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Balance Sheet Fundamentals. Balance Sheet describes liquidity and solvency. Limitations: Historical Cost—may be reliable but not relevant Judgment for some accounts—management can influence account balances through judgment Omits some “assets” (like value of employee knowledge)

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slide1

Balance Sheet Fundamentals

  • Balance Sheet describes liquidity and solvency
  • Limitations:
    • Historical Cost—may be reliable but not relevant
    • Judgment for some accounts—management can
    • influence account balances through judgment
    • Omits some “assets” (like value of employee
    • knowledge)
    • Omits some “liabilities” (like operating leases)
slide2

Balance Sheet Fundamentals

Balance Sheet elements:

Assets

Liabilities

  • Current
  • Long-Term Investments
  • Property, Plant, & Equip.
  • Intangible
  • Other
  • Current
  • Long-Term

Owner’s Equity

  • Capital Stock
  • Retained Earnings
  • Additional Paid-In
  • Capital
slide3

Current Assets

Assets that are:

  • Cash or
  • Other assets expected to be converted to cash within
  • one year or one operating cycle
  • Cash: recorded at its stated value
  • Short-term investments: recorded at fair market value
  • Accounts Receivable: recorded at collectible value
  • Inventories: recorded at lower of cost or fair market value
  • Prepaid Items: recorded at cost

Any restrictions must be disclosed (e.g. minimum deposits).

slide4

Long-Term Investments

Investments in:

  • Bonds, common stock, long-term notes
  • Tangible assets not used for operations
  • Special funds (e.g. pension funds)
  • Non-consolidated subsidiaries or affiliated companies
slide5

Property, Plant, and Equipment (PP&E)

Tangible property used for operations:

  • Land
  • Buildings
  • Machinery
  • Furniture
  • Tools

Most assets are depreciable (except land).

slide6

Intangible Assets

Lack physical substance, but still hold value:

  • Patents
  • Copyrights
  • Franchises
  • Trademarks
  • Goodwill
  • Secret Processes
slide7

Current Liabilities

Obligations to be paid off using current assets.

  • Covered later in Ch. 13

Current Assets – Current Liabilities = Working Capital

Represents relatively liquid available resources

slide8

Long-Term Liabilities

Obligations to be paid off past current operating cycle.

  • Covered primarily in Accounting 472
  • Bonds Payable
  • Notes Payable
  • Pension Obligations
slide9

Owner’s Equity

Owners’ residual claim to the firm.

  • Net Assets – Net Liabilities
  • Capital Stock—usually valued at par value
  • Additional Paid-In-Capital—excess of amounts paid
  • above par
  • Retained Earnings—undistributed earnings kept
  • within the firm
slide10

Extra Required Balance Sheet Disclosures

  • Contingencies: material, uncertain events (e.g.
  • potential lawsuit liability)
  • Accounting Policies: types of depreciation and
  • inventory methods used, for example
  • Contractual Issues: covenants, restrictions, liens