Chapter 2: Balance Sheet Quiz on Friday September 12

The Balance Sheet! The formal way of presenting the Financial Position (which shows assets, Liability and Owners Equity) The main purpose of Balance Sheet is to show the Financial Position of a person, business or other organization

The Balance Sheet! BS shows how balanced the company is: i.e. it shows total assets vs total liability A balance sheet reports the assets, liabilities, and owner’s equity of a business at a specific date. This is why some people call Balance Sheet as “snap shot”.

The Balance Sheet!

Who? Name of the company What? Balance Sheet What the Balance Sheet Does Indicate: Title: Who? Name of the company What? Balance Sheet When? Date that the Balance Sheet was made for. (For example, December 31 2012) A detailed summary of Assets, Liability and Owners Equity at a particular date

What the Balance Sheet Does Indicate: A view of the firm’s ability to carry on business operations to see whether there is enough cash to carry on business Show’s the firms’ ability to repay current debts  determine whether there are enough short term assets to cover short term debts.

What the Balance Sheet Does Indicate: Shows the strength (or health) of the owner’s claim against the assets (residual claim) = Lenders want to know “is there enough equity that I can go after in case the business goes bankrupt?”

How money (invested by the owner in the company) has been used What the Balance Sheet Doesn’t Indicate: Details of profit/loss What claims creditors and the owner have against specific assets i.e. which assets belong to creditors and which assets belong to the owner are not shown in BS. How money (invested by the owner in the company) has been used The true value (=fair market value) of the business is not known until the business is actually sold

The assets are listed in the order of their liquidity. Important Features of the Balance Sheet The assets are listed in the order of their liquidity. High liquidity assets mean that we can easily convert this asset into cash. Low liquidity assets mean that we can not easily convert the asset into cash.

The assets are listed in the order of their liquidity. Important Features of the Balance Sheet The assets are listed in the order of their liquidity. Under asset column, cash is the most liquid asset, so they come first and then usually Accounts Receivalbe next. (AR = what customers owe the business)  ARA: AR is an asset Equipment and buildings are necessary for daily operation, so they are the lowest liquid asset. They are listed at the bottom of asset section.

Important Features of the Balance Sheet 2. The liabilities are listed in order which they are normally paid. This means Accounts Payable (The business bought an asset from a supplier but the business has not paid the money yet) is usually the top of the list because the company usually has to pay AP in about 30 days. (APL) : AP is a liability

Important Features of the Balance Sheet 2. The liabilities are listed in order which they are normally paid. Bank Loan is usually the next item because they have to be paid in about 1 year. (example: auto loan) Mortgage payable is usually the bottom of the list because mortgages usually have to paid back 25 years later. (example: building mortgage)

Assets = Liability + Owners Equity Important Features of the Balance Sheet 3. The balance sheet is set up in the form of the fundamental accounting equation. Assets = Liability + Owners Equity Assets appear on the left side of the balance sheet. Liabilities and Owners Equity are listed on the right side of the balance sheet.

Important Features of the Balance Sheet 4. The financial details of items are fully disclosed on a balance sheet. For example, if you paid $10,000 and borrowed $90,000 to buy a machine, you will have to show the following: Asset Liabilities Cash ($10,000) Mortgage payable $90,000 Machine $100,000

Important Features of the Balance Sheet 5. The two final totals (total asset amount and total liabilities and owners equity amount) are recorded on the same line and underlined with a double line. (If you see page 21 (text), you can see it.

Accounts Receivalbe (asset) Some customers, who do not have cash right now, will buy the laptops from Future Shop on credit. This means that the Future Shop will “receive” the cash 3 months later (or 6 months later) depending on the contract. Futureshop has a legal right to collect this money, so futureshop can record this amount as Accounts Receivable (or AR) under asset category.

These customers are debtor because they owe money to Future Shop. Accounts Receivalbe (asset) These customers are debtor because they owe money to Future Shop. Debtor is anyone who owes money to the business.

Accounts Payable A business sometimes buys goods or services from its suppliers with the understanding that payment will be made later. For example, if Future Shop buys 100 units of lpad ($500 each) from Apple Corporation with an agreement that Future shop will pay $50,000 in 30 days. In this case, Apple Corporation is called a supplier.

Accounts Payable Future Shop must record this $50,000 as Accounts Payable under liability because this $500,000 is a debt of Future Shop.

Classwork / Homework Answer Review Questions (Page 28) Review Questions : #1,2, 3, 4, 6, 9, 11, 12, 13, 14, 15, 16, 17 Exercise : #1