UNDERSTANDING BALANCE SHEET 1Đặng Thị Thu Hằng

ELEMENTS OF THE BS The balance sheet: reports the firm’s financial position at a point in time. The BS consists of assets, liabilities and equity. Assets: resources controlled as a result of past transactions that are expected to provide the future economic benefits. 2Đặng Thị Thu Hằng

Liabilities: obligations as a result of past events that are expected to require an outflow of economic resources. Equity: the owners’ residual interest in the assets after deducting the liabilities. Equity is also referred to as stockholders’ equity, shareholders’ equity, or owners’ equity. 3Đặng Thị Thu Hằng

LIMITATION OF THE BS The BS should not be interpreted as market value or intrinsic value. The BS consists of a mixture of values. There are a number of assets and liabilities that do not appear on the BS but certainly have value. 4Đặng Thị Thu Hằng

ALTERNATIVE FORMATS OF BS PRESENTATION The current/ noncurrent format: classified balance sheet and is useful in evaluating liquidity. Under IFRS: firms can choose to use a liquidity based format if the presentation is more relevant and reliable. 5Đặng Thị Thu Hằng

DISTINGUISH SOME COMPONENTS Current assets: likely to convert into cash or used up within one year or one operating cycle. Current liabilities: obligations that will be satisfied within one year or one operating cycle, whichever is greater. 6Đặng Thị Thu Hằng

Working capital: CA – CR Noncurrent assets: do not meet the definition of CA but also easily to convert into cash or used up within one year or operating cycle. Noncurrent liabilities: do not meet the definition of CL, provide information about the firm’s long- term financing activities. 7Đặng Thị Thu Hằng

GOODWILL Is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition. 8Đặng Thị Thu Hằng

EXAMPLE Wood corporation paid $600 million for the outstanding stock of Pine corp. At the acquisition date, Pine reported the following condensed BS The fair value of the plant and equipment was $120 million more than its recorded book value. The fair value of all other identifiable assets and liabilities were equal to their recorded book values. Calculate the amount of goodwill Wood should report on its consolidated BS. Book Value (million) CA$80 Plant and equipment, net760 Goodwill30 Liabilities400 Stockholders’ equity470 9Đặng Thị Thu Hằng

Goodwill is only created in a purchase acquisition. Internally generated goodwill is expenses as incurred. Goodwill is not amortized but must be tested for impairment at least annually. Accounting goodwill # economic goodwill. Economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions. 10Đặng Thị Thu Hằng

ESSAY Explain the concept of Goodwill. Give an example of a brand name of a Vietnamese company that would require additional costs above book value to acquire. (Each group write within words for this essay) 11Đặng Thị Thu Hằng

FINANCIAL ASSETS are measured at historical cost, amortized cost or fair value. Measured at amortized cost = held to maturity securities. Measured at fair value = mark to market accounting 12Đặng Thị Thu Hằng

Historical costAmortized costFair value Unlisted equity investments Loans and receivables Held to maturity securities Trading securities Available for sale securities Derivaties 13Đặng Thị Thu Hằng

EXAMPLE Triple D Cor. Purchased a 6% bond, at par, for $ at the beginning of the year. Interest rates have recently increased and the market value of the bond declined $ Determine the bond’s effect on Triple D’s financial statements under each classification of securities. 14Đặng Thị Thu Hằng

COMMON SIZE BS A vertical common size balance sheet: expresses each item of the BS as a percentage of total assets. 15Đặng Thị Thu Hằng

EastWest Cash$ Accounts receivable Inventory Current assets Plant and equipment Goodwill Total assets Current liabilities Long term debt Total liabilities Equity9.150 Total liabilities & equity Đặng Thị Thu Hằng

17 East (%)West (%) Cash510 Accounts receivable87 Inventory126 Current assets2523 Plant and equipment7177 Goodwill40 Total assets100 Current liabilities227 Long term debt5833 Total liabilities8040 Equity2060 Total liabilities & equity100 Đặng Thị Thu Hằng

CALCULATE 18Đặng Thị Thu Hằng

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EXERCISE 1 Create the Balance sheet: -Cash on hand: USD -Cash in bank: USD -Payable to suppliers: USD -Rights to use land: USD -Workshops: Capital: Đặng Thị Thu Hằng

The company ABC was established with the initial capital is 600 million USD, which included 400 million cash in the bank and 200 million cash on hand. 1.Buy the fixed assets and pay cash is 80 million USD 2.Buy materials about 60 million USD which pay by cash is 50 million USD and the rest will be paid within 60 days 3.Buy tools about 2 million USD and pay by cash. 21 EXERCISE 2 Đặng Thị Thu Hằng