Financial Accounting: Copyright 2004 The McGraw-Hill Companies, Inc. Permission required for reproduction or display. PowerPoint Presentation Materials For Financial Accounting: A New Perspective by Paul Solomon

CHAPTER 4 The Balance Sheet

PERFORMANCE OBJECTIVES PO2: Identify how accounting information is used to make business/personal decisions PO4: Explain key business terms PO5: Apply fundamental accounting equation; analyze, prepare balance sheet PO7: Define activities & classify accounting & cash transactions into activities

PERFORMANCE OBJECTIVES PO8: Explain role of ethics PO9: Identify types of investor/creditor decisions; describe information needed in financial statements PO11: Differentiate balance sheet from income statement transactions, account titles

PERFORMANCE OBJECTIVES PO12: Prepare statement of owners’ equity PO13: Link, calculate balance sheet, income statement, statement owners’ equity PO14: Navigate annual report; locate information to make informed decisions

USER FOCUS Why are account titles useful to you?

INSIGHTS How do corporate balance sheets differ from non-corporate balance sheets? How are investment securities presented on balance sheet? How did CMU avoid a negative cash balance during the year?

TOPICS History of the balance sheet More balance sheet transactions at CMU Account categories, titles

HISTORY OF BALANCE SHEET 1 1586 Italian Benedictine monk Publishes accounting book First to mention financial statements 17th century French government required reports on Fixed, movable property Accounts receivable, payable

HISTORY OF BALANCE SHEET 2 Other influences Owner’s needs when relative ownership changed Industrial Revolution Importance of information on assets, liabilities

REVIEW BALANCE SHEET TRANSACTIONS AT CMU 1 Assets = Liabilities + Equity On 1/2 Susan contributes $30,000 $30,000 On 1/2 Susan transfers $6,000 to savings $6,000 <6,000>

REVIEW BALANCE SHEET TRANSACTIONS AT CMU 2 Assets = Liabilities + Equity On 1/4, acquires store equipment $10,000 on credit $10,000 On 1/6, acquires merchandise for cash $15,000 <$15,000>

TRANSACTION IDENTIFICATION, EXPLANATION: E Transaction E Assets = Liabilities + Equity On 1/9,CMU paid $2,000 security deposit to lease store

TRANSACTION IDENTIFICATION, EXPLANATION: C2 Transaction C2 Assets = Liabilities + Equity On 2/3, paid $10,000 cash to settle credit card obligation & avoid interest charge

TRANSACTION IDENTIFICATION, EXPLANATION: F Transaction F Assets = Liability + Equity On 7/ ,borrowed $5,000 with bank credit line at 8% interest

TRANSACTION IDENTIFICATION, EXPLANATION: G Transaction G Assets = Liabilities + Equity From July to December, acquired $18,000 merchandise on account

TRANSACTION IDENTIFICATION, EXPLANATION: H Transaction H Assets = Liabilities + Equity On 7/1, paid $7,000 to acquire used van with 5 year useful life

TRANSACTION IDENTIFICATION, EXPLANATION: I Assets = Liabilities + Equity On 11/1, collected $6,000 cash from customers before goods, services provided

TRANSACTION IDENTIFICATION, EXPLANATION: J1 Transaction J1 Assets = Liabilities + Equity From 7/31 to 11/30 paid $12,000 cash to reduce accounts payable

TRANSACTION IDENTIFICATION, EXPLANATION: J2 Transaction J2 Assets = Liabilities + Equity On 12/31, converted $6,000 account payable to 6% interest bearing note payable due 3/31

TRANSACTION IDENTIFICATION, EXPLANATION: K1 Transaction K1 Assets = Liabilities + Equity On 12/31, paid $5,000 cash to settle credit line loan from July

TRANSACTION IDENTIFICATION, EXPLANATION: L Transaction L Assets = Liabilities + Equity On 12/31, acquired $4,000 of computer, printer by signing promissory note

TRANSACTION ANALYSIS: E Transaction E Assets = Liabilities + Equity On 1/9,CMU paid $2,000 security deposit to lease store 2,000 <2,000>

TRANSACTION ANALYSIS: C2 Transaction C2 Assets = Liabilities + Equity On 2/3, paid $10,000 cash to settle credit card obligation & avoid interest charge <10,000> 10,000

TRANSACTION ANALYSIS: F Transaction F Assets = Liabilities + Equity On 7/ ,borrowed $5,000 with bank credit line at 8% interest 5,000

TRANSACTION ANALYSIS: G Transaction G Assets = Liabilities + Equity From July to December, acquired $18,000 merchandise on account 18,000

TRANSACTION ANALYSIS: H Transaction H Assets = Liabilities + Equity On 7/1, paid $7,000 to acquire used van with 5 year useful life 7,000 <7,000>

TRANSACTION ANALYSIS: I Transaction I Assets = Liabilities + Equity On 11/1, collected $6,000 cash from customers before goods, services provided 6,000

TRANSACTION ANALYSIS: J1 Transaction J1 Assets = Liabilities + Equity From 7/31 to 11/30 paid $12,000 cash to reduce accounts payable <12,000>

TRANSACTION ANALYSIS: J2 Transaction J2 Assets = Liabilities + Equity On 12/31, converted $6,000 account payable to 6% interest bearing note payable due 3/31 <6,000> 6,000

TRANSACTION ANALYSIS: K1 Transaction K1 Assets = Liabilities + Equity On 12/31, paid $5,000 cash to settle credit line loan from July <5,000>

TRANSACTION ANALYSIS: L Transaction L Assets = Liabilities + Equity On 12/31, acquired $4,000 of computer, printer by signing promissory note 4,000

TRANSACTION ANALYSIS: Totals Assets = Liabilities + Equity Totals $75,000 $13,100 $61,900

CMU Balance Sheet 12/31 Assets Current assets Investments Property, plant, equipment $56,300 2,000 16,700 Liabilities Current Noncurrent Owner’s Equity $9,000 4,000 61,900 Total assets $75,000 Total liabilities & Equity

CLASSIFIED BALANCE SHEET Classifies assets, liabilities into current and noncurrent categories Current categories Accounts expected to be Turned into cash Sold Exchanged Discharged Within one year

INSIGHT 4-1: How Balance Sheets Differ Business Entity Investment Earnings Sole proprietorship Contributed Capital Retained Earnings Partnership Corporation Capital Stock

USER FOCUS: Why Account Titles Are Useful Elements of financial statements Patterns Liability: payable, obligation Use Appendix A to help

ACCOUNT CATEGORIES, TITLES: Current Assets Cash, Cash Equivalents Marketable Securities Accounts, Notes Receivable <Allowance for Uncollectibles> Inventories Prepayments

ACCOUNT CATEGORIES, TITLES: Noncurrent Assets Investments Property, Plant & Equipment <Accumulated Depreciation> Intangible Assets Other Assets

ACCOUNT CATEGORIES, TITLES: Current Liabilities Accrued Liabilities Advances from Customers Current Portion of Long-Term Debt

ACCOUNT CATEGORIES, TITLES: Noncurrent Liabilities Mortgages Payable Notes Payable Bonds Payable Capital Lease Obligations Warranty Liabilities Pension Obligations Deferred Income Taxes

ACCOUNT CATEGORIES, TITLES: Owners’ Equity Capital Stock Additional Paid-In Capital Retained Earnings <Treasury Stock>

CURRENT ASSET ACCOUNTS 1 Cash & cash equivalents Cash on hand Highly liquid, interest bearing investments with maturities less than 3 months Marketable Securities Temporary, short-term investments of idle cash Stocks, bonds, certificates of deposit

INSIGHT 4-2 Investments in Securities Trading securities Actively traded for profit Available-for-sale securities Debt or equity securities Management intends to sell but not actively trade Held-to-maturity securities Debt securities Management intends to hold

CURRENT ASSET ACCOUNTS 2 Accounts, Notes Receivable Money company expects to collect from customers <Allowance for Uncollectible Accounts> Contra account Subtracted from primary account (Accounts Receivable)

CURRENT ASSET ACCOUNTS: 3 Inventories Product for resale to customers Prepayments Payments made in advance for Insurance Use of facilities (prepaid rent) Supplies

NONCURRENT ASSET ACCOUNTS 1 Investments Assets acquired for Dividends Increases in market value Interest

NONCURRENT ASSET ACCOUNTS 2 Property, Plant, Equipment (Fixed Assets) Land Buildings, equipment, furniture & fixtures subject to depreciation <Accumulated depreciation> Contra account Subtracted from primary account (building, equipment, etc.)

NONCURRENT ASSET ACCOUNTS 3 Property, Plant, Equipment (Fixed Assets) Natural resources subject to depletion <Accumulated depletion> Contra account Subtracted from primary account (oil, timber, etc.)

NONCURRENT ASSET ACCOUNTS: 4 Intangible Assets No physical substance Examples Patents, copyrights, trademarks, franchises, computer programs, leases, goodwill <Amortization> Contra accountant Subtracted from primary account (patent, etc.)

NONCURRENT ASSET ACCOUNTS 5 Other Assets Assets that don’t fit elsewhere Examples Idle land held for future use Organization costs

CURRENT LIABILITY ACCOUNTS Cash, goods or services owed Accrued liabilities owed to Employees Vendors & suppliers Advances from customers Deferred revenues Unearned revenues

NONCURRENT LIABILITY ACCOUNTS 1 Mortgages payable Loan on property Bond payable Legal instrument Capital lease obligation For property Deferred income taxes Difference between what is owed government and income tax expense

NONCURRENT LIABILITY ACCOUNTS 2 Warranty liabilities Owed for product defects Pension obligations Retirement obligations

OWNERS’ EQUITY ACCOUNTS 1 Capital stock Common Voting rights Right to share profits Recorded at par value Preferred Preferred status for dividends, assets

OWNERS’ EQUITY ACCOUNTS 2 Additional Paid-In Capital Excess owner investment above par value Retained Earnings Accumulated earnings Minus losses & dividends Treasury Stock Shares of stock reacquired by corporation Contra equity account

INSIGHT 4-3 How CMU Avoided Negative Cash Balance Figure 4-2 shows negative cash (<$5,000>) after transaction J Sales occurring throughout the year Cash inflow continuous Overcomes negative cash balance