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)

Balance Sheet Fundamentals Balance Sheet elements: Assets Liabilities Owner’s Equity Current Long-Term Investments Property, Plant, & Equip. Intangible Other Current Long-Term Capital Stock Retained Earnings Additional Paid-In Capital

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).

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

Property, Plant, and Equipment (PP&E) Tangible property used for operations: Land Buildings Machinery Furniture Tools Most assets are depreciable (except land).

Intangible Assets Lack physical substance, but still hold value: Patents Copyrights Franchises Trademarks Goodwill Secret Processes

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

Long-Term Liabilities Obligations to be paid off past current operating cycle. Covered primarily in Accounting 472 Bonds Payable Notes Payable Pension Obligations

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

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