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NIPA Methodology 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? National Income Accounting and the Flow of Funds

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National income accounting and the flow of funds l.jpg
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?


National income accounting and the flow of funds3 l.jpg
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


The business sector l.jpg
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


The balance sheet l.jpg
The Balance Sheet

  • The Basic underlying identity of a firm’s balance sheet is

    Assets = Liabilities + Stockholder Equity


The balance sheet6 l.jpg

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


Example microsoft in millions l.jpg

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)


The balance sheet8 l.jpg
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


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Statement of Income/Retained Earnings

  • The Basic underlying identity in this statement is

    Net Income = Revenues - Costs


Statement of income retained earnings10 l.jpg

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


Example microsoft in millions11 l.jpg

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)


Statement of cash flows l.jpg
Statement of Cash Flows

  • The basic underlying identity in this statement is

    Change in Working Capital = Change in Current Assets – Change in Current Liabilities


Statement of cash flows13 l.jpg

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


Example microsoft in millions14 l.jpg

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)


Deriving the production account l.jpg

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


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Deriving the Production Account

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


Deriving the production account17 l.jpg

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


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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)


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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


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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


Deriving the production account21 l.jpg

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


Deriving the production account22 l.jpg
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


Deriving the production account23 l.jpg

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


Deriving the production account24 l.jpg
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


Deriving the production account25 l.jpg

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


Deriving the production account26 l.jpg
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


Microsoft s production account l.jpg

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


Deriving the appropriations account l.jpg

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


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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)


Deriving the appropriations account30 l.jpg

Use

Corporate Tax

Dividends Paid

Addition to Retained Earnings

Source

Equals Net Income Before Tax

Deriving the Appropriations Account


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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”


Deriving the appropriations account32 l.jpg

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


Deriving the appropriations account33 l.jpg

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


Deriving the appropriations account34 l.jpg
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


Deriving the appropriations account35 l.jpg

Use

Corporate Tax

Dividends Paid - Dividends Received

Undistributed Profits

Source

Profit

Deriving the Appropriations Account


Microsoft s appropriations account l.jpg

Use

Corporate Tax: $4,733

Dividends Paid - Dividends Received: $857

Undistributed Profits: $9,136

Source

Profit: $14,725

Microsoft’s Appropriations Account


Deriving savings investment account l.jpg

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


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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


Deriving savings investment account39 l.jpg

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


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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


Deriving savings investment account41 l.jpg

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


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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


Deriving savings investment account43 l.jpg

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


Deriving savings investment account44 l.jpg
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


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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


Microsoft s savings investment account l.jpg

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





Other sectors l.jpg
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


Nipa accounts l.jpg
NIPA Accounts

  • The NIPA account is a configuration that includes

    • NIP (National Income and Product): Consolidated Product account and the Business appropriations account

    • Personal Income and Outlays: Household Appropriation Account

    • Government Receipts and Expenditures: Government Appropriations Account

    • Foreign Transactions: Foreign Appropriations and Savings/Investment Accounts

    • Gross Saving/Investment: Domestic Portion of Consolidated Saving/Investment Accounts


Capital finance flow of funds l.jpg
Capital Finance (Flow of Funds)

  • The Flow of Funds is a detailed look at the savings/investment accounts

    • “Changes in Liabilities” are subtracted from both sides do that the Left hand side of the chart is “Sources of Funds” and the RHS is “Uses of Funds”

    • The Data is disaggregated by asset type (Deposits, Loans, Securities, Trade Credit) and by Sector (Business, Financial, Household, Government, and Foreign)


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Input/Output Accounts

  • The Input/Output Tables illustrate the flows of goods and services across sectors of the economy

    • The national production accounts are disaggregated across industries and commodity.



Output equals income l.jpg
Output Equals Income

GDP ($11,649.3)

+ Net Factor Payments ($73.5)

GNP ($11,722.8)


Output equals income56 l.jpg
Output Equals Income

GDP ($11,649.3)

+ Net Factor Payments ($73.5)

GNP ($11,722.8)

  • Depreciation ($1,370.1)

    Net National Product ($10,352.7)


Output equals income57 l.jpg
Output Equals Income

GDP ($11,649.3)

+ Net Factor Payments ($73.5)

GNP ($11,722.8)

  • Depreciation ($1,370.1)

    Net National Product ($10,352.7)

  • Indirect Taxes ($834.4)

    National Income ($9518.3)






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