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THE BALANCE SHEET. Claims against resources (Liabilities). Remaining claims accruing to owners (Owner’s Equity). BALANCE SHEET. Resources (Assets). BALANCE SHEET Fundamental Objectives.

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balance sheet

Claims against resources (Liabilities)

Remaining claims accruing to owners (Owner’s Equity)

BALANCE SHEET

Resources (Assets)

balance sheet fundamental objectives
BALANCE SHEETFundamental Objectives
  • Liquidity - length of time until assets are realized or converted to cash (or until a liability has to be paid)
  • Solvency– the ability of a firm to meet its debts as they come due
  • Financial flexibility - ability of company to manage its cash flows (deal with emergencies or take advantage of unexpected opportunities)
balance sheet1
Balance Sheet

Basic Definitions - SFAC No. 6

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

balance sheet2
Balance Sheet

Basic Definitions - SFAC No. 6

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.

balance sheet3
Balance Sheet

Basic Definitions - SFAC No. 6

Owners’ Equity

The residual interest in the assets of an entity that remains after its liabilities are deducted.

balance sheet format

Cash

Inventories

Receivables

Prepayments

Balance Sheet Format

Asset Classifications

Current Assets

balance sheet format1

Investments and funds

Intangibles

Noncurrent Assets

Property, Plant, & Equipment

Deferred Charges

Balance Sheet Format

Asset Classifications

balance sheet format2

Current Liabilities

Balance Sheet Format

Liability Classifications

Accounts Payable

Short-term Notes Payable

Collections in advance of unearned revenue

Accrued Expenses

balance sheet format3

Capital Leases

Long-term Notes Payable

Noncurrent Liabilities

Bonds Payable

Pension Liabilities

Balance Sheet Format

Liability Classifications

balance sheet format4

Capital Stock

Other Contributed Capital

Retained Earnings

Treasury Stock

Balance Sheet Format

Equity Classifications

Owners’ Equity

working capital analysis
WORKING CAPITAL ANALYSIS

Current assets

Less: Current liabilities

Equals: Working Capital

Current assets

Current liabilities

= Current Ratio

(Working Capital Ratio)

additional reporting issues
Additional Reporting Issues
  • Loss and gain contingencies
  • Subsequent Events
  • Disclosure Notes
  • Valuations reported in the

Balance Sheet

  • Comparative Statements
loss contingencies
LOSS CONTINGENCIES
  • Disclose a loss contingency when . . .
    • Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the statements, or
    • The amount of the loss can be reasonably estimated.
  • If both conditions exist, loss contingency must be accrued (recorded)
gain contingencies
GAIN CONTINGENCIES
  • Gain contingencies are never recorded prior to realization

“Conservatism”

  • They may be disclosed in footnotes discussed within the statements only if a high probability of realization exists
accounting for contingencies

CONTINGENT LOSSES

Likelihood

Accounting Action

Probable

Recognize liability if amount can be estimated. If not disclose in a footnote

Reasonably possible

Disclose in a footnote

Remote

No recognition required, may disclose in a footnote

CONTINGENT GAINS

Likelihood

Accounting Action

Probable

If amount can be estimated, conservative approach is to disclose in footnote.

Reasonably possible

May disclose in a footnote, but be careful to avoid misleading implications.

Remote

No recognition or disclosure

ACCOUNTING FOR CONTINGENCIES
subsequent events
SUBSEQUENT EVENTS
  • Events occurring after the Balance Sheet date but before the issuance of the financial statements
  • They would have a material effect on the financial statements

3-8-x9

12-31-x8

Subsequent Period

Balance Sheet

Date

Date Financials

Issued

subsequent events1
SUBSEQUENT EVENTS
  • Reported on the Balance Sheet (recorded)
    • If they provide additional evidence about conditions that existed at the balance sheet date
  • Reported in notes to the Balance Sheet
    • If they result from conditions that did not exist at the balance sheet date, arose after that date, and do merit adjustment
  • Neither recorded or disclosed
    • Nonaccounting events or conditions that management normally communicates through other means
reserves
“RESERVES”
  • This term may be misinterpreted as a “fund of cash”
  • Confusing uses of “Reserves”
    • Contra asset:
      • Reserve for uncollectible accounts
      • Reserve for depreciation
    • Estimated liability (Reserve for warranties)
    • Appropriation of Retained Earnings

(Reserve for future expansion)

  • Term, “reserve” should really be eliminated
retained earnings restrictions appropriations
RETAINED EARNINGSRestrictions (Appropriations)
  • Limit the ability of the corporation to declare dividends
    • Required by law or contract
    • Voluntary decision by the Board of Directors
  • Entry is reversed when the reason for the restriction ceases to exist
  • The term “reserve” is permitted - but should be avoided since it is misleading!!!
limitations of balance sheet
Limitations of Balance Sheet
  • Current value amounts may not be shown on the Balance Sheet.
  • Contains many estimates.
  • Certain assets and liabilities are not shown on the Balance Sheet, e.g., human resources.
ratio analysis
Ratio Analysis
  • Liquidity (Solvency) Ratios
    • Current Ratio
    • Acid-test Ratio
  • Efficiency Ratios
    • Inventory Turnover
  • Equity Position and Coverage Ratios
    • Debt-to-Equity
  • Profitability Ratios
    • Earnings Per Share