640 Securities: Fixed Assets: $2,223 Plant & Equipment: $6,078 lessaccumulated depreciation: $3,855 Other: $65,074 Total Assets: $79,571 Liabilities Current Liabilities: $1,573 Loans Accounts Payable: $1,573 Bonds: Other: $16,978 Stockholders Equity $61,020 Total Liabilities:$79,571 Example: Microsoft (in Millions)

8. The Balance Sheet • The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity • The Balance sheet gives a nice overview, but doesn’t really indicate how income was generated or who received payments

9. Statement of Income/Retained Earnings • The Basic underlying identity in this statement is Net Income = Revenues - Costs

10. Sales lessCosts of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Operating Income PlusInterest/Dividends Received: LessInterest Paid PlusNet Gains on Sale of Assets/Securities Equals Net Income Before Tax: LessCorporate Tax Equals Net Income After Tax: LessDividends Paid Equals Retained Earnings: Statement of Income/Retained Earnings

11. Sales: $32,187 lessCosts of Goods & Services Sold: $18,970 Materials/Services $4,247 Wages & Salaries $13,284 Depreciation: $1,439 Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income: $13,217 Operating Income: $13,217 Other Income: $1,509 Plus Interest/Dividends Received: Less Interest Paid Plus Net Gains on Sale of Assets/Securities: Equals Net Income Before Tax: $14,726 Less Corporate Tax: $4,733 Equals Net Income After Tax: $9,993 Less Dividends Paid: $857 Addition to Retained Earnings: $9,136 Example: Microsoft (In Millions)

12. Statement of Cash Flows • The basic underlying identity in this statement is Change in Working Capital = Change in Current Assets – Change in Current Liabilities

13. Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Less Change in Current Liabilities Loans Accounts Payable Additions to Working Capital Provided by Operations Net Income (After Tax) Depreciation Less Gains on Sales of Assets Other Sources Sale of Fixed Assets: Sale of Securities: Stock/Bond Issues: Less Reductions in Working Capital Dividends Paid Purchases of Fixed Assets Purchase of Securities Retirement of Stocks/Bonds Statement of Cash Flows

14. Change in Working Capital: $2,788 Change in Current Assets: Cash & Equivalent: $3,422 Accounts Receivable: - $187 Inventories: Other: - $412 Less Change in Current: Liabilities Loans: Accounts Payable: Other: $35 Equals Additions to Working: $101,706 Capital Provided by Operations: $15,224 Net Income (After Tax): $9,993 Depreciation: $1,439 Other: $3,731 Effect of Exchange Rate: $61 Less Gains on Sales of Assets/Securities: Other Sources: $86, 482 Sale of Fixed Assets: Sale of Securities: $84,362 Stock/Bond Issues: $2,120 Less Reductions in Working: $98,918 Capital Dividends Paid: $857 Purchases of Fixed Assets: $1,954 Purchase of Securities: $89,621 Retirement of Stock: $6,486 Example: Microsoft (in Millions)

15. Sales lessCosts of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax: Less Corporate Tax Equals Net Income After Tax: Less Dividends Paid Equals Retained Earnings Deriving the Production Account

16. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account

17. Sales lessCosts of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax Deriving the Production Account

18. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account • Arrange items by “source” (on the right) and “use” (on the left)

19. Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid Net Income Before Tax Source Sales Interest Received Dividends Received Gains on Sale of Assets/Securities Deriving the Production Account

20. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account • Arrange items by “source” (on the right) and “use” (on the left) • Subtract “Interest/Dividends received” and gain on sale of assets from both sides

21. Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid - Interest Received Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities Source Sales Deriving the Production Account

22. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account • Arrange items by “source” (on the right) and “use” (on the left) • Subtract “Interest/Dividends received” and gain on sale of assets from both sides • Profits = Net Income – Dividends Received – Gains on Asset Sales

23. Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid - Interest Received Profits Source Sales Deriving the Production Account

24. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account • Arrange items by “source” (on the right) and “use” (on the left) • Subtract “Interest/Dividends received” and gain on sale of assets from both sides • Profits = Net Income – Dividends Received – Gains on Asset Sales • Subtract “Purchased Materials/Services” and inventories from both sides

25. Use Wages & Salaries Depreciation Indirect Business Taxes Interest Paid - Interest Received Profits Source Sales less Materials/Services Ending Inventory less Beginning Inventory Deriving the Production Account

26. Deriving the Production Account • Eliminate Taxes and dividends paid. These will show up in the Appropriations Account • Arrange items by “source” (on the right) and “use” (on the left) • Subtract “Interest/Dividends received” and gain on sale of assets from both sides • Profits = Net Income – Dividends Received – Gains on Asset Sales • Subtract “Purchased Materials/Services” and inventories from both sides • Gross output = Sales – consumed materials + change in inventories

27. Use Wages & Salaries: $13,284 Depreciation: $1,439 Indirect Business Taxes Interest Paid - Interest Received Profits: $14,726 Net Income: Dividends Received: Gain on Sale of Assets Income: $29,449 Source Sales: $32,187 Other: $1,509 less Materials/Services: $4,247 Change in Inventories Gross Output: $29,449 Microsoft’s Production Account

28. Sales lessCosts of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax: Less Corporate Tax Equals Net Income After Tax: Less Dividends Paid Equals Retained Earnings Deriving the Appropriations Account

29. Deriving the Appropriations Account • Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS)

30. Use Corporate Tax Dividends Paid Addition to Retained Earnings Source Equals Net Income Before Tax Deriving the Appropriations Account

31. Deriving the Appropriations Account • Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) • Now, so our terminology matches, we need to convert “Income” to “Profits”

32. Use Corporate Tax Dividends Paid Addition to Retained Earnings - Dividends Received - Gains on Sale of Assets/Securities Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities Deriving the Appropriations Account

33. Use Corporate Tax Dividends Paid - Dividends Received Addition to Retained Earnings - Gains on Sale of Assets/Securities Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities Deriving the Appropriations Account

34. Deriving the Appropriations Account • Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) • Now, so our terminology matches, we need to convert “Income” to “Profits” • Undistributed Profits = Additions to Retained Earnings – Gains from asset sales

35. Use Corporate Tax Dividends Paid - Dividends Received Undistributed Profits Source Profit Deriving the Appropriations Account

36. Use Corporate Tax: $4,733 Dividends Paid - Dividends Received: $857 Undistributed Profits: $9,136 Source Profit: $14,725 Microsoft’s Appropriations Account

37. Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Less Change in Current Liabilities Loans Accounts Payable Additions to Working Capital Provided by Operations Net Income (After Tax) Depreciation Less Gains on Sales of Fixed Assets & Securities Other Sources Sale of Fixed Assets: Sale of Securities: Stock/Bond Issues: Less Reductions in Working Capital Dividends Paid Purchases of Fixed Assets Purchase of Securities Retirement of Stocks/Bonds Deriving Savings/Investment Account

38. Deriving Savings/Investment Account • Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right

39. Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Less Sales of Securities: Plus Gains on Securities Change in Fixed Assets Purchases of Fixed Assets Less Sales of Fixed Assets: Plus Gains on Assets Less Depreciation Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues Less Stock Retirements Addition to Retained Earnings: Net Income (After Tax) Less Dividends Paid Deriving Savings/Investment Account

40. Deriving Savings/Investment Account • Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right • Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides

41. Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Less Sales of Securities: Change in Fixed Assets Purchases of Fixed Assets Less Sales of Fixed Assets: Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues Less Stock Retirements Addition to Retained Earnings: Net Income (After Tax) Less Dividends Paid Less Gains on Securities/Assets Plus Depreciation Deriving Savings/Investment Account

42. Deriving Savings/Investment Account • Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right • Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides • Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales • Finally, subtract change in Liabilities from both sides and regroup

43. Change in Fixed Assets Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories Change in Current Assets Cash & Equivalent Accounts Receivable Change in Securities Purchases of Securities - Sales of Securities: Less Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation Deriving Savings/Investment Account

44. Deriving Savings/Investment Account • Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right • Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides • Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales • Finally, subtract change in Liabilities from both sides and regroup • Net Acquisition of Financial Assets = Change in Current Assets + Change in Securities

45. Change in Fixed Assets Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories Net Acquisition of Financial Assets Less Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation Deriving Savings/Investment Account

46. Change in Fixed Assets: $1,954 Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories: Net Acquisition of Financial Assets: Purchases – Sales of Stock: $5,259 Cash & Equivalent: $3,422 Accounts Receivable: -$187 Other: -$412 Less Change in Liabilities: Loans Accounts Payable: Bond Issues – Retirements: Stock Issues - Retirements:-$4,366 Other: $35 Gross Investment: $14,367 Undistributed Profits: $9,136 Plus Depreciation: $1,439 Effect of Exchange Rate Change: $61 Other: $3731 Gross Savings: $14,367 Microsoft’s Savings/Investment Account

47. Microsoft Summary

48. Microsoft Summary

49. Microsoft Summary

50. Other Sectors • In addition to the business sector, there will be corresponding accounts for • Household & Non Profits • Government • Foreign (BOP Accounts) • These individual tables can then be consolidated into a national account by adding across sectors and making the appropriate cancellations • Taxes Paid = Receipts By Government • Transfers Paid = Transfers Received